Entrepreneurial Wire

Understanding Your Income Statement

cas0827 — Mon, 06 Dec 2010 18:28:52 +0000

The income statement is one of three important financial documents to help business owners as well as shareholders better understand their company. The income statement is also known as “statement of income,” “statement of earnings,” “statement of operations” and “statement of operating results.” This financial document is a way of laying out all your “income” and all you “expenses” into an easy to read and examine document. This document can help owners understand where they are generating the most revenue as well as where they are losing the most revenue, which can be extremely important to a struggling business.
There are two types of income statements, multistep and single step. Although both present the same information and end up with the same bottom line number the multistep provides two profits that are excluded from the single step, gross income and operating income, while the single step starts with net sales and ends with net income. Both gross income and operating income can be figured from the data in the single step income statement, but they are displayed in the multistep statement. The reason for the multistep income statement is to allow the owner to see exactly each step of the expenditure process until he reaches his bottom line.
Each line on an income statement either determines revenue generated or an expense incurred. The best way to think of an income statement is like a ladder system, each step represents a different calculation. It is important to understand what each number means in order to better understand your business as a whole. Below is an example of an income statement (multistep) once you have reviewed the information we will go into specific details of each category.
Income Statement

Net sales are the “top line” of the income statement. Net sales are all of the products of services generated in a given accounting period. All of the revenue earned from its customers through the selling of products and services is found on this “top line” number. Although the importance of the bottom line is critical in future success the top line determines the companies growing potential. A company typically cannot grow faster than its revenue.
Cost of sales is the next information in the income statement. This is where you figure all of your expenses incurred directly related to the product or service. In other words, what it cost you to make or produce what you sold. Raw materials, labor and manufacturing overhead are all expenses related directly to the product or service. All other expenses will be deducted later on in the income statement. You want to be sure that these expenses are only related directly to the production of your good to ensure that a proper gross income can be calculated.
Gross income, also known as gross profit, is the amount of income generated before all other expenses and taxes are deducted. Gross profit allows the owner to see what amount of money is generated directly through the selling of the product or service before any additional expenses are incurred, such as advertising and marketing. Gross income is an important number especially in the start up phase of a business in the business plan. This tells the owner exactly how much income he or she has to work with in order to see a profit at the end of the day.
Selling, general and administrative expenses “it is the sum of all direct and indirect selling expenses and all general and administrative expenses of a company.” Direct selling expenses would be expenses that can be directly linked with the selling of a unit. Advertising is a good example of a direct selling expense. Indirect selling expenses would be all of the other expenses that cannot be directly related to the selling of a specific unit. Telephone and all postage are two examples of indirect selling expenses. General and administrative expenses include payroll of non-sales employees as well as rent and power.
Operating income is determined by deducting SG&A from gross income. Operating income is all of the operating expenses, related directly and indirectly, deducted from net sales. This number is often weighed on more heavily by financial advisors and investors because it excludes any other profit generating systems as well as any expenses incurred not dealing with the overall operating of the business. The operating income is profit generated with all of the direct operating expenses removed.
Other income and expenses would be any other forms or revenue generating means or expenses incurred outside of operating day to day. Interest expense is the amount of interest paid on borrowed money from a bank or an investor. Another expense in this category would be an accounting fee is there is one. Some businesses use outside accountants to come in and make sure the things are dispersed and recorded properly. Additional income could be interest income. Just as and interest expense is paid interest income is any interest gained through the means of additional money storage through stocks or bonds.
Pretax income is just what it says, income earned before taxes. Pretax income is a great way to measure corporate profitability. “Numerous and diverse techniques are available to companies to avoid and/or minimize taxes that affect their reported income.”
Income taxes are not actually paid. They are either a predetermined estimate or in some cases as separate account is allocated just for taxes that soon will be paid. This is why the pretax income is so important to business owners as well as accountants if you have one present.
Net income, also known as net profit or net earnings, is “the bottom line” number for a company. Net income is a clear sign of businesses profitability, although if expenses exceed net sales than obviously a loss would be observed as the company’s bottom line. Net income becomes part of the company’s equity as retained earnings.
The importance of the income statement is invaluable to a business owner because of all the useful knowledge that is displayed in an easy to read manner. Now that we have a clear understanding of the income statement it is important to understand how these numbers will affect the other important financial document. The balance sheet is set up a little different from the income statement (revenue – expenses = net income), it uses the following formula, Assets = Liabilities + Equity.
Assets incorporate all of the fixed concrete items that are owned by the company such as equipment, land, furniture, inventory, and everything else that makes up the business as well as cash. It is essentially anything that can be converted to cash for liquidation purposes. Liabilities incorporate accounts payable, creditors, lenders and yearly taxes. Items that are still to be paid for encompass the liabilities section of the balance sheet. Lastly is the equity portion which is most important to the owner because it is the owners section. “The difference between what the entity owns and what it owes represents the owners’ share of the company.” This is what the business owner can claim ownership to on the assets portion of the balance sheet.
The portion of the income statement that goes directly over to the balance sheet is the net income or “bottom line” figure. It goes under the equity portion of the balance sheet. There are a few simple rules that can help you better understand the relationship between the income statement and the balance sheet.
+ Net Income = + Equity
+ Revenues = + Assets which + Equity
+ Expenses = – Assets and/or + Liabilities which – Equity

Identifying Your Target Market

cas0827 — Tue, 10 Aug 2010 16:47:37 +0000

Does Wal Mart sell groceries, clothes, and cleaning products? Does Gulfstream sell jets? Does Chuck E Cheese sell birthday parties? These three nationally known brands all have one thing in common; they understand their target market to the fullest extent. Wal Mart sells convenience, a one stop for all your needs. Gulfstream sells valuable time to corporate CEO’s on top of luxury, allowing them to get work done while traveling. Chuck E Cheese sells a safe, clean and friendly environment for parents to bring their kids for a good time.

Recession Advertising

cas0827 — Fri, 21 May 2010 16:18:45 +0000

Advertising in a recession is not heard of for majority of small business owners. The philosophy behind small business entrepreneurship is to minimize costs in order to increase profits. When these businesses encounter a recession the easiest and a lot of times the first thing to go is advertising and marketing. This expense has proven to be the most commonly dropped expense incorporated with a slowing of the economy. Why is this? What is the logic behind eliminating advertising? Most small businesses are operating on such a small budget that advertising expenses can be proportionally substantial expenses. By eliminating them they in return increase their profits, but this is a very short term solution to a long term problem. Eliminating advertising and marketing is one of the most occurring and tragic problems with small business failure in a recession.
There are multiple ways that small businesses find ways to advertise. Local billboards, banners, sponsorships, community involvement, and school fundraisers are a few ways that local businesses are able to get their name out. These advertising mediums are all great ways to market your business but they are costly. It is important to understand the value of advertising for your business in the everyday economy but especially important in an economic recession. According to Laura Lake, in her article “Should You Cut Your Marketing Budget in a Recession,” business owners should look at their adverting and marketing not as an expense but as an investment. The importance of advertising is critical to future business success especially in a long term problem such as a recession.
I’m not saying that as a small business on a relatively fixed income that you should increase your advertising budget by 200% and over market yourself. I just want to stress the importance of your marketing plan. If you need to cut your advertising expense budget a little in order to compensate for reduced income than do what you have to do, but don’t cease all of your marketing. This would be a great time to reflect back to your business plan under your marketing plan section in order to give yourself a refreshing look into your market. This will allow you to see where your business was heading on day one and where it is heading now in order to get a sense of your current customer base. In a recession there is no better time than to evaluate your customer. Determine why it is that they buy from you, what do you have over the competition, what could your product or service be substituted for? These are all important questions that a business owner should evaluate in order to determine where and how to market themselves. Once you have determined your target market, research all of your sources of advertising in order to determine the best way to reach your market.
According to Lake, SMART marketing consists of the following:
S – Strategize
M – Maintain market spend
A – Assess and allocate the budget
R – Research your customer thoroughly
T – Target and reach out to them
SMART marketing is a great way to help guide you through making your marketing plan both effective and efficient. Once you have established a demographic of your market and decided the proper routes to reach them within your advertising budget it’s now time to get innovative. Look for ways to advertise and reach your market without spending too much money. Try to cut your budget even smaller by using other advertising means to reach the same target market just under a different approach.
Once you have set up your new and improved money saving marketing plan you should put it to use. It will not do any good as an idea until you act on it. Deciding to improve your marketing plan as opposed to cutting your advertising could be the one essential key that could save your business. Weathering the storm of a recession only means more profit in the end. A recession is sometimes needed in an entrepreneurial economy. Through the recession many businesses both competitors and substitute products will be eliminated allowing your business the means to recruit a stronger customer base. Although a recession is hard on an entrepreneur it should be looked at as a challenge to survive knowing that the reward at the end will be well worth the fight. Continuing to market in a recession can be one of the tools to help ensure that your business and your life will continue well beyond the scope of the recession.

JIT Inventory System

cas0827 — Tue, 11 May 2010 16:01:07 +0000

JIT inventory control is a great way for manufacturing industries to produce more effectively and efficiently while providing a quality ensured finished item. JIT stands for just in time inventory control. JIT was based off of the Toyota production system that was implemented 30 years ago by Taiichi Ohno. It was put into use when Toyota realized that they were very far behind the American made automobile company Ford. They where looking for a method other than the “American mass production system that had worked so well for so long,” (Ohno). The traditional way of producing a huge amount of a small number of types of cars was not the way Toyota wanted to produce their automobiles. They wanted the customer to have options and ultimately have what they wanted. After World War II is when the Toyota Production System came to light laying the ground work for what we today call JIT inventory control system.

The benefits that accompany JIT inventory control system are:
• eliminated expenses
• increased efficiency
• increased goal size
• increased productivity
• supplier/customer relationships
• employee moral

JIT inventory control system allows the manufacturer to eliminate certain expenses relating to warehousing and inventory stock. The JIT system allows for “just in time” production. No parts are necessary until the time they are needed in the assembly time line. The traditional way of production was to have more than what you needed in supplies and produce more finished products than want was needed. This opened the door for a lot of unnecessary expenses. JIT will allow you to decrease expenses while producing more of what you need as opposed to what you don’t need in mass production.

There is a direct correlation between customer satisfaction and productivity. Because so much emphasis is placed on customer satisfaction productivity will increase accordingly allowing for an increased goal size to be implemented. This direct correlation is what manufacturers thrive off of. A simple cause and effect chain all based off of customer satisfaction and customer needs.

Supplier/customer relations will be another benefit of JIT inventory control. The amount of trust and faith the will be put into a supplier will be tremendous. You will be relying on your supplier to get you what you need when you need it at the time it is needed. This will ensure that a relationship is built and can only work with positive communication. JIT is so time specific that once a relationship has been built between a supplier and a manufacturer the number of suppliers for that manufacturer will be minimal.

With all of the positive increases associated with JIT inventory control employees moral will increase as well. Employees can focus on other fields such as R&D instead of inventory allowing them to feel more valued in a company. When employee moral is at a high greater productivity and efficiency will increase as well. Employees are a direct result of the inside of a company, if their moral is high a manufacturer can expect grand results to follow.

Although there are many benefits to JIT inventory control there are also some negatives that accompany JIT. Because JIT is so specific it does not allow room for changes in a product. Nothing is kept on hand it is only wanted when it is needed therefore there is no inventory available to make the changes with. This can be costly for a manufacturer especially if there is a defect in one of the product lines. This would call for a total reconstruction in order to determine where the fault lies and how to fix it according to JIT.

Another negative associated with JIT is the trust given to the supplier. If the supplier was not able to deliver production would come to a stand still. As a manufacturer you have to rely on the success of another business in order to ensure the success of yours. This is why communication is so great in this system. If your suppliers employees go on strike this would affect your employees as well because without the supplier your employees and your production would cease. When production stops customers cannot receive their product. This will decrease customer satisfaction and employee moral. The trust built with the supplier is imperative to a manufacturer’s success.

JIT inventory control systems are a great way to increase productivity and ensure customer satisfaction but it must be set up properly or the effects can be devastating to a company. Everything about JIT is directly related with one another allowing for a tremendous cause and effect scenario.

Fraud and Credit Battle

cas0827 — Mon, 03 May 2010 15:11:59 +0000

Fraud, this is such an important topic because the effects of it can have devastating results on businesses as well as individuals. Fraud is something that occurs daily. Anything from an elderly person being taken advantage of over the phone to agents, brokers, and lawyers getting kickbacks under the table is considered fraud. According to dictionary.com fraud is the “deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.” Under this definition some health insurance companies could be found guilty, but we won’t get into that subject. The bottom line is that fraud is something that everyone will have an encounter with and it’s up to that individual or business to know what to expect and how to prevent it from happening.

Fraud can come in many different types of faces. The most common type of fraud today, which is heard about almost every evening on the news, is identity theft. Identity theft not only affects the individual who’s identity was taken but also all the businesses that were involved with the transactions after the identity was stolen. Telemarketing fraud is another common type that is mostly directed toward elderly individuals who have the time to listen to a telemarketer, but not solely. Once they get a hold of their account information they are able to start billing for services that they may or may not be providing. These telemarketers would like to be able to get that individual to sign a contract and if this is carried out than the damage can be significant and sometimes legal. Another type of fraud is called advance fee scheme where the victim gives money to someone in exchange for a larger lump sum of money over an amount of time or a service that they never get. Finders fees are the loop whole in this scheme, the “finders” are supposed to be looking for financing opportunities for the individual in exchange for these fees. All of these types of fraud can be broken down into multiple categories that all go back to the main problem of fraud.

It is clear to us how fraud can affect individuals directly through identity theft or telemarketing schemes but what about the average small business. Are they susceptible to fraud in all of its many faces? Unfortunately no one is safe from fraud and it affects small businesses more harshly the larger companies. Larger companies have the benefit of being, well, larger. They employee more individuals and have more contracts to handle. Being a larger corporation you also have the luxury of financial means that allow you to get a lawyer to review every document you sign and most large companies have a lawyer on payroll for matters such as this. Having access to this kind of means can help larger corporations avoid fraud. Smaller businesses can avoid fraud just as larger corporations by taking the time to read contracts, no matter what the length. Ensuring themselves that they fully understand everything in the contract and if they have any questions to contact the service provider. Another way for small businesses to avoid fraud is to check identification before swiping credit cards or even debit cards. There are a few businesses that have started doing this but it has not fully caught on yet. This is the best way as a business to keep your hands clean in an identity theft situation. Just by being aware of everything you sign you name to and checking identification you can prevent fraud from happening inside your small business.

Your credit in this world means absolutely everything. It determines when or if you can buy a car, a new house, get a business loan, or even apply for a credit card. It is extremely valuable to every American to ensure that their credit is almost flawless. This is one reason why identity theft is such a huge offense. It not only hurts the person immediately financially but it can also cause long term damage that can change the course of their life. When dealing with credit bankers look at four variables when determining a person’s ability to pay back a loan. Character, capacity, capital, and collateral are the four c’s that bankers evaluate every potential customer on.

• Character: Just like your character in the everyday world is evaluated on everything that you’ve done or haven’t done, character in banking is just the same. It is the background check of your past bills, payments, loans, credits, total debt, and available debt. It is an extensive look into your past experiences with other businesses or lenders. Late payments and missed payments are all included in this character evaluation. All of these above variables are factored into determines your credit score. It is important to maintain a good credit score that is evaluated depending on what your character looks like. A good credit score is all that you need sometimes to get the loan from the bank and it’s all based on your character.

• Capacity refers to your ability to pay the loan back in full. If you’re a business it is based on your revenues if you’re an individual it is based on your income. New businesses with no track record of income are less likely to receive a loan purely due to the risk involved for the bank. This is why purchasing an already existing business is much easier to receive a loan. A track record of revenues is already determined so that a banker can look at the facts to determine if and when the business should be able to pay the loan in full.

• Capital refers to your capital assets. The bank must look into your assets as a business because if your business does fold than they will be stuck with your assets. They will have to sell them at less than market value due to depreciation and the need to re-gain the money to close the loan. Capital assets can be all of the fixtures inside the business, equipment, inventory, real estate, and machinery that can be sold at a later date if the business goes under.

• Collateral is the last thing a banker will examine before giving you a loan. Collateral are the physical assets or even property that a business will put up in order to secure the loan if the loan is not paid in full. Banks will deal with these just as capital. Cash is the best asset to possess because banks can deal with cash much easier than equipment or even property. If the loan is not completed for whatever reason the collateral will be submitted to the bank in order to clear whatever debt is left in the loan.

Of the four c’s the most important is your character that is evaluated through your credit score. Bankers weigh very heavily on the credit score in order to determine your ability to repay a loan. This is based on the fact that past performances will be repeated in the future, so why would they loan you any money if you’ve shown a negative track record for the last five years. Bankers, years ago, used to have a say in whether or not you could receive a loan. They had a lot of input that they could weigh in on the decision. Today, with the spike in technology and downfall of the economy, bankers don’t have the power they used to. It’s all based on a computer that only wants numbers and from these factors it can determine if you have the ability to pay back a loan. No matter what the business or idea the computer is not interested, it’s only interested in the facts. This is why your credit score is so valuable because if a computer is only based on numbers than there’s no way you will receive a loan for $100,000 with a credit score of 400. This is why your character is important not only in your personal life but also in your financial life.

The Up’s and Down’s of E-Commerce

cas0827 — Mon, 26 Apr 2010 15:11:25 +0000

Online businesses have become a very popular trend in the last few years especially for young entrepreneurs looking for away to generate a profit with a small initial investment. According to a Netcraft study done in 2008 there are approximately 182 million websites on the internet and this number has probably grown by 50% in the last two years with E-commerce popularity rising. Keep in mind that this is not counting businesses found on EBay, Amazon, or any other online seller account site. Online business is very popular as the statistics show, but the question is why? Is it better to have an online business as opposed to a brick and mortar establishment? These are questions that entrepreneurs must answer before they decide to invest either way into their endeavor.

Another important determinant is whether or not you’re selling a product or service. If you’re selling a service do you need to bring your clients in to an office to meet face to face or can your performance be done over the phone. If so this would eliminate the need for any overhead as you would be working directly from home without any concrete overhead directly related to your business. If you’re selling a tangible item such as apparel, accessories, car parts, or anything that can be touched you have to ask yourself if you’ll be able to sell to customers without them being able to hold or see the item directly. These are two totally different businesses with their own set of pros and cons related to online selling.

The Power of Purchasing a Business

cas0827 — Sun, 18 Apr 2010 15:19:56 +0000

The power of purchasing a business that already exists has numerous advantages as well as disadvantages. Weighing out these pros and cons can help you make the decision with a much more educated mind. When you are buying a business you have to assume that you are going to spend much more than you would if you were going to start it yourself from scratch. Although there are almost always deals to be had in the business world, when buying a business you must weight out your decision. If the business is being sold first you must consider why and if it is being sold at a below market value price the reason is going to be imperative to your future success. If a business is being sold below market value than obviously the business could not sustain itself for a number of possible reasons. Whether it was the reputation, employees, strategy, or even customer demand it is up to the new owner to find the problem and solve it. Sometimes this requires more capital investment up front on top of the purchase price.

“Remember there is always another deal. Deals are like London buses-there is always one coming.” Richard Branson

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Franchising Your Future

cas0827 — Wed, 07 Apr 2010 18:00:12 +0000

“I believe that most entrepreneurs-especially in the restaurant business-get into trouble by making their menus too broad and offering too many products.” Dave Thomas

The first distinction that must be made before we dive into the world of franchising is the difference between a franchisee and a company owned store within a franchise. A franchisee is a business owner. They are allowed the right and trademarks to the business at hand. McDonalds is an example of a franchise that is established through multiple franchisees. The franchisee pays an initial investment up front as well as continued royalties to corporate as the business continues to flourish. A company owned store with in franchise is owned directly by the corporation and all individuals who work there are employees of the corporate office. No individual person owns the franchise it is owned by the corporation. A franchisee is the owner of his own business but most follow guidelines and procedures to insure that the franchise is in-line with all other stores in order to create a sense of familiar expectation no matter which store a customer arrives at.

The Need for Achievment in Small Business

cas0827 — Tue, 06 Apr 2010 17:00:20 +0000

Is the need for achievement, a personality attribute, necessary for success in small business? Why or why not? Locus of control? Independence? Leadership?

Small businesses ownership takes quite an amount of time involvement from the owner. Many small businesses become a part of the owners’ family as a result of the total time involvement. I can speak as an example of the time involvement for a family owned and ran business. Ever since I can remember I have been involved with our family owned and operated business located in Forest City, NC. A small business requires time, dedication, investment both monetary and non-monetary, as well as basic fundamental knowledge of the particular business. With all of the involvement and dedication along with the ups and downs as part of finding success it is hard to believe that anyone would want to dive into such a risky endeavor. What makes the average person with an idea different from the entrepreneur? Entrepreneurs must possess a need for achievement. Something inside of them wants to take the risk and make their idea become a reality. As humans we are risk-averse, the average human stays away from the uncertain. While it is fun to fathom up great ideas and let our imaginations run wild, only a small percentage of people actually take the risk.

Welcome to My E-Blog

CurtSnethen — Fri, 02 Apr 2010 15:01:04 +0000

My E Blog

Welcome to the E-Blog. A blog spot just for those interested in everything dealing with a relating to the creative world of entrepreneurship. Interviews, informative research, new information regarding entrepreneurship, as well as some information the every entrepreneur should know will all be located here at my E-Blog. So feel free to make yourself a follower and comment as much as you please. I hope to teach a lot as well as learn from everyone’s past knowledge. Now it’s time to E-Blog!