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A Simple Guide to Understanding Your Profit and Loss Statement

9/17/2015

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By Doug & Polly White, ENTREPRENEUR.COM
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Most entrepreneurs start organizations because they are passionate about the primary work of the business -- which usually isn’t accounting. This means that most entrepreneurs aren’t completely comfortable interpreting the monthly financial reports they receive.

We have met hundreds of entrepreneurs who never look at their profit and loss statements because they do not understand them and explanations have been too complicated. While we can’t teach you to be a CPA, we can give you some basics that will help you with this important financial tool.


All P&Ls are based on a very simple formula -- sales minus costs equals profit. It really is that simple. Everything else is a matter of breaking out sales or cost into more detail and adding subtotals. Sales are typically shown at the top of the P&L. Costs are shown below sales and profit is at the bottom. You may see a number of subtotals as you look down the column, but it is still sales minus costs equal profit.

Unfortunately, we sometimes use different words for sales, costs and profits. This can make accounting seem more difficult than it really is. For example, sales can also be called revenue or income. Costs may be called expenses and profits may be referred to as net income. In fact, the P&L itself can also be called an income statement. All of these AKAs can be confusing, but don’t let it throw you. A rose by any other name …

Your company’s sales may be broken into several different sources. For example, the sales of a restaurant may come from customers who dine in or take out or from catering. Such a business may choose to break sales into those three pieces. Typically, these three components would be added together in a line called total sales.

Similarly, costs are usually broken into various components. For example, you may see material costs, labor costs and overhead broken out separately. There are an infinite number of ways to break out costs, but once you get below the total sales line everything else you see is a cost, broken out in one way or another.

One of the most useful ways to subdivide costs is into those costs that are directly associated with delivering your product or service and those that are not. Consider a company that makes and sells different types of widgets. It will have the cost of the components used to make the widgets, the cost of the workers who assemble the widgets and the costs of the production facility. These costs are referred to as cost of goods sold (COGS) because they can be tied directly to the production of widgets.

In a service business, this is called the cost of service (COS). For example, a lawn maintenance service would include the cost of the employees who do the work, fuel costs and the cost of other supplies such as fertilizer and grass seed.

Sales minus COGS is known as gross profit (or gross margin). This is the money the business earns after it subtracts the cost of delivering its product and/or services. It is also the money needed to cover the other costs associated with running the business and still generate a profit.

Other costs of the business are not associated with the production of widgets. Such costs might be the cost of the people who sell the widgets, the cost of the accountants who produce the P&Ls and even the president’s compensation. These costs are most often referred to as selling, general and administrative costs (SG&A). With this addition, the P&L is now broken down into two parts: sales minus COGS equals gross profit, and gross profit minus SG&A equals profit.

If you have been filing your P&Ls away without reading them, you are not alone. However, understanding your P&L is essential to being able to run your business successfully.

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The 9 Biggest Financial Warning Signs

9/13/2015

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By Brian Hamilton, ENTREPRENEUR.COM
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When you’re running a business, the ultimate sign of financial distress is usually running out of cash – you just don’t have any money left.  However, even though it seems obvious, running out of cash is almost always a symptom and not a cause of business failure. The key, like any illness, is to catch the symptoms early, so that you can begin to identify the causes.


The Symptoms:
1) You’re struggling to be profitable. No matter what anyone claims, an unprofitable business is, by definition, a business at risk.  When there isn’t a clear path to profitability, the business is forced to raise money outside of itself, which opens up an entirely different world of risk.  The business relies, not on itself, but on others.

2) Your margins are slipping (gross or net). A margin is taking a profit number and dividing it by sales. Gross profit margin (gross profit divided by sales), usually measures a company’s ability to manage its most important costs. Margins are always expressed as cents on every sales dollar.  Net profit margin is a company’s net profit divided by its sales.  Often, the net profit margin of a company is far more important than the amount of dollars in profit that a company is earning.  This is because net profit margin is typically an indicator of how profitable a company will be as it grows.  In my experience, even financial professionals do not put in enough time into understanding margin performance.


3) Your sales are stagnant or decreasing. Like the biology of plants, something is either growing or dying.  Sales money are used to pay for expenses, so there is a clear financial impact of not having as much sales money available to pay for expenses; however, the very dangerous part of sales stagnation or decline is that it usually indicates a lack of customer acceptance, which is key to any business.   There is no better barometer of market/customer acceptance than revenue

4) Your rate of sales growth is declining. This is something to watch out for, and it’s a fairly subtle point.  Even if your sales are increasing, you have to keep an eye on the rate of growth.  Is your sales percent change higher, year over year, for this year, than it was last year?  If not, it may be a symptom of financial issues.  One very important note: it’s natural for companies, as they grow bigger, to start seeing their rate of sales growth go down.  It’s much easier to “double” your sales when you had $1000 in revenue last year than it is when you had $100,000,000 last year.  Still, it’s important to keep your eyes on the rate of growth.

5) You are profitable, but do not have positive cash flow from operations. It would take too many words to explain this in full, but it is very possible to be profitable and still not be generating positive cash flow.  At some point, all businesses need a good accountant—one who is experienced in financial analysis and who can help you navigate through this issue of liquidity.  Not all accountants are good at financial analysis, so this may take some digging on your end.


The Causes:
6) Renewal sales, inbound leads, or other metrics related to market acceptance are flat-lining. Most companies live and die on the stickiness of their product— i.e., repeat business and word of mouth.  The market tends to be efficient, and customers tend to make good purchasing decisions.  A company should have metrics by which it can evaluate how solid its customer relationships are.   Most businesses have unique ways to measure the stickiness of customer base – renewals, repeat business, Yelp ratings.    When these metrics start sliding, it will eventually have serious financial consequences and will likely manifest itself in some of the symptoms listed above.

7) Your employee turnover is getting higher. While it’s true that each industry will have specific challenges and rates of employee retention, significant changes in employee turnover tend to be an early warning sign that a business is in trouble.   Sometimes this is measured, erroneously, by changes in key personnel.  I’m more interested in overall employee retention changes.

8) The product or service you offer is decreasing in quality. You need objective metrics to measure the quality of your product.  This is very closely related to point number 6.  Ultimately, marketing, public relations, and “buzz” can only help you to a certain extent.  The product’s quality should speak for itself.   You want to be offering a product whose quality is so high that, in order to lose, you have to virtually everything else wrong.  This must be tracked internally by the company, not just by customers. 

9) Your office/workspace/headquarters looks messy. In my previous consulting career, I got to the point where I could walk into a business, and pretty much know immediately if it was doing well or not.  Are the bathrooms clean, are the floors clean, what’s the condition of the paint?  Do people care about the company? You’ll be able to tell by how they treat their workspace.

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5 Tips to Get Clients to Pay on Time

9/10/2015

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By Nina Zipkin, ENTREPRENEUR.COM
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Don’t get stuck in a holding pattern because of late payments from customers. Keep your cash flowing by maintaining both your client relationships -- and your sanity.

  • Create a payment calendar. 
For large jobs, don’t just send the client one big bill at the end of the project. Instead, map out when you'll hit specific milestones. Once that calendar is mutually agreed upon, send the client invoices as those aspects of the work are completed. Make it a policy that you won't continue with the next step until you receive payment for the prior one – and send those invoices right away.

  • Make it worth their while. 
If you can swing it, consider incentives to encourage your customers to pay or pay through a platform that’s most convenient to you. Small nudges can be powerful habit changers.

  • Be a person, not a bill. 
Send handwritten thank you notes to clients for big projects – and find out who cuts the checks. Being more than another piece of paperwork to the accounting department can get payments made more quickly.

  • Send regular reminders. 
Follow up by e-mail or phone two weeks before invoice deadlines. If clients miss the deadline, call them with a gentle reminder. Being professional, polite and organized will make all the difference.

  • Stand your ground. 
Always be upfront with your payment policies, and make sure you protect yourself legally by agreeing to payment collection terms before you get to work for your clients. You also might want to consider charging late fees. Maintain a paper trail and employ the necessary legal advice in the event there is a dispute.
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How to Hire an Accountant for Your Business

9/10/2015

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By ENTREPRENEUR.COM
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A good accountant can be your company’s financial partner for life—with intimate knowledge of everything from how you’re going to finance your next forklift to how you’re going to pay for your daughter’s college education.

While many people think of accountants strictly as tax preparers, in reality, accountants have a wide knowledge base that can be an invaluable asset to a business. 


A general accounting practice covers four basic areas of expertise:

1. Business advisory services. This is where accountants can really earn their keep. Since the accountant is knowledgeable about your business environment, your tax situation and your financial statements, it makes sense to ask them to pull all the pieces together and help you come up with a business plan and personal financial plan you can really achieve. Accountants can offer advice on everything from insurance to expansion. Accountants can bring a new level of insight to the picture, simply by virtue of their perspective.

2. Accounting and record-keeping. Accounting and record-keeping are perhaps the most basic accounting discipline. However, most business owners keep their own books and records. The reason is simple: If these records are examined by lenders or the IRS, the business owner is responsible for their accuracy; therefore, it makes more sense for the owner to maintain them.

Where accountants can offer help is in initially setting up bookkeeping and accounting systems and showing you how to use them. A good system allows you to evaluate your profitability at any point in time and modify prices accordingly. It also lets you track expenses to see if any areas are getting out of hand. It lets you establish and track a budget, spot trends in sales and expenses, and reduce accounting fees required to produce financial statements and tax returns.

3. Tax advice. Tax help from accountants comes in two forms: tax compliance and tax planning. Planning refers to reducing your overall tax burden; compliance refers to obeying the tax laws.

4. Auditing. Auditing services are required for many different purposes, most commonly by banks as a condition of a loan. There are many levels of auditing, ranging from simply preparing financial statements from figures that the entrepreneur supplies all the way up to an actual audit, where the accountant or other third party gives assurance that a company’s financial information is accurate.

Choosing an Accountant
The best way to find a good accountant is to get a referral from your attorney, your banker or a business colleague in the same industry. If you need more possibilities, almost every state has a Society of Certified Public Accountants that will make a referral.

Don’t underestimate the importance of a CPA. This title is only awarded to people who have passed a rigorous two-day, nationally standardized test. Most states require CPAs to have at least a college degree or its equivalent, and several states also require post-graduate work. When dealing with an accountant, you can only hope they're well-educated and well-versed in your business’s needs. Passing the CPA exam, however, is a guarantee of a certain level of ability.

Once you've come up with some good candidates (five is a good number to start with), a little preparation is in order before you interview them. The first step is to take an inventory of what you'll need. It's important to determine beforehand just how much of the work your company will do and how much of it will be done by the accountant.

Once you've given some thought to your expectations, you’re ready to interview. Your principal goal is to find out about three things:

1. Services. Most accounting firms offer tax and auditing services. But what about bookkeeping? Management consulting? Pension fund accounting? Estate planning? Will the accountant help you design and implement financial information systems? Other services a CPA may offer include analyzing transactions for loans and financing; preparing, auditing, reviewing and compiling financial statements; managing investments; and representing you before tax authorities.

Make sure the firm has what you need. If it can’t offer specialized services, such as estate planning, it may have relationships with other firms to which it can refer you to handle these matters. In addition, make sure the firm has experience with small businesses and with your industry. Someone who's already familiar with the financial issues facing your field of business won’t have to waste time getting up to speed.

2. Personality. Is the accountant’s style compatible with yours? Be sure the people you're meeting with are the same ones who'll be handling your business. At many accounting firms, some partners handle sales and new business, then pass the actual account work on to others.

When evaluating competency and compatibility, ask candidates how they'd handle situations relevant to you. For example: How would they handle a change in corporation status from S to C? Or an IRS office audit seeking verification of automobile expenses? Listen to the answers, and decide if that’s how you would like your affairs to be handled.


3. Fees. Ask about fees upfront. Get a range of quotes from different accountants. Also try to get an estimate of the total annual charges based on the services you've discussed. Don’t base your decision solely on cost, however; an accountant who charges more by the hour is likely to be more experienced and thus able to work faster than a novice who charges less.

At the end of the interview, ask for references—particularly from clients in the same industry as you. A good accountant should be happy to provide you with references; call and ask how satisfied they were with the accountant’s services, fees and availability.

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5th National Conference on Internal Auditing - A GREAT SUCCESS

6/17/2015

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The Institute of Internal Auditors Qatar in association with The Scientific Accounting Association (SAA) hosted a very successful Fifth National Conference on Internal Auditing at The Grand Hyatt hotel, Doha - Qatar from 31 May to 2 June 2015. 

The conference with the theme “Auditing Matters” was attended by a large number of dignitaries and more than 400 delegates including Auditors from Bahrain, UAE, Kuwait, Lebanon and Saudi Arabia.

One of the valued sponsor was Ahmed Tawfik & Co. CPA - Mazars for this great event. Other sponsors were Qatar National Bank, Qatar Rail and Price Waterhouse Coopers, Deloitte, Protiviti, KPMG, Moore Stephens, BDO and Teammate, Thomson Reuters, Al-Najar, PRC, Bahwan Cybertek and Al-Sayed Accounting. Qatar University is our Academic Partner and The Audit Bureau Qatar our Strategic Partner.

The three day event had 32 international speakers addressing the delegates in 15 sessions and 6 workshops on topics relevant to the theme of the conference, “Auditing matters”, with reference to COSO (Committee of Sponsoring Organizations) framework on Internal Control. 


PHOTO GALLERY:
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If you're not using this data-searching trick in Excel, you're wasting lots of time

3/2/2015

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By Sara Silverstein, BUSINESSINSIDER.COM
VLOOKUP is one of the most useful functions in Excel. You can pull specific data out of huge data sets with a simple formula. Just watch.
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No Accounting Skills? No Moral Reckoning

4/26/2014

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By Jacob Soll, The New York Times
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SOMETIMES it seems as if our lives are dominated by financial crises and failed reforms. But how much do we even understand about finance? Few of us can do basic accounting and fewer still know what a balance sheet is. If we are going to get to the point where we can have a serious debate about financial accountability, we first need to learn some essentials.

The German economic thinker Max Weber believed that for capitalism to work, average people needed to know how to do double-entry bookkeeping. This is not simply because this type of accounting makes it possible to calculate profit and capital by balancing debits and credits in parallel columns; it is also because good books are “balanced” in a moral sense. They are the very source of accountability, a word that in fact derives its origin from the word “accounting.”

In Renaissance Italy, merchants and property owners used accounting not only for their businesses but to make a moral reckoning with God, their cities, their countries and their families. The famous Italian merchant Francesco Datini wrote “In the Name of God and Profit” in his ledger books. Merchants like Datini (and later Benjamin Franklin) kept moral account books, too, tallying their sins and good acts the way they tallied income and expenditure.

One of the less sexy and thus forgotten facts about the Italian Renaissance is that it depended highly on a population fluent in accounting. At any given time in the 1400s, 4,000 to 5,000 of Florence’s 120,000 inhabitants attended accounting schools, and there is ample archival evidence of even lowly workers keeping accounts.

This was the world in which Cosimo de’ Medici and other Italians came to dominate European banking. It was understood that all landowners and professionals would know and practice basic accounting. Cosimo de’ Medici himself did yearly audits of the books of all his bank branches; he also personally kept the accounts for his household. This was typical in a world where everyone from farmers and apothecaries to merchants — even Niccolò Machiavelli — knew double-entry accounting. It was also useful in political office in republican Florence, where government required a certain amount of transparency.

If we want to know how to make our own country and companies more accountable, we would do well to study the Dutch. In 1602, they invented modern capitalism with the foundation of the first publicly traded company — the Dutch East India Company — and the first official stock market in Amsterdam. But it was through an older and well-maintained culture of accountability that they kept these institutions stable for a century. The spread of double-entry accounting to the Netherlands during the early 1500s made the country the center of accounting education, world trade and early capitalism. Well-accounted-for provincial tax returns allowed the Dutch to float bonds at dependable 4 percent interest rates. The Dutch trusted their managers to know how to keep good books and make regular interest payments, while paying off state debt.

Every level of Dutch society practiced double-entry accounting — from prostitutes to scholars, merchants and even the Stadholder, Maurice of Nassau, Prince of Orange. Painters regularly depicted merchants keeping their books; Quentin Metsys’ “The Money Changers” (circa 1549) showed that even skilled accountants could be fraudulent. In other words, the advantages and pitfalls of accounting were at the fore of public consciousness.

Not only did the Dutch have basic financial management skills, they were also acutely aware of the concept of balanced books, audits and reckonings. They had to be. If local water board administrators kept bad books, the Dutch dyke and canal system would not be well maintained, and the country risked catastrophic flooding.

This desire for accountability was what pushed the Dutch to reform their financial system when it began to collapse under the weight of fraud. The first shareholder revolt happened in 1622, among Dutch East India Company investors who complained that the company account books had been “smeared with bacon” so that they might be “eaten by dogs.” The investors demanded a “reeckeninge,” a proper financial audit.

While the state did not allow the Dutch East India Company’s books to be audited in public, Prince Maurice did do a serious internal audit, and Dutch burghers were satisfied with both company and state accountability. A cultural ideal was set. For the next century, it became common practice for public administrators to have portraits of themselves painted with their account books — sometimes with real calculations in them — open, for all to see.

These historical examples point the way toward achievable solutions to our own crises. Over the past half century, people have stopped learning double-entry bookkeeping — so much so that few know what it means — leaving it instead to specialists and computerized banking. If we want stable, sustainable capitalism, a good place to start would be to make double-entry accounting and basic finance part of the curriculum in high school, as they were in Renaissance Florence and Amsterdam.

A population well-versed in double-entry accounting will not immediately solve our complex financial problems, but it would allow average citizens to understand the nuts and bolts of finance: balance sheets, mortgage interest, depreciation and long-term risk. It would also give them a clearer sense of what financial accountability really means and of how to ask for and assess audits. The explosion of data-driven journalism should also include a subset of reporters with training in accounting so that they can do a better job of explaining its central role in our economy and financial crises.

Without a society trained in accountability, one thing is certain: There will be more reckonings to come.

Jacob Soll, a professor of history and accounting at the University of Southern California, is the author, most recently, of “The Reckoning: Financial Accountability and the Rise and Fall of Nations.”

A version of this article appears in print on 04/28/2014, on page A21 of the NewYork edition with the headline: No Accounting Skills? No Moral Reckoning.

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Mazars LLC is a registered firm under Qatar Financial Center with QFC No. 00634.
​The partners of Mazars LLC are also partners at Ahmed Tawfik & Co. CPA, a firm registered under the Ministry of Commerce and Industry in Qatar.

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