Merchbooks

When NOT to use Excel

Yes…you read that right

Excel continues to be the #1 tool for most small business owners…

and to me, knowing excel can lead to the largest ROI

But there are times where you should NOT rely on excel…

Let’s get into it:

1️⃣ Your Accounting Software

I’ve seen many people reconcile their books in excel

and maybe that’s OK if you have very little business activity…

or if you reconcile your books only at year end with your tax accountant

but in all other circumstances, setting up an accounting software like Quickbooks Online will save you HUGE headaches, allowing you to

✅ Sync your transactions from your bank

✅ Set up rules for classifying transactions

✅ Add metadata, like vendor name, descriptions, or receipts

✅ Perform bank reconciliations

✅ Book journal entries

✅ Run custom reporting

Most accounting softwares you can get for less than $50 a month…and some are even free

2️⃣ Task management system

Odds are you aren’t the only one in your Finance & Accounting department

And even if you are…you most likely have dozens of tasks to handle each month

I see people sometimes outline these tasks in excel, but they lose out on so much with this approach

With a task management system, you can:

✅ Assign people tasks, allowing them to get notified

✅ Have a discussion on the task in the task itself

✅ Include subtasks, and dependency tasks

✅ Sync updates to slack / email

✅ View tasks in list vs kanban vs calendar format

✅ Include instructions in a nice UI

✅ Attach documents & other resources

Almost all task management softwares offer a free starter plan.

Those are just 2 areas where using an excel sheet can get you into trouble…there are many others

Where else would you suggest to avoid using excel?

Let us know & join the discussion in the comments below 👇

9 ways to improve Cash

Good Accounting Professionals take care of their clients cash flows.

Based on my experience, here are 9 levers you can use to make an impact:

1️⃣ Sales:
-Improve payment terms with clients (negotiate down payments and short payment terms)
-Accelerate the lead time to close deals

2️⃣ Procurement:
-Avoid down payment
-Push the payment terms as far as possible

3️⃣ Project:
-Compute cash balance of each project
-Plan your cash in and cash out and monitor it

4️⃣ Collection of overdues:
-Automate the dunning process
-Escalate significant issues to management & key account manager

5️⃣ Inventory:
-Monitor level of inventory
-Reduce lead time
-Optimise stock buffer
-Reduce delays

6️⃣ Finance:
-Automate reporting
-Improve understanding of cash flow statements
-Bring transparency to management
-Escalate collection issues

7️⃣ Sales administration:
-Optimise the process between a cash milestone achievement and the issuance of the debit note to your client

8️⃣ Management:
-Translate cash objectives in team & individual objectives
-Put cash on the management reviews agenda
-Follow up cash as KPI

9️⃣ Culture:
-Communicate, explain, repeat: it’s a culture shift

👉 What would you add?

10 SaaS KPIs

1) Customer Churn Rate

Description: Percentage of customers lost in a given time frame

Formula: Customers lost / Total Customers

2) New Buyer Growth Rate

Description: Speed at which you gain new customers over defined periods of time

Formula: (New buyers this month - New buyers last month) / New buyers last month

3) Lifetime Value

Description: Revenue from a customer over the retention time period

Formula: Customer Value * Average Customer Lifespan

4) Customer Acquisition Costs

Description: Amount of money a company spends to get a new customer

Formula: Cost of Sales and Marketing / Number of New Customers Acquired

5) Net Burn rate

Description: Net Cash spent by a company in a specific time frame (usually monthly or normalized to a year)

Formula: Cash Spent - Cash received

6) Runway

Description: Time that a startup has before they run out of finances

Formula: Current Cash Balance / Burn Rate

7) Average Revenue Per User (ARPU)

Description: Average revenue generated per customer (either monthly or annually)

Formula: Total revenue / Total number of customers

8) SaaS Quick Ratio

Description: Compares revenue added (new business) vs revenue lost (churn)

Formula: (New MRRt + Expansion MRRt) / (Churned MRRt + Contraction MRRt)

9) Monthly Recurring Revenue (MRR)

Description: Monthly revenue from customers with a subscription

Formula: Number of customers * Average billed amount

10) Total Addressable Market (TAM)

Description: Market size of a product/service in value that the company can achieve

Formula: Annual Contract Value per client * Number of potential clients

👉 Which other KPIs would you add?

A Simple Explanation of Cash that even Kids can understand

Explanations for kids... and adults!

💵What is Cash Flow?

Cash flow is like the money that comes in and out of your piggy bank.

👩‍💼Why is it important for Businesses?

They need to make sure they have enough money coming in to pay for things like rent, salaries, and supplies.

They also need to make sure they have enough money to invest in growing their business or saving for the future.

🌀Net Income vs. Cash:

It's important to note that net income is not the same as cash flow.

Net income is the profit a business makes after subtracting expenses from revenue.

Net income does not take into account changes in cash, such as money spent on capital expenditures or money received from financing activities.

Example:
Let's say your lemonade stand makes $100 in revenue and has $80 in expenses, so your net income is $20.
However, if you also spent $15 on a new lemon squeezer, your cash flow would actually be only $5.

⚙️Investing in Capital Expenditures (Capex):

Investing in capital expenditures is another aspect of cash flow management.

This means using your money to invest in long-term assets that can generate more revenue or improve the efficiency of your business.

Example:
Let's say you run a lemonade stand and want to increase your production.

You might invest in a new lemon squeezer or a larger pitcher.

This would require spending some money upfront, but it could pay off in the long run by helping you sell more lemonade and earn more money.

📆What is Liquidity Planning?

Liquidity planning is an important aspect of cash flow management.

This means making sure you have enough cash on hand to cover your expenses in case there's an unexpected cost or decrease in sales.

Example:
Let's say you're running a lemonade stand and one day it rains, so you don't make as much money.

If you didn't plan for this and save enough money, you might not be able to afford to buy more lemons and sugar for the next day.

🏦Financing:

Financing is the final aspect of cash flow management.

This means borrowing money to invest in your business or to cover expenses when you don't have enough cash on hand.

Example:
If you want to buy a new lemon squeezer but don't have enough money, you could borrow some money from your parents or a friend.

However, it's important to make sure you can pay back the money you borrow.

📝Managing Your Cash Flow:

It means keeping track of how much money you have coming in and going out.

It also means planning for unexpected expenses, investing in capex, and using financing wisely.

Just like your piggy bank, it's important to manage your money well so you use it to achieve your goals and avoid running out of cash.

👉 Which other explanation would you give if you had to explain cash to a kid?

Cash vs Accrual

These 2 reporting methods can result in wildly different figures

Let’s start with some definitions…

➡️The CASH Basis

Under the Cash basis of accounting, money IN is treated as income, while money OUT is treated as expenses

Note that while this is generally true, there are some exceptions:

☝️Money IN can represent an expense refund (negative expense), or debt (which is a balance sheet item) to name a few…

✌️Money OUT can represent a sales refund (reduction in sales), or inventory / fixed asset (which are balance sheet items) to name a few…

➡️ The ACCRUAL Basis

Under the Accrual basis of accounting, income is only recognized once it’s EARNED, while expenses are only recorded once they are INCURRED

What does that mean?

Earning income means you delivered your product or service

Incurring expenses means you consumed something that had a cost

…and this is where so many of the adjusting journal entries that are required each month are prepared such as

1️⃣ Prepaids - causing you to amortize certain expenses paid upfront to be split over the the period in which it gets incurred

2️⃣ Deferred Revenue - causing you to amortize income collected / invoiced upfront over the life of the contract

3️⃣ Accruals - causing you to recognize certain expenses in the current period, even if the bill hasn’t been received, or the payment has been made

These are just a tiny few of the many adjusting journal entries required for a month end close

🤔 So which method do I prefer?

Well…that depends a lot on the company

For small companies, the cash basis is great, as it simplifies much of your reporting

At the same time, larger companies almost always opt for the accrual basis of accounting, for the following reasons

1️⃣ GAAP Requires Accrual

While the IRS may allow companies up to a certain size to report under either method, GAAP requires you to reconcile under the accrual method.

That can be especially relevant for the 2nd reason:

2️⃣ Investors/Partners like to see what’s really happening

When you have outside investors, it’s common for them to want to see your financial statements under the accrual basis

Why?

Because the accrual basis explains what’s really happening in the business, allowing you to make better sense on key KPIs & margins, and to forecast the future

So in short:

◾SMALL BUSINESSES without a heavy amount of outside capital can benefit from the SIMPLICITY of the CASH BASIS of accounting

◾ LARGER BUSINESSES with a larger amount of outside capital are often required to record under the ACCRUAL basis

That’s my take on the Cash vs Accrual basis of accounting…but there’s much more to it

What would you add?

Let me know by joining the discussion in the comments below 👇

Accounts Payable

➡️ What it means

Money a company owes to its suppliers and vendors for goods and services purchased on credit

➡️ Where it shows up

On the Liabilities section of the Balance Sheet

➡️ Why it’s important

1️⃣ Cash Flow Management - a higher AP balance can mean that you are utilizing favorable cash flow measures for the near future, however it’s important to keep track as the amount can catch up with you

2️⃣ Relationship with Suppliers - It’s important to keep track of your AP balance or your relationship with suppliers may worsen, leading to future issues with purchasing goods & services on credit, or legal action

➡️ Common AP formulas

1️⃣ Accounts Payable Turnover Ratio: Measures how many times a company pays off its accounts payable balance during a specific period.

Formula: Purchases on Credit / Average Accounts Payable

Alternate Formula: COGS / Average Accounts Payable Balance

💡A high Accounts Payable Turnover Ratio means that the company is paying off it’s outstanding AP more quickly

2️⃣ Days Payable Outstanding (DPO): Represents the average number of days it takes a company to pay its suppliers.

Formula: Accounts Payable / Purchases on credit * Number of days.

Alternate formula: Average AP / COGS * Number of Days

💡A Lower DPO means the company is paying off it’s AP balance more quickly

3️⃣ Average Age of Accounts Payable: Measures how long a company takes to pay off its debts

Formula: Accounts Payable / Annual Credit Purchases / 365

Alternate Formula: Accounts Payable / Average Daily Cost of Goods Sold

💡A lower Average Age of Accounts Payable means the company pays it’s AP balance more quickly

➡️ Common Journal Entries

1️⃣ When purchasing good or services on credit…

Debit Software expense (or the relevant account)

Credit Accounts Payable

2️⃣ When paying off AP balance

Debit Accounts Payable

Credit Cash

Those are my notes on Accounts Payable

There’s much more to it!

What would you add?

Let us know in the comments below 👇

Accounts Receivable (AR)

Some see it as the antithesis to cash

Others as a necessary evil to carry out your sales

But how does your Accounts Receivable work? And what are some things to watch out for?

As always…let’s start with some definitions

➡️ What is Accounts Receivable?

This figure represents amounts owed to you by your customers

Because it contains economic value (IE a right to receive cash), it’s an asset

➡️ Why is your Accounts Receivables balance important?

A few reasons…

1️⃣ Your Accounts Receivables balance is one of the few assets that are intended to convert directly to cash

2️⃣ The higher your Accounts Receivable balance, the tighter your cash constraints

3️⃣ The longer your balance is outstanding, the higher the likelihood of recording a bad debt

➡️ What are some common formulas related to Accounts Receivable?

1️⃣ Accounts Receivable

Beginning Balance ➕ new invoices sent ➖ payments collected

2️⃣ Days Sales outstanding (DSO)

Accounts Receivables / Net Credit Sales * Number of Days

This represents how many days it takes you on average to collect against your balance - the lower the number, the quicker you are collecting

3️⃣ Accounts Receivable Turnover Ratio

Net Credit Sales / Average Accounts Receivable

Similar to DSO, this shows you how many times a company can convert it’s AR balance to cash in a given period.

The higher the ratio, the quicker you are collecting

4️⃣ Bad Debt Expense Ratio

Bad Debt Expense / Total Credit Sales

This shows you how much of your AR balance you can expect to write off in bad debt

➡️ What are some common journal entries?

When an invoice is sent...

Debit AR

Credit Sales (or deferred revenue)

When cash is collected…

Debit Cash

Credit AR

➡️ What are some ways you can keep your AR balance low?

❤️ FRIENDLY WAYS

▪️ Request payment upfront

▪️ Collect credit card / banking details for auto-debit

▪️ Follow up on outstanding balances continuously - don’t assume people will pay without reminders!

▪️ Request credit check references

💔 NOT SO FRIENDLY WAYS

▪️ Turn off service

▪️ Send the account to a collections agency

▪️ Threaten legal action

➡️ What are some common reports related to AR?

1️⃣ Accounts Receivable Aging Summary

This summarizes who owes you what, and is often grouped by how many days outstanding

2️⃣ Accounts Receivable Aging Detail

This shows you the detail of each and every invoice that is outstanding

That’s my take on Accounts Receivables - what would you add?

Let us know by joining in on the conversation in the comments below 👇

Business Travel: Stay at the Mom and Dad Hotel

Imagine this:
1. Tax deduction for you
2. Tax-free income for Mom and Dad

It doesn’t have to be Mom and Dad. The tax-free income can go to your brother or sister, or your best friend.

To make this work, you need to have a business reason to travel and stay overnight at the Mom and Dad Hotel.

Say you travel to a convention, rent your parents’ guest room for five days, and pay them $1,000 fair rent. You deduct the $1,000 as a business travel expense. Your parents have $1,000 of tax-free income.

Sound good?

Here’s what can happen if your menu pricing doesn’t excite you 👇🏻

❌ You won’t be making the margins to run your business
❌ You’ll end up resenting the work and it will show in your deliverables

What happens when your pricing DOES excite you?

🔥 You’re motivated to market your menu
🔥 You’re motivated to give your absolute best and go the extra mile for your customers

So, next time you’re pricing a new menu item, think about the recipe cost which will drive the best margins that is going to make you happy to do the work 😄

https://merchbooks.com/tax-planning/business-travel-stay-at-the-mom-and-dad-hotel-2/

Imagine this:

1. Tax deduction for you
2. Tax-free income for Mom and Dad
It doesn’t have to be Mom and Dad. The tax-free income can go to your brother or sister, or your best friend.

To make this work, you need to have a business reason to travel and stay overnight at the Mom and Dad Hotel.

Say you travel to a convention, rent your parents’ guest room for five days, and pay them $1,000 fair rent. You deduct the $1,000 as a business travel expense. Your parents have $1,000 of tax-free income.

Sound good?

Business Travel: Stay at the Mom and Dad Hotel | Restaurant Accountants Business Travel: Stay at the Mom and Dad Hotel Imagine this: Tax deduction for you Tax-free income for Mom and Dad It doesn’t have to be Mom and Dad. The tax-free income can go to your brother or sister, or your best friend. To make this work, you need to have a business reason to travel and stay ...

https://merchbooks.com/tax-planning/how-to-switch-from-the-mileage-rate-to-the-actual-expense-method/

Act Now: Earn 9.62 Percent Tax-Deferred - Zero Cost Accounting | Merchbooks Through October 2022, you can buy Series I bonds that pay 9.62 percent interest. And you receive that rate for six months from the time of purchase. What happens after that? On November 1, 2022, the U.S. Treasury Department sets a new six-month rate equal to the fixed rate (currently zero) plus the....