Financial Considerations4.4 - Establishing Bank Accounts4.5 - Establishing Financial Control Systems 4.6 - Establishing Record-Keeping Strategies Flashcards
4.4 - Bank accounts – separate entity principle
What Is Separate Entity Accounting Principle:
separate entity accounting principle is when the owners finances are separate to that of the business and therefore should be recorded separately —-> this is easier to do with separate bank accounts.
Bank Accounts
What is a business bank account and why is it important?
A business bank account is a checking or savings fund separate from the owner’s personal bank account.
It is important because:
The business is a separate entity from the person, therefore finances should be separate.
Easier to keep track of financial performance
Fees such as interest are separate from personal expenses
What are the factors to consider when choosing the right bank account
BIOCC Bank fees interest fees overdraft faciality credit cards connivance and support
BOIC
Bank Fees - There may be a monthly or annual fee for the account
Overdraft Facility - This allows the bank balance to go negative, improving the business’ liquidity (access to cash)
Interest Rates - Savings accounts will earn interest, overdrafts & credit cards will be charged interest
Credit Cards - Do you need a business credit card for purchases?
BOIC
Bank Fees - There may be a monthly or annual fee for the account
Overdraft Facility - This allows the bank balance to go negative, improving the business’ liquidity (access to cash)
Interest Rates - Savings accounts will earn interest, overdrafts & credit cards will be charged interest
Credit Cards - Do you need a business credit card for purchases?
What is financial control systems and what does it do? and once you answer that give 2 reasons on why they are important
Financial control systems help the owner monitor, record and evaluate the business’ financial success.
Financial control systems will vary from business to business depending on its size and nature.
These are important because:
Without these systems, you won’t know if your business is making money!
The government requires record to be kept for tax purposes.
Allows the owner to make decisions about the future of the business.
Allows the owner to present the financial information to potential investors or partners.
Accounting Crash Course!
what is profit and what does it equal to, and what does break even point and what is it equal to
Profit = Revenue - Expenses
Break-Even Point = the amount of revenue needed to meet all expenses (when profit = 0)
Financial control systems
Budgeting cash flow control of accounts receivable inventory control auditing
Financial control system - Budgeting
What does budgeting mean?
And why is it important
Budgeting: refers to predicting/estimating the value of the businesses’ financial performance for a given period of time in the future (could be monthly, quarterly or yearly).
Budgets are important because:
Helps the business establish standards and use them as a benchmark against which to compare actual events.
and
It is used to control the business.
Financial Control Systems - Cash flow management
What is cash flow management
and how do you manage your cash flow?
Cash-Flow: the money being transferred into and going out of the business.
One of the major reasons small businesses fail is lack of cash flow, meaning they don’t have the funds to pay their expenses.
Manage your cash flow by:
Chasing up debtors (people who owe you money) regularly
Ensure customers are paying the correct amount on time
Do not continue doing business with customers in arrears (owing)
Financial control system – Control of accounts receivable
What does
Accounts Receivable: the outstanding invoices or payments that a business has – the money that the business is owed by its customers.
When a business makes a sale – and has delivered the good or service to a customer – but the customer still owes payment on the good or service, the amount will be recorded under accounts receivable.
Collecting accounts receivable is vital in a business to ensure cash flow
Financial control system – Control of accounts receivable
What does accounts receivable mean?
and what are some strategies to control accounts recevibale
Accounts Receivable: the outstanding invoices or payments that a business has – the money that the business is owed by its customers.
When a business makes a sale – and has delivered the good or service to a customer – but the customer still owes payment on the good or service, the amount will be recorded under accounts receivable.
Strategies to control accounts receivable:
Set the right credit terms – typical payment cycle ranges from 30-90 days:
Longer payment term extends more credit to customers – why would a business want this?
Shorter payment terms should result in the business being paid faster – why would a business want this?
Offer a variety of payment methods to make payment easier:
Bonuses/rewards for early payment (e.g. discounts, free shipping, gifts, loyalty points or future credits).
Late payment fees could also be used to encourage prompt payments.
Financial control system – inventory control
What is inventory and what is inventory control?
what are some Strategies
Inventory: materials on hand to complete production – businesses hold large inventories to make sure that they don’t run out of materials.
This has become a huge cost because stock has to be stored – this money can be reinvested elsewhere into the business.
Materials can also become unavailable after a certain period of time.
Inventory control: is a system businesses use to ensure that the costs associated with maintaining an inventory of materials are kept to a minimum.
Inventory control strategies:
Not allowing materials to remain idle and making sure than materials are available for production when needed.
Using both physical control of inventory and a technological control – e.g. by using an inventory recording system.
Using computerisation
What does auditing mean?
Auditing: the process of testing and evaluating a business’s accounting processes and internal controls.
Internally – whereby employees of the business perform the audit.
Externally – whereby another business performs the audit. This can be costly, therefore, many businesses avoid an external audit.
What is record keeping?
and what are some strategies
Record-keeping
Record all transactions (expenses and revenues) in a table, excel or a software program such as Quickbooks or MYOB.
This information is essential to keeping track of business performance.
All receipts, tax invoices and other documents should be carefully filed.
Record-keeping strategies:
Source documents – written documents that provide evidence of a financial transaction.
Producing a balance sheet – a summary of a business’s assets (what they own) and liabilities (what they owe) at any point in time.
