Legit Numbers 🔢 #01

This week's top posts on Your CFO Guy LinkedIn

Welcome to the first edition of Legit Numbers!

Whether you're looking to catch up on the popular posts you engaged with or to discover the ones you may have missed, this digest has got you covered, and I hope it enables you to enhance your financial knowledge and skills.

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What we’ll be covering in this edition:

The 3 Financial Statements 📄 📄 📄
Everything you need to know about Adjusting Journal Entries 👇
Want your Finance & Accounting function to run smoothly?
Be a FULL STACK Finance & Accounting professional
10 Things about Accounting you may not have known 😯

Let's dive in...

Accounting vs FP&A

These 3 statements are affected by close to every action taken in your Finance & Accounting department

Let's take a deep dive on each:

📄 𝐈𝐍𝐂𝐎𝐌𝐄 𝐒𝐓𝐀𝐓𝐄𝐌𝐄𝐍𝐓 (also known as Profit & Loss)

This represents everything in terms of what your company is EARNING...

as well as what your company is SPENDING

Here are the major sections (and what they mean):

⚫ REVENUE

What is being earned via sales

⚫ COGS

The cost to deliver your product or service

⚫ GROSS PROFIT

Your profitability in carrying out your product or service (Revenue - COGS)

⚫ OPERATING EXPENSES

All other costs that relate to your core business, but aren't necessary to carry out your product or service (IE not COGS)

⚫ NET OPERATING INCOME

Gross Profit less Operating Expenses

⚫ OTHER INCOME

Money earned that is not core to the business (common ones can be interest income, or cash back from credit cards)

⚫ OTHER EXPENSES

Expenses that are incurred that are not core to the business (common ones can be depreciation and interest expense)

⚫ NET OTHER INCOME

Other Income - Other Expenses

⚫ NET INCOME

Net operating income + other income

📄 𝐁𝐀𝐋𝐀𝐍𝐂𝐄 𝐒𝐇𝐄𝐄𝐓

Here you can see a snapshot of everything the company OWNS (assets)...

while also understanding what the company OWES to creditors (liabilities)...

and the money put into the business through investments & prior profits (owners equity)

It is separated by 3 sections:

⚫ ASSETS

What the company owns that represents economic value.

Common ones are cash, accounts receivable, and prepaid expenses

⚫ LIABILITIES

What the company owes to creditors. Examples can include credit card balances, accounts payable, and deferred revenue

⚫ EQUITY

This is the net value of the company that the owner's can claim, and is typically comprised of amounts invested, and prior earnings (retained earnings)

📄 𝐒𝐓𝐀𝐓𝐄𝐌𝐄𝐍𝐓 𝐎𝐅 𝐂𝐀𝐒𝐇 𝐅𝐋𝐎𝐖𝐒

This statement shows you all of the details that makes up the movements in your cash balance on the balance sheet.

It is comprised of 3 sections

⚫ CASH FROM OPERATING ACTIVITIES

This section shows all of the cash flows from activities related to operating the business

⚫ CASH FROM INVESTING ACTIVITIES

Here you show the cash movements from long term assets

⚫ CASH FROM FINANCING ACTIVITIES

Here you show the cash from all equity investments and debt injected / paid out from the company

This summary is just a brief overview of these 3 statements - what would you add to the topic?

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Do you know what adjusting journal entries are?

If not...you should.

They are probably the biggest piece in a Month End Close process

Adjusting journal entries are entries booked to your general ledger to allocate the correct amount of income and expenses in an accounting period

This is most common with companies that follow the accrual basis of accounting, but even companies who follow cash basis will most likely need to book some adjusting journal entries each month

Adjusting journal entries are best maintained by a set of workpapers, typically in excel, showing how exactly the entries were calculated

Let's go over a few of the most common:

➡ PREPAID EXPENSES

Prepaid expenses are amounts paid for goods or services to be benefitted from in a future period.

This is especially common when you prepay for a 12 month subscription of something, but can also represent you purchasing something that you haven't used up yet (like a ticket to a conference next quarter)

➡ ACCRUED EXPENSES

Accrued expenses are expenses that have been incurred, but have NOT yet been recorded on a company’s general ledger

The most common example that I see is whenever a company knows that a service has been incurred, but they haven't received a bill yet from the vendor

➡ ACCRUED INTEREST

Accrued interest is booked to show the amount of interest due on debt that has NOT yet been paid

Here, just like a payable, you continue to increase your liability to reflect the amount of interest that's owed.

This is especially popular with convertible notes

➡ DEPRECIATION

Depreciation is recorded to reflect the wear and tear of a fixed asset over it’s useful life

Here you would use accumulated depreciation to show the cumulative reduction in the assets value

➡ INVENTORY

Inventory adjustments are booked when inventory gets moved to cost of goods sold

It can also be booked when items move from raw materials, to work in process, to finished goods

➡ DEFERRED REVENUE

Deferred revenue represents the amount of an invoice / payment received that has NOT been earned."

Click the image below for Adjusting Journal Entries Guide on my LinkedIn

12 Ways to Say Accounting

Follow these steps 👇

⬅️ ACCOUNTING ➡️

1️⃣ Set up your Month End Close

This is the heart and soul of your financial reporting…

Get it wrong, and everything that you analyze will be wrong as well

Consider the following:

▪️ Organize your chart of accounts

▪️ Sync your bank & credit cards to your accounting software

▪️ Classify transactions in bulk + Set rules

▪️ Perform Bank Reconciliations

▪️ Prepare Adjusting Journal Entries in Excel

2️⃣ Set up your AP function

AP can be one of the most draining tasks on your Finance & Accounting function..

And all it takes is one mistake in a wire payment to wreak havoc

Consider the following:

▪️ Create a group email address “ap@yourdomain.com”

▪️ Implement an AP management software

▪️ Collect approvals

▪️ Process payments on a schedule

3️⃣ Set up your payroll function

This can be another function that drains your resources if not set up properly…

and mistakes with paychecks can be catastrophic

Consider the following:

▪️ Use a PEO

▪️ Create a group email address “payroll@yourdomain.com”

▪️ Prepare a backup payroll file in excel

▪️ Set up auto processing as a precaution

4️⃣ Set up your invoicing function

Get this wrong and you’ll drain more resources, and delay getting paid

Consider the following:

▪️ Create a group email address “invoicing@yourdomain.com”

▪️ Bulk upload invoices to your accounting software from excel

▪️ Charge customer via autodebit

⬅️ FP&A ➡️

5️⃣ Create a 3 statement model

This 3 statement model will be the foundation for reporting on both your historicals + your projections

Consider the following:

▪️Match to your chart of accounts

▪️Import your actuals

▪️Build a revenue build + headcount forecast

6️⃣ Analyze & iterate on your projections

Your projections can be come stale FAST.

Don’t wait before it’s too late

Consider the following:

▪️Analyze Budget vs Actuals each month

▪️Implement changes to your projections before it’s too late

7️⃣ Prepare Board Reporting

This one is my favorite - the Board controls the most sensitive decisions at the company.

Consider the following:

▪️Showcase the key areas of the business

▪️Present financial information in a visually appealing way

▪️Have a story for each line item

8️⃣ Raise Capital & Manage runway

If you’re a startup, raising capital is a must.

Consider the following:

▪️Raise capital ahead of when you need it

▪️Have your pitch deck materials ready

▪️Showcase your blueprint for success via your financial model

Those are my suggestions for running a smooth Finance & Accounting function

The Difference Between Accounting and FP&A

The term “Full stack” is most commonly used amongst software engineers, highlight someone who can focus on the front end, as well as the back end.

Finance & Accounting is no different

I’ve seen this mistake so many times in my career:

😩 A Controller who continues to focus on what’s happening, but can’t explain where the business is going

😩 An FP&A manager who knows all of the ins and outs on the financial data it is presented with, but is clueless on how accounting compiled that data

😩 An AP clerk knows how to process payables efficiently and reliably, but can’t understand the ins and outs on how an adjusting journal entry works

😩 A VP of Finance who owns the forecast an reports to the board of directors, but has no idea how a journal entry affected the 3 statements

It doesn’t have to be this way

You have a choice

Continue to focus on what you know

Or step out of your comfort zone to learn both sides of FP&A and Accounting

Here’s what happens when you learn both

✅ Your job prospects greatly improve

✅ Your compensation, which is a reflection of the value you bring, goes up exponentially

✅ You start to understand the full picture, allowing you to perform each function better

✅ You perform higher level, more challenging tasks that stimulate your mind

✅ You get to work with many great people in unison

But that’s not where the value ends.

The value also gets magnified to the company that you work for.

When FP&A and Accounting work together..

🤝 Projections are way more defensible

🤝 Timeliness of reporting is improved

🤝 Resources are used efficiently

🤝 Greater insights are gained

Here's my 80+ pg MEGA GUIDE on Month End Close 😝 👇

1️⃣ GAAP is not the same as IFRS

GAAP=Generally Accepted Accounting Principles (GAAP)

IFRS=International Financial Reporting Standards

Each of these reporting standards can differ from one another…

2️⃣ Cash is not the same as Accrual

Some companies record their financial activity on the cash basis

➡️ Cash in=revenue

➡️ Cash out=expenses

Others record on the accrual basis

➡️ Income earned=revenue

➡️ Expenses incurred=expenses

These 2 can wildly differ from one another

3️⃣ EBITDA does not equal cash flows

For some companies these can be similar

For others, it can be the difference between night and day

4️⃣ EBITDA is not found on the P&L

That’s right - it isn’t even a metric that you’ll find on your P&L

It’s instead a separate calculation that many like to do to get insight into the financial health of a company

5️⃣ Your Cash Flows Statement is just an output from your P&L and Balance Sheet

If you could only collect 2 statements from someone, which would you choose?

it definitely wouldn’t be the cash flow statement

Not because it’s not important…it’s very important

but because you can create your own cash flows in a matter of minutes via the indirect method by taking the values from your P&L and Balance Sheet

6️⃣ Retained earnings is just your cumulative Net Income balance (not paid out in dividends)

This connection is so crucial - it’s how the 2 statements feed into one another

7️⃣ Deferred Revenue can be booked before cash is collected

Most people think deferred revenue can only be recorded once cash is collected, but that is simply not the case

It may be recorded when the payment is due, along with a few other criteria

Don’t believe me? Check out ASC 606-10-45-2

8️⃣ Not all purchases flow through on your P&L

Some purchases may relate to inventory, or fixed assets - so you may not notice them immediately if you just looked at your P&L

9️⃣ Positive values don’t always mean income and Negative values don’t always mean expense

The general idea is that your profit & loss & Balance sheet will show all values as a positive value

The only times you’ll see a negative is it’s a calculation row (like net income)

Or a contra account (like discounts, or accumulated depreciation)

🔟 Bank Reconciliations are a must

There’s only one way to confirm with 100% accuracy what your bank balance is and that’s to match it to a legal document from your bank

Are there any other items you’d add to the list?

Thank you for taking the time to read through the first edition of Legit Numbers. I hope you found the content informative and valuable in enhancing your financial knowledge and skills.

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If you have any questions please contact me at josh@yourcfoguy.com