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hey uh well we are going to get started today thank you so much for everyone who has joined for our september bank and brews all about best practices for business finances just a few housekeeping rules um to submit questions or comments please use the chat feature and um throughout the presentation i will moderate that and um ask those questions to jennifer and lisa this uh workshop is being recorded so you don't have to frantically write down everything and we will include this video in our recap blog so not only will you have the video but we're also writing a recap blog highlighting the key takeaways from today and throughout the presentation jennifer and lisa will um they'll mention some templates and show you some templates and just before we get started those templates will be included in the blog so again you don't have to rush to write down everything we are going to provide you all of this information right to your inbox so again we appreciate you logging on and i'm going to hand it off to sam brown for introductions good afternoon everybody i uh it is great to be back uh it's it's great to have all y'all join in with us today extraco has loved doing these bank and brews we liked them more when we were in person and there really was some brew involved um but who knows maybe some of y'all have a brew in your hand right now and if you do more power to you today's bank and brew is actually an extremely practical one um but coming from the commercial side of extraco banks it's one that we wish all of our customers would participate in because y'all may or may not believe how often we come across people who own businesses or run businesses that aren't really up to speed on things as basic and and and important to the foundation of a business as what we're going to talk about today uh today's focus is on the best practices regarding the finances of a business and um you know why it even matters and then how do you keep good records and retain those uh what types of policies and procedures should you have to to help encourage that um bookkeeping tips um you know that stuff it's it's not the the fun sexy part of a business but it is the most important part if you're not keeping records if you're not keeping good books not only are you not going to know how the business is doing you may end up getting in a lot of trouble or at the very least it may be hard for you to go get that loan uh whenever it's time for you to grow the business because the bank's going to want to see all this uh and then finally uh just up-to-date financial statements uh we we've got two folks today and either one of these people could have carried this whole bank and brew by themselves um one of them works with me and one of them i get to work with a lot even though we don't work for the same folks i'll introduce our second speaker first uh just so i can lead into our first speaker uh with with her bio our our second speaker is my co-worker here at extraco banks uh her name is lisa carro and she is a cpa and the controller here at extraco banks she's got over 25 years of experience in accounting and audit and management and project management experience she began her career in auditing and then moved into the private industry uh and when she was in the private industry it was for a company here in town that was headquartered an internationally well-known company called curbs international and she was a controller for curves so if that doesn't give her instant credibility i don't know what does because curves is as big as they come but she joined us here at extraco back in 2014 uh she has since acquired her lean six sigma green belt certification and for those of you who don't know what that is that that means that she's certified training in lean six sigma methodologies to identify inefficiencies quantity cost and implement process improvements with businesses so lisa will be our our second speaker uh our first speaker is uh jennifer manning and jennifer and i have the privilege of knowing each other and working closely with each other through a lot of projects at the waco chamber of commerce she is also a cpa and a partner at patilla brown and hill and in the works in both accounting and business consulting and she's been with that firm for 26 years she assists her clients with individual and business tax planning and preparation payroll processing and reporting and internal accounting and financial statement preparation uh she is the chair elect for the greater waco chamber of commerce currently she's the uh the chairperson for the chambers total resource campaign which is a one million dollar uh fundraising campaign for the chamber and she and i are working closely on that she is also on the board of trustees for the university of mary hardin baylor so uh as i said we've got two folks today that are both extremely experienced and extremely qualified and and i hope all of y'all take good notes as christina said you'll be able to get this presentation the powerpoint later uh but take good notes because this is stuff people pay a lot of money to hear from folks and you're getting it for free today at our bank and brew and on behalf of extraco banks just thank you all again for joining us and with that i'm going to turn it over to jennifer manning from attila brown and hill all right thank you sam so much we so appreciate extraco and our partnership with your bank and we are very excited to be here today um lisa and i well actually i'm just going to say so sam said today is you know business practices something that is extremely practical and sometimes when you hear extremely practical then you think extremely boring and so lisa and i are going to do our best to not make it extremely boring even though we can't have our brews today maybe maybe some do maybe some don't and give you some great examples and some uh stories of things that we've seen and the good and the bad and the ugly and hopefully kind of lead you on a path and inspire you to take a look at your business finances even though sometimes it's maybe the last thing you want to do when you're really tired after a long day of running your business so in the whole scheme of things today we want to talk about why business finances matter and then just give you some keys to moving in the right direction to make sure you have all of your ducks in a row and frankly i think this year more than ever we've seen how important it's been to not only just have everything ready to go for your tax return or maybe a requirement by your bank if you happen to have a loan but given everything that's happened with covet and the pandemic and then also funding through the sba you know a lot of small businesses were able to take advantage of those those funding opportunities to get them through this tough time and in order to do that though you had to have good payroll information that you could share and include on a loan application if you were doing the ppp loan which was the payroll protection loan or you had to have really good financial statement information to be able to submit to the sba if you were doing maybe the economic injury disaster loans so there again you had to have things at your fingertips ready to go be able to take advantage of these opportunities and i think it really just kind of heightened our awareness even here within the firm of hey there are there are a lot of business owners who work really hard and have great businesses but they don't always have the paper to back it up and we want to make sure that on paper you look as good as you do in person and so that's what lisa and i want to talk to you about today obviously business finances are super important financial statements are super important when we're talking about taxes you know not always our favorite topic but we know that we have obligations as business owners for state taxes federal taxes payroll taxes and it's just a big part of our obligation to our employees and our obligation to ourselves to make sure that we keep the stress off and that we have everything in order to make sure that we can meet our responsibilities from a tax perspective and it truly keeps things um a lot more fun if it's just a smooth process and it's not something that at the end of the year you kind of come up against you know surprises or maybe you owe a little more money than you thought or um you know we would much rather it be we've planned for it whatever that may be good or bad um and we know really what that story is because we've seen our financial statements all year long so i think it's just kind of a good habit to get into as well and i think one other thing that sam alluded to is we want you to be be ready um for any lending that you might need to grow your business or a potential investment opportunity um i think texas has been texas and central texas specifically has been very insulated from some of the economic downturns that we've experienced not just this year but even in the past and so there are continuing to be lots of opportunities for businesses whether you're selling a business or consolidating with another um you know we've got lots of opportunities and you want to make sure that you have the financial information to back up your decisions and when you go into extraco for your loan and to meet with your lender they want to see financial statements they want to know when they're talking to you that what you're sharing about your business is exactly what it shows on paper and that's really a result of maintaining these business practices these good practices that we're going to talk about today but maintaining those every month and so with that um i will turn it over to lisa she's going to talk about some retention practices and things that are just good to kind of get you started in the right direction so lisa i'll turn it to you all right thanks jennifer i don't know how fun the taxes are as jennifer mentioned but anyway it could make it at least more pleasant yeah so one of the big things for providing information on the taxes as jennifer mentioned is record retention record retention is extremely important in an organization because as she mentioned it can make the whole process a lot simpler a lot smoother a lot easier easier and so we have here on the slide is some information the suggested guidelines that jennifer provided to us that she provides to her clients and again this is all support and backup for if you're audited on your tax return whether it's on a 1040c on a schedule c or if it's on your corporate tax return and you think the federal law can go back for three years and unfortunately if they find where you have us to underestimated income or unfortunately some errors or possible fraud then they can go back as far as six years some samples that she has on here a lot of the general ledger basic items such as ar ap and payroll general ledger that's all about seven years as you can see on this slide and again as christina mentioned we'll be providing this material to you so you can see that it's truncated there but you'll have the full list that jennifer has provided then permanent files a lot of permanent files involve legal documentation such as the articles of incorporation stocks deeds property and then i also want to note here that it's not only physical retention but it's off also a software retention whatever software you use for your general ledger you would want to back that up at least nightly if you have information that you save in excel on a certain network drive you would want to back that information up as well lisa i have a question um can does it have to be all paper copies or can it be digital copies that's a good question most definitely can be soft copies we here at extraco try to streamline processes and so therefore we have a lot of items that are just saved out on our network drive or for items that we have maybe in paper then we also have a software tool that we can scan that information and save it so either one as long as you have the support in a digital or physical format thank you yes ma'am good question all right the next slide is policies best practices policies and procedures okay so what's the difference between the two well policies are basically written narrative guidelines and conduct within your organization it's important to try to reduce your employer liability and it's there to protect your employees and your employers i guess one of the most uh prominent policies is a personnel policy and again right here down below you'll see travel and accountable plan not accountable again this is a little excerpt that jennifer has provided on policies and again you will get the full list of items that they utilize and they provide to their customers or clients shall i say so again policies it is a more broad narrative on basically the do's and the don'ts of the company and again the one of the most important one is the personnel policy that can cover sick time that can be vacation time ethics social media with all the social media that's out there just how to you know what not to post what's okay to post also use some business properties such as computers so a personnel policy very important also you can have a expense policy and fixed asset policy and here on the accountable plan and the non-accountable that is false under an expense policy and so an accountable plan is one where the employee would go and use their personal credit card or a corporate credit card to go buy expenses for the company and then what they what they would do is submit that for reimbursement from the company so for those items you would want sufficient documentation such as receipts um also the irs i will note that the irs actually excuse me says that for items under 75 you don't have to produce receipts but again you can put that in your company policy a non-accountable plan excuse me a non-accountable plan is more of a per diem we don't use that here at extraco but jennifer does at her entity where they give the employee a per diem so that's maybe a hundred dollars a day and they can go spend those funds and if they exceed that then that's unfortunately out of pocket and then they also submit that to the employer as well also along with that authority limits excuse me my allergies are bothering me today no fever on the authority limits that's important to designate levels of authority for different individuals within your entity so you can say give supervisors up to a thousand dollars and management above that possibly five thousand that's important to set the boundaries for individuals so you don't have an employee going and spending 25 000 on software at that upper management did not think was a good choice so authority limits are very important you can just set up a matrix that designates each person's level of authority and that's level of authority to purchase items and also to sign contracts and business business contracts as well also then last but not least procedures what are procedures well procedures are more detailed specifics on how to perform a task for example accounts payable accounts payable we have a detailed procedure on how to perform accounts payable whether that's in invoicing or if that's processing checks why is that important well just in case if you're a person that issues checks is out perhaps they want a trip to hawaii and so they took off and all of a sudden someone needs a check cut well somebody there needs to be able to perform that function ideally if you have backups to perform the job that's ideal but if not then you need to be able to fill in in case of an emergency next slide all right bookkeeping we've mentioned it several times already well what are bookkeeping activities in general it is recording all financial transactions of the company and again typically clients utilize some sort of software program to record those activities such as quickbooks or quicken and adequate support for your transactions adequate support for your transactions is backing up those activities that you record such as okay book bookkeeping activities that could be accounts receivable that is where you are issuing invoices to your clients well you need to make sure that you have adequate support for that invoices that you iss e to your clients accounts payable when they're processing ap you need to have the invoices to support that payment to that vendor payroll is another important category when you're processing payroll you need to have adequate files for that employee you need to have their w-4 on file you need to have certain personnel items on file you need to record and keep all those transactions there their time sheets if you utilize timesheets but all of that information is very important even when you do a lot of those items that i mentioned is done through the system when you're processing ap when you're processing ar but some of the itunes could be manual some people do fixed assets and a software program some people utilize a spread excel spreadsheet if you're don't have too many fixed assets when you're booking a main what we call a manual entry which is outside of your say ar and ap the ledgers is what we call it if you're doing a manual transaction then we also encourage you that you have support for that manual transaction or that manual journal entry for example prepaids prepaids you may not have that module in a software program so you might maintain those prepaids in an excel spreadsheet but when you post your entry for that then we highly recommend that you have some sort of support to back up that manual general ledger entry typically an excel spreadsheet is what we use and then as mentioned on tax on this information you need for tax purposes again all of this information is very important in order to provide if you're ever audited also if you utilize like a accounting firm such as patilla brown hill if you utilize them for either producing financial statements for you or doing your tax return it's paramount that you're able to provide them with this information with these transactions with the financial statements which jennifer will go over next but it's important that you're able to provide that to your tax account or cpa so then therefore they can utilize that information to produce whatever it is you have to ask for the tax return or the financial statements i will say that just as a side note that the better shape that your records are in then the less work on the cpa or tax account the less hopefully digging that they will have to do and hopefully then you can save yourself some money there all right now i'm going to pass it over to jennifer so she can talk about those financial statements all right thank you lisa so a couple of things that i will add just to kind of piggyback on what lisa was sharing so and i know we're talking about you know all of these bookkeeping type items that need to be addressed on an ongoing basis and lisa was talking about you know accounts receivable accounts payable fixed assets you know all of these things you're kind of like ah how am i going to get all this done that sounds like a daunting task well i will say that so much of the software now and lisa even mentioned quickbooks and quicken for those of you that own businesses with quickbooks it definitely gives you already kind of pre-formatted financial statements now definitely it's dependent upon the information that you're putting in so you know junk in junk out good stuff in good stuff out so we want to make sure that the information you're putting in is complete and accurate and just like many of the banks extraco has the availability to download transactions from their bank account to your quickbooks file so a lot of these things can be automated now it's not super seamless where you just dump it in and everything codes to the right place there's still some work that has to be done on your end so that you categorize the expenses correctly but at least some of that front-end data entry can be done for you so don't let us just kind of talking about the general terms make it seem so daunting because really when you kind of break it down and look at the most important things so much of that can be automated and we do a lot of work for small businesses kind of across the nation and a lot of those are franchises and they have kind of their own proprietary software that they may use as they're out in their trucks providing services whatever the case is a lot of those proprietary softwares will integrate with quickbooks or other accounting softwares so i encourage you to kind of look at options to mitigate the amount of time that you're going to have to devote to it and really devote your time to the important part and i think lisa said that right on you know you want to make sure that you're doing what you can on your end to provide accurate information to your tax accountant or to your advisor and then you know on our end we want to make sure that you're not just coming to us to say oh clean up all of my bookkeeping while that's super important a lot of that can be done by you so that we're really adding value and helping you make good decisions based on your financial information so it's kind of trying to bring it full circle and figure out you know how best to allocate your time and the time that you're going to spend with your advisor so so keep that in mind but i definitely encourage you to look at options for software and jennifer i'm just going to go ahead and i'm sorry to interrupt but because of my allergies bothering me i didn't um i left off a couple of things yeah one thing that i was going to say that kind of leads into your financial statements is just as jennifer mentioned that software sometimes they come with a canned already financial statement a balance sheet an income statement you know and again like she mentioned do understand that you can taper it to your needs but then underneath that i guess i was going to mention that you should try to visualize what you want your and financial statements to look like what categories do you want to show up on the balance sheet what categories do you want to show on the income statement and then i would recommend from there then you figure out okay what actual general ledger account or chart of account do you want underneath those categories that will roll up to the items that she's going to go over for example like on the income statement you might just have one line on the income statement that says occupancy expense but then on the general ledger you could have under occupancy expense you could have rent you could have utilities and you can have repairs and maintenance and i would not clutter up the chart of accounts with too many accounts but just information anything that you want to track that would be important for you to track because you don't want a voluminous amount of target accounts because of what we'll talk about later but you just want enough to help you track items absolutely and another item i was going to say is i believe either sam or jennifer mentioned this i think a lot of people don't view this as very fun except for i guess for us as accounting nurse but um you know lots of times and and i have seen this in the past in my previous lives where lots of times people are like okay i just got to run my business i just got to get it going and they kind of put a lot of this foundational is what i refer to all of this that we're covering they leave a lot of this foundational stuff kind of to the side well i have been there done that where is difficult then to go back and try to put some of these foundational items into place so the sooner the better so on to you jennifer sorry all right no no you're totally fine thank you no i think that's great and even in talking about your chart of accounts and you know what you really want to be tracking sometimes it's kind of like okay what do i do where do i find a template or something to start with there are lots of good resources um i think lisa mentioned earlier you know if you own your own business and maybe you're a single member llc so you report it on your personal tax return on schedule c there's actually that's kind of an income statement that the irs requires that you report to them annually so sometimes people will even start there just because they're like all right i know i have to track this for tax purposes let me start here and then you can kind of add things to it that are meaningful to you and then a lot of the software's and this does include quickbooks as well they come with kind of a setup process that you can go to go through and it will say you know what type of business do you have and maybe you'll say i have rental property or i'm a realtor or i run a restaurant and it will give you kind of a template that many other similar entities have used before and you can at least start with that and then add and delete as you want so lots of good resources out there don't think you have to start from scratch because um because you don't and that's you know kind of an easy thing to find you can even google you know example chart of accounts so so definitely i encourage you to use your resources all right so now that we've kind of talked through the bookkeeping if you go back one more slide go go back one christine if you don't mind thank you um so now that we've talked about kind of the bookkeeping and the foundational piece and so we're kind of behind the scenes and all the things that lisa's been talking about now it's like okay so when we're kind of bringing all the bookkeeping together and we're talking to a potential investor or we're talking to extraco about an expansion loan what do we need to bring to the table and what does it mean and what do we need to be looking at each month so we're just talking about kind of some basic financial statements today so we're going to talk about the balance sheet and the income statement and then we're also going to kind of walk through a statement of owner's equity because i think that's important too but mainly sorry a lot of background noise there for a minute sorry about that um but mainly we want to make sure that these financial statements are meaningful to you and i've been lisa and i've been doing this for many many years and sometimes we have a lot of business owners that kind of just gauge how their business is doing depending on how much money they have in their bank account and that is totally not the way to be doing it and there's a few reasons for that one a lot of times business owners make the mistake early on of commingling personal and business assets and i will just pretty much always tell you if you do nothing else i encourage you not to do that because number one it is not a good picture of where you are from a business standpoint i've had clients come in and say i am working as hard as i possibly can i can't work one more hour this week but i am not making any money and we sit down with them and look through their records and we say well you're making your house payment out of this business account you're paying your car payment you made your daughter's tuition payment you paid your utility you're making money you're just using it on personal things and so it's hard to see oh okay you know this is what the business is really generating versus these are the personal expenses that i'm utilizing those funds for so really do your best set up two different bank accounts uh you know have your business account even if it's not a separate tax id number if it's a sole proprietorship and you're just kind of keeping it simple on the front end that's fine just go ahead and keep a separate business account it's so much easier even if you have to go back and recreate things at the end of the year you will be glad that you segregated it um so we always talk about that and then the second thing that i always talk about is payroll and just to remind you like there are many many things that advisors can help you with and get you out of kind of jams with but the hardest thing i would say is probably payroll related the irs you know the new nicer irs that we hear about all the time and they really will give some grace and especially right now but they will give some grace on federal taxes allow us to set up payment plans you know abate penalties and interest but when it comes to payroll and payroll taxes and not making tax deposits for your employees they are not as liberal with that grace and so i always encourage you if you know nothing else get someone to help you with get your getting your payroll set up and stay on top of that so those are my two things keep business and personal separate and really make sure that you take care of yourself on the payroll tax deposits okay so on to financial statements um we're going to talk about the balance sheet and income statement and all of this is derived from the bookkeeping that you're doing behind the scenes so let's go to the next slide so we have a lot of businesses can you flip one more christina there we go oh i'm sorry go back up one more all right so a lot of times business owners will just say uh you know i'm looking at my income statement and it looks good i think i'm fine well sometimes if you don't look at the balance sheet that income state can be statement can be really inaccurate so you want to make sure you're really doing both and a lot of times business owners will say i don't even know what a balance sheet is is and i sure don't know how to use it but it really is a great tool and i really like it when you're doing comparative analysis and kind of seeing where you come from you know how's the business doing over time and so this is just an example of a simple balance sheet and the it's kind of it's going to have three parts to it so you're going to have your assets your liabilities and then your owner's equity and i'm going to use terms today that are really more talking about a business owner in a sole proprietorship or a single member llc so i'm going to use those terms but all of these are kind of interchangeable so you'll hear people respond refer to retained earnings owner's equity shareholders equity all of those terms are very similar in how they work on the balance sheets so just so you kind of know but this top part of the balance sheet is going to be the assets at a point in time so your income statement you know you may run that year to date january through august 31st or maybe you run it month today but the balance sheet is at a specific point in time so this one for instance is as of december 31 17 and december 31-18 and the whole point to this is shut to show you the status of all of your business assets and so in this case you'll see there at the top current assets being your cash maybe a cd accounts receivable that lisa referred to maybe you have inventory in your business that you're selling so those those are all current assets and they're typically listed kind of in order of liquidity so how fast can you turn those assets into cash and that's our fastest you know way to generate some some quick cash is those things that are in our current assets the second piece that you'll see there is your property plant and equipment so that's all of your kind of more your assets that you're going to use over time so if you bought you know you're in a construction business and you bought a backhoe or you bought a truck or a trailer those are things that are not just going to be expensed in year one like maybe your repairs and maintenance on that car might be but you're going to set these up as an asset of the company and you're going to depreciate that over time and so this part of the balance sheet is really tracking that status and so you'll see the equipment and furniture building and leasehold improvements so obviously you're building um if you're if you own that in the same entity that you're operating your business it would be listed on here as well and depreciating it so the irs says you know okay if you have these assets that have more than one year of life you're going to depreciate those out over time now from a tax planning standpoint the irs gives you a lot of opportunities to take accelerated depreciation and help kind of sometimes control income or your income tax liability so that that would be here as well in this accumulated depreciation account but um you know obviously this is kind of further down the sheet as far as liquidity because sometimes it takes a little longer to sell a truck urge to sell a b ilding so that's why you see that secondly and then third we have other long-term assets so these are things that would take even longer to maybe turn into cash and so in this example and we have a franchise bank and brew llc and they upon purchasing the franchise for their business they had this initial outflow of let's just call it sixty thousand dollars so over time though they are continuing to amortize that um and and that is shown there as well so this is kind of the status of assets as of december 31st 2018 compared to 2017. so just gives you a good quick glance and this is one of the reports and it looks just like this that quickbooks will generate for you so it's very helpful um just to have that as a good benchmarking report and an analysis tool to use at the end of the month so let's move on to the next part of the balance sheet which is the liability section and so here we are listing all of our liabilities who do we owe money to so we may have accounts payable which is just our vendors our normal operating vendors that we owe we may owe some payroll taxes at the end of the month that we've collected from our employees checks maybe we owe some sales tax from our sales that we had that month and then we move on to our bigger items so we have our notes payable um with extraco or our note payable to a shareholder who have we borrowed money for uh from that we're continuing to pay back and so you know sometimes it's kind of confusing because people think you know if you're just looking at cash in cash out you think okay i wrote a check to extraco for fifteen hundred dollars that's my expense well really it's not a portion of that is principal and a portion of that is interest and the interest is deductible for expense purposes for tax purposes and so you'll see that over on your income statement but the principal portion of that loan that's kind of um bringing down that balance due every month that tracking is here on your balance sheet so you can always come here and see okay i started out i had borrowed 150 000 from extra code now i've made progress i'm down to a hundred and eleven thousand four seventy three so i've paid that principle over time that's where you're going to come and see that progress being made so that's why i know you know lisa said you know as accounting nerds but it's so true like we like to see those changes and that progress and i think that's the part that's in you know that's helpful to businesses and exciting for businesses to know that you're making that progress so so that kind of goes through our reliability section go back up just one more time sorry and then the last piece there is owner's equity so you'll see that there and as of 2000 december 31 18 it's 120 077 so a lot of times we'll get the question and then people will say well what's my business worth well sometimes you can come to this owner's equity side however this is not that answer most of the time sometimes people think it is but it's really not because we are looking at just your total assets the book value of your assets less your liabilities that doesn't necessarily mean that your furniture and equipment that you've bought is not worth more than what we show on the balance sheet so you got to kind of keep that in mind don't let that be misleading but at the end of the day if you were to liquidate your assets and your liabilities as they currently stand this in theory would be what you have left so it's kind of just a good way of seeing okay at the end of the day if i had to get it get rid of it all this is where you would land okay so let's move to the second or the next slide please all right so this is the income statement and it's typically a report that more people are used to dealing with as opposed to the balance sheet so as lisa mentioned you know we may just have one line item that's revenue on this income statement but when you go to you know your bookkeeping side you may have it listed a little more segregated maybe you have you know income from product sales or you have service revenue or rental income all kinds of different things can roll up into this one revenue line item and then you also have cost of goods sold and so those are the costs that are directly uh related to generating that revenue and cost of console can include a lot of different things and so it can be purchases of items that you've sold it can be labor for the people that are providing the services in your business it can even be depreciation on fixed assets that you use in providing that that's providing that revenue so maybe it's depreciation on the backhoe that you're using out on your construction job so it's kind of just a good way to get to the gross profit so before any of your overhead expenses this is the gross profit of your business and i think it's always good i like to kind of assign percentages to it you can do some ratio analysis but this is a good way to kind of get a glimpse of all right year to year where did i go am i up or am i down if there's a variance why is it um if you know good or bad you just want to be armed with that information and if you go further down the income statement then you're going to start seeing kind of more of your overhead expenses so your advertising bank charges credit card fees insurance payroll payroll for your owners or for those that are not necessarily providing the service um telephone uniforms you know all of those things that are part of doing business but maybe they're not directly related to the revenue that you're generating so they're going to be down there kind of what we'll call below the line below that gross profit line so you know keep that in mind this again is just an example but kind of like lisa said you can cur you can customize it customize this to be most meaningful to you so maybe at the end of the year you come through and you say okay um you know my telephone or no let's say like my supplies i've got 3181 dollars of supplies you know what maybe i want to start tracking office supplies versus supplies that are more related to our services performed so that's an option but you know you can always kind of take a look at that as you go um and customize it to be meaningful so at that point we get down to our operating income and then we also have a section that's kind of our other income and expenses and so things that are really not in the whole scheme of generating our income so we have some interest income that we earned um on our bank accounts on our cds some miscellaneous income maybe just kind of little outliers we had a deposit return something like that and then we also have our interest expense on our debt so not something that's up there above the the operating income line but obviously we're recording that so all of that filters down to our net income that we have there at the bottom so for the period ending 12 30 118 for that year our net income was ninety four thousand two hundred and fifty four fifty five dollars so the last piece of that i always like to kind of tag on the bottom is all right so how does the income statement relate to the balance sheet well here's that answer so you know we talked about owner's equity at the beginning now this is showing you your income that you generated for the year goes into that owner's equity and increases that number going into the following year there can also be a decrease to that owner's equity number and i have that listed here as an owner distribution so as an owner of a sole proprietor you don't actually get wages instead you take distributions and so i've listed that here because that's where you're taking funds from the business for your personal use so we're maintaining separate accounts of business versus personal but obviously you have to be able to pay your personal bills and so we take that out as a distribution so if you were to look here you see ending owner's equity of a hundred and twenty thousand seventy seven dollars that's the same number that you should see as owner's equity over on your balance sheet if you don't you know you have a problem the whole point of a balance sheet is for it to be balanced so your assets should equal your liabilities plus your owner's owner's equity most of the time in your software it will hardly ever let you post an entry or a transaction that would allow you to be out of balance but i have seen it happen and especially if you're using excel and maybe you you know you have a great format but you accidentally dropped a row in there at the very end and you forgot to update your uh formulas you know some of those little things happen so just kind of as a last piece go back and double check and make sure everything ties down together so just a reminder there all right so we've worked hard we've done all our bookkeeping all of that looks great our financial statements are ready to go we print them out at the end of the month now what do we do lisa all right and one thing i wanted to note there is you know we've been talking about how important it is to have your finances in order your your balance sheet and income statement and your supporting documentation you know but not only is it important for the taxes for tax purposes and that's what we've been stressing a lot but it's also important for the owner of the company because hopefully if you have once you start growing hopefully then you have staff that perhaps you have somebody that can do all the accounting work for you and then you can you know be the visionary as the owner and deal with operational items well you're going to want to look at the financial statements you're going to want to look at that balance sheet you're going to want to look at that income statement because the two of them together definitely tell a story as jennifer was pointing out as she was going through it you're going to want to look at the fluctuations or the variances of how it's gone up how it's gone down and you'll get very familiar with them as you look at them monthly and also that's another thing that we do is here is and i've seen it in practice all the time is where as jennifer mentioned about comparative even on the income statement items we'll look at a calendar rise like month to month to identify any kind of blips in there and to research it if all of a sudden your supplies was running around 500 and it went to 5 000. well why is that and you can ask your staff so anyway i just wanted to mention that all right the financial step statement checklist i'm going to go over the just briefly talk about the balance sheet and then jennifer will go over the income statement again you will get this in full detail and it was provided by patilla brennan hill and this is something that they provide to their clients at the end of the day what we say or determine is that for your financials to be correct in the accounting department always say that as long as you're doing a reconciliation of every single one of your balance sheet accounts and then you're reviewing the general ledger and you're looking at those fluxes and those differences and some of the items that jennifer is going to go over then i feel confident that the financial statements are correct so she has on her checklist here and some i'm not going to go over every one of them but important ones to note here you know cash accounts what does that mean well you know do a bank reconciliation reconcile your general ledger to your bank statement accounts receivable as i've been mentioning before ar and ap typically if you're utilizing a software then you're going to have a sub ledger because that software allows you to process your accounts receivable process your accounts payable well you want to make sure that that sub ledger ties to your general ledger account number to your control account is what they call it and so on some other items on here payroll taxes you're going to have some payroll tax liabilities on your general ledger well go back to the source document go back to your payroll files and make sure that your payroll reports tie to what is on the liabilities for payroll um let's see another one sales tax notes payable again it's just making sure you're basically just verifying the accuracy of your balance sheet accounts you just want to know that they are good so you're going to have some sort of reconciliation some kind of support to back up the amounts for each of these accounts jennifer i'll pass it back to you to go over the income statement items okay sounds good thank you all right so on the income statement whereas when we're talking about the balance sheet it's you know we want to know what each individual balance is on um on the balance sheet so you know when you look at that balance sheet there should never be someone that can ask you to ask you well what is this cash account and you say i don't know i don't remember that one you know you want to make sure you kind of have those things in your head well on the income statement it's a little bit different because there we're talking about a period of time so it's not just one point in time so here it's a little more kind of like lisa alluded to earlier about variance analysis if your supplies went from 500 to 5000 okay fine let's just make sure we have in our head why that happened oh you had a big um you know you had a big event and you purchased a lot of office supplies or you know because you had a bunch of people coming in and you were giving promotional items okay makes sense we're all good with that the variance makes sense um so you just want to look down the down the comparative financial statement and i like to run you know a month you know 8 31 8 1 to 8 31 of this year versus last year and then run year-to-date versus year to date last year because those things can tell you two very different things so we always want you to go through look at those variances doesn't take much time and those things will generally pop right out at you and a lot of your software is even will let you have the either a dollar change line or a percentage excuse me dollar change column or percentage change column with your income statement and so that's even an easier way you know drop that out to excel and sort it and see anything that has more of a 20 change or any you know you can use it for any kind of benchmarking that you want um but it's super simple to do that and be pretty meaningful we always look at you know and these are kind of some of the things that you do at the end of the year but monthly also want to make sure that you have your interest expense tied down to your amortization schedule when you're tracking those loans um do your wages and your payroll taxes tied to your payroll tax reports that's one of the things we always look at because it's kind of like a little red flag raiser sometimes when you're having an audit whether that's sba or just a financial statement audit or the irs you know those are kind of things that you can always look at and tell if a business owner kind of knows what's going on because it's a simple way to say all right if wages on my income statement are five hundred thousand dollars is that also what they included on their 941s and their w-2s to their employees it should or you should be able to reconcile them a lot of times people like to allocate officer salaries from their employees salaries and so we'll see that delineation on a p l as well um so we always like to see that um and sometimes it's just a matter of all right are there large balances in other income or miscellaneous expense and kind of like lisa alluded to earlier you know when you're kind of developing your chart of accounts on the front end and you're figuring out what's meaningful to you you know you may not realize oh i'm using miscellaneous expense a lot because i don't necessarily have a category for x you know maybe it's cable and you've always had internet phone cable you know all of those things consolidated into communications and then you started moving things to miscellaneous expense well maybe you just need an internet line item or maybe you just need you know just something that's a little more meaningful and it doesn't get clogged up in a miscellaneous expense um so those things can be checked there and then also bottom line you w nt to check your net income all right does that make sense to you you know you know what you're doing on a day-to-day basis you're thinking of your vision going forward does your net income and the resulting tax liability match what you think is going on and if it doesn't then you want to investigate that further so it's kind of you know we're going through the balance sheet and a lot of these questions that are on the checklist are very detailed but at the end of the day you know we want the big picture items your net income your gross profit we want those to be your focus and if you've laid the foundation then you're able to focus on those things and not quite as much on the details going forward um so that's why i think this checklist is helpful it just kind of helps identify some little quick tips and tricks to make sure that you keep on top of your financials and jennifer i've jotted down here that on the balance sheet accounts i would recommend best practice is to check those monthly and then another item i noted here is as you become more advanced your company might want to set up departments like here we have a sales department a legal department or you might have different lines of business and you might want to set that up as a set that up separately where you can show okay let me see my line of business for product a and my line of business for product b so is the more advanced you become in your company then you might want to set up say departments or another bucket per se so you can keep track of are those lines of business profitable or not absolutely and a lot of the software's too one mistake that i've seen a lot of people do is they will if they especially if they use quickbooks so many small businesses use quickbooks so i always kind of come back to that um but a lot of people they'll end up you know they'll have a chart of accounts that's for a product a and then you'll do a charter chart of accounts for product b or service one and service two you really don't have to have some huge chart of accounts it can be one chart of accounts but quickbooks actually lets you use what they call classes so what lisa is referring to as departments they call classes and it's super simple to use and set up like literally in about four clicks so um you know you definitely have that capability in the software and many accounting softwares as well perfect well um again please submit your questions in the chat feature and i just want to give a big thank you to jennifer and lisa this is such a complicated topic and there's so many terms um and you guys explained it so well and the examples are really helpful and so i just want to say thank you so much we have heard um a lot from our small businesses and entrepreneurs that we work with at extraco that understanding finances is really difficult especially when you're starting a new business you're trying to understand everything you're launching that sometimes the really important things um get left behind and so this is why we knew we wanted to um give this information out to everyone just because it's so important and making sure like you all have said this whole time setting up your business correctly for lending opportunities talking to a bank and just getting off on the right foot and so we really appreciate y'all um explaining everything so well i've gotten a lot of comments today throughout the presentation how well you all explained it so awesome thank you can i just say one quick thing christina sure i just want to say thanks so much for extraco definitely for inviting us and then also for the support that you give to our firm you've been a great partner with us forever so business friendly in our community and it is a um it's an honor for me to to be here with you guys today and i mean just a a small little way to pay back how supportive you guys have been of our firm and i encourage all of the the people that are on the call to use extra code to its fullest extent and use them as a good resource they're super friendly people and super happy to help and can definitely point you in the direction the right direction on a myriad of things so thank you guys to you and to your leadership team they're really great oh thank you thank you jennifer yeah absolutely um okay well we are going to wrap up for today again we will send you all this video along with a recap blog early next week um and we will include those templates that jennifer and lisa mentioned throughout the presentation um our october bank brews is all about the human resource life cycle and we have done this one before but it continues to be highly um and a worksheet a workshop that people really want to learn more about so we're going to do it again so that will be virtual and we will send you all more information on that um in the coming weeks so thank you again jennifer and lisa and we hope you all have a great day everyone all right [Music]