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Accounting Cycle

See Also:
Account Reconciliation
Account Reconcilement Definition
Accrual Based Accounting
Financial Accounting Standards Board (FASB)
Generally Accepted Accounting Principles (GAAP)
Thirteen Week Cash Flow Report

Accounting Cycle Definition

The accounting cycle, defined as the process taken by prudent accountants which leads to sensible accounting records, is part of the general best practices of accountancy. During the accounting cycle, controllers assure the quality of work with 3 main phases: analysis, record keeping, and adjustment.

Accounting Cycle Meaning

The term accounting cycle means the procedure accountants follow which eventually leads to representative financial statements for a company. Over time, an accounting cycle sequence has emerged from the successes and failures of the accountants who walked before. These, eventually, were assembled and accepted as a formal system to assure that records are kept relevant.


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Accounting Cycle Process

The accounting cycle process created is now widely accepted as a set of best practices. The value of these is that they account for quantitative as well as qualitative analysis, provides a framework of records as a foundation for statements, and allow for changes to occur which are then included in the statements. Find the accounting cycle process below:

1. Identify the Transaction

This part of the qualitative analysis assures that a transaction is important to the accountant and her work. Invoices and other documents allow this to occur.

2. Analyze the Transaction

When analyzing the transaction, the accountant relies on their expertise to decide what accounts and statements are effected by the transaction and in what way.

3. Record the Transaction as a Journal Entry

In this stage, the transaction is placed where it belongs in the transaction journal.

4. Post the Transaction to the Ledger

Here, the above journal entries are then included in T-accounts where they belong in the ledger.

5. Create a Trial balance

This stage assures that all existing credits and debits balance in their respective accounts.

6. Adjust Entries

Include accrued and deferred entries. Include these entries in the period which they effect. These entries are included, here, in the journal and T-accounts

7. Calculate the Adjusted Trial Balance

Create a new trial balance, after you adjust the entries for accrued and deferred entries.

8. Create Financial Statements

Here, financial statements are created from the adjusted trial balance.

9. Closing Entries

In this stage of the accounting cycle, temporary accounts are finally included in the Owner’s Equity section of financial statements. Call these the closing entries.

At this stage, the accountant can pass off the final accounting statements to their supervisors. Sometimes, a new trial balance is created here before sharing financials with company controllers. As with other stages of the process, the accountant will use their best judgement to decide what the next course of action will be.

Accounting Cycle and Operating Cycle

The accounting cycle and operating cycle are very closely related. These ties become more obvious when working in either department. With cash cycles, capital investments, permanent or seasonal hiring, and other needs that the operations department has the accounting department must be well informed in order to meet the needs of an ever-changing business. In many minds, the ties between the accounting and operations department may even be stronger than others. Most businesses will want to ensure regular communications between all departments, but most of all these.

Accounting Cycle Example

For example, John is the head accountant for a merchandising company. In truth, his side of retail may be the most important because nothing happens with a business until he makes a sale. John is an expert when it comes to the accounting cycle for a merchandising company. He has earned this through the constant struggles that he faces in his daily work.

John has to face one such struggle today. A deferred entry, in the form of an account payable with terms will effect the current period, has come up. He prepare financials, at his level of expertise. But the company has not informed John of this expense yet.

Luckily, John is at the adjust entries phase of his work. This is the perfect place to receive this information. Now, John can adjust entries to include the new expense. This will include additional information which was not otherwise in the statements. John loves to place as much useful information as possible in his statements. He is happy to do the extra work.

Conclusion

In conclusion, John receives a hail of praise when he finally presents the statements to the board of directors. For his continued attention to detail while still monitoring the big picture, he receives a large raise. His company wants to make sure they retain his expertise. John is happy for his success and thanks the accountants who first conceived of the accounting cycle transactions.

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Can You Build Success by Narrowing Your Customer Base?

I recently read an interesting Business.com article by Art Saxby. Art Saxby is the founding principal of Chief Outsiders. In this article, he talks about how to achieve success by narrowing your customer base.  Sounds counter-intuitive… But how many firms tie up valuable resources catering to high-maintenance customers who often don’t stick around in the long run?

Can You Build Success by Narrowing Your Customer Base?

Here’s an excerpt from the article:

Achieving success by narrowing your customer base?

It sounds counterintuitive, but many small- to mid-size businesses can achieve higher profits and more success by downsizing the base of customers they serve.

Creating the perfect situation in which you and your customer base share common goals, respect, and appreciation can alleviate personal and professional stress and allow your business to grow.

Identifying Positive and Negative Customers

Some customers can boost your profits. Others can break your bank. If you don’t know which are which, you’re jeopardizing your business. Many companies could significantly increase profits overnight by either firing troublesome, unprofitable customers or ratcheting the price up so unprofitable customers leave or become profitable.

  • Positive customers truly understand and appreciate what you do. They’re willing to work with you and pay a fair rate for the product or service they receive. When you compare the revenue you receive from these clients to the time spent for their continued business, you should find a fair and practical balance.

While every customer or client cares about price, your positive customers understand the value you bring to their businesses. You understand the issues they have with growing their businesses and you talk to them about ways you can help; they, therefore, understand and value what you do.

  • Negative clients, on the other hand, can tax both your business’s operations and finances. For many companies, there’s a constant push to sell whatever can be sold to whoever will buy it. The business appears successful, and salespeople and operations stay busy in this scenario.

However, these customers can actually cost your company money, without really understanding or valuing the benefits of the product or service you provide. Your sales team might have lured these customers in with big price discounts or unrealistic delivery commitments to close the initial sale.

Negative customers often kill profitability by tying up valuable resources, like customer service time, engineering, or inventory. In many cases, these high-maintenance customers leave before you even recover your startup costs.

When is it Time to Narrow Your Base?

One of the biggest clues that your company is spreading its net too broadly in terms of customer base is when most new sales are closed due to low prices and discounting. To sell to a wide audience, a product or service must have broad appeal.

However, if everybody likes your business, but nobody loves it, you are forced to compete on price. By trying to reach everyone, you meet a bit of everyone’s needs, but not enough of anyone’s specific needs for them to pay you a premium. It’s also possible you’ve loaded up your product/service with things customers don’t care about and aren’t willing to pay for.

Analyze Your Sales Team’s Invested Time

Analyze your sales team’s invested time. This process can reveal which customers take up the majority of your business’s efforts. Often, a salesperson will cater to certain companies or segments and have specific product lines she likes to push. It’s a natural tendency to gear your efforts toward your interests, but this approach can really inhibit a company’s growth.

The likes and dislikes of a salesperson can actual control a company’s growth. If everyone is only focusing on what they consider their specialties, productivity and shared goals can suffer.

Focusing on price versus quality, and on isolated sales efforts versus a unified vision, can weaken your customer service and profit potential.

Companies can increase profitability by avoiding unprofitable customers. Clients only interested in price are often unfit for long-term business relationships.

The original article can be found here.

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Narrowing Your Customer Base

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The 5 C’s of Banking

“The “5 C’s of credit” or “5 C’s of banking” are a common reference to the major elements of a banker’s analysis when considering a request for a loan. Namely, these are Cash Flow, Collateral, Capital, Character and Conditions. This article will provide an in-depth description of each of the 5 C’s of credit or banking to help you understand what your banker needs to understand about your business in order to approve your loan. By the end of this article, you will have insight as to where your banker is coming from. As a result, it will better prepare you to handle their questions and concerns.

The 5 C’s of Banking – Cash Flow Importance

Cash Flow is the first “C” of the 5 C’s of Credit (5 C’s of Banking). Your banker needs to be certain that your business generates enough cash flow to repay the loan that you are requesting. In order to determine this, the banker will be looking at your company’s historical and projected cash flow and compare that to the company’s projected debt service requirements. There are a variety of credit analysis metrics used by bankers to evaluate this. A commonly used methodology is the “Debt Service Coverage Ratio” generally defined as follows…”

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5 C's of Banking

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Supplier Power

Supplier Power Definition

“In Porter’s five forces, supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products. When analyzing supplier power, the industry analysis is being conducted from the perspective of the industry firms. In this case, it is referred to as the buyers. According to Porter’s 5 forces industry analysis framework, supplier power, or the bargaining power of suppliers, is one of the forces that shape the competitive structure of an industry.

The idea is that the bargaining power of the supplier in an industry affects the competitive environment for the buyer. Furthermore, it influences the buyer’s ability to achieve profitability. Strong suppliers can pressure buyers by raising prices, lowering product quality, and reducing product availability. All of these things represent costs to the buyer. In addition, a strong supplier can make an industry more competitive and decrease profit potential for the buyer. On the other hand, a weak supplier, one who is at the mercy of the buyer in terms of quality and price, makes an industry less competitive and increases profit potential for the buyer….”

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How to Prepare a Break Even Analysis

Break even analysis, defined as the studying the path to the point where a company is neither losing money nor making a profit, is very important to the survival of any start-up business. Perform it for either products or the business as a whole. The break even calculation can be in reference to pro or post-forma, that is before or after the company has been formed.

Break Even Analysis Explanation

The break even analysis serves to provide the company with a very important piece of information:

“How much revenue does the firm need to make in order to break even?”

This break even analysis is quite easy to do. The only critical piece of information that you will need to attain is a breakdown of the your firm’s expenses into Fixed Expenses and Variable Expenses.

Once you have a breakdown of fixed costs and variable costs, input these costs into the template. You will also be able to conduct various “What if” scenario analyses to see how the breakeven revenue will change.

Once you are able to arrive at the break even analysis you can show the Owner(s)/Management this metric and make it part of their sales planning. Another idea might be to incorporate this metric into the Flash Report review meeting. This way your staff can know on a weekly basis if they are on track to at least breaking even. To learn how to price for profit, download our Pricing for Profit Inspection Guide.

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Financial Ratios

Monitoring a company’s performance using ratio analysis and comparing those measures to industry benchmarks often leads to improvements in company performance. Not to mention these ratios are often part of loan covenants. The following article provides an overview of the 5 categories of financial ratios and links to their description and calculation.

Use the following Financial Ratios to measure financial performance against standards. In addition, analysts compare these ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). Furthermore, the most useful comparison when performing financial ratio analysis is trend analysis. They are derived from the three following financial statements:

5 Categories of Financial Ratios

The five (5) major categories in the financial ratios list include the following :

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5 Categories of Financial Ratios

5 Categories of Financial Ratios

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Should You Cut Marketing Expense in a Recession?

Most CFO’s cut costs to obtain profitability for the company. In a recession, that is often the best course of action. The question is: what kind of knife do you use? A meat cleaver or a scalpel?

Should You Cut Marketing Expense in a Recession?

Marketing costs are a prime target for the CFO’s slashing of expenses. The logic is: If fewer people are buying then why spend more marketing dollars to prospects who aren’t going to buy anyway? Makes sense!

But there is another way to look at marketing dollars. Even in the lowest point of a recession there are sales, albeit, at a lower level. Let’s assume that your company wants to hold sales flat good times or bad.

During the good times sales come relatively easy. There is plenty of demand and it doesn’t take much effort for the phone to ring. If you wanted to hold sales flat then you would reduce your marketing dollars in the good times. Right?

Conversely, when bad economic times are upon us it takes considerably more effort to generate the same sales volume. So if you increase your marketing efforts in a recession you should be able to hold your sales flat.

The problem with this argument is that most companies don’t have the free cash flow to fund increased expenses in a down market. So what is the solution?

I suggest that you take a scalpel versus a meat cleaver to your marketing expenses. Analyze the productivity of your marketing dollars. What marketing programs have produced the most results? Is it public relations? Direct mail? web site?

You should start tracking how your sales inquiries hear about you. We had one client who was spending $250,000 per year on yellow pages ads. We set up a program to track the source of each sale. The client discovered that less than 10% of their new sales cam from the ads. The majority of their new sales cam from the inside sales force. Consequently, we reduced the yellow page budget to $50,000 per year and hired two more inside salesmen.

So before you start slashing and burning your marketing budget go back to the tried and true marketing efforts that produce results.

When in a recession, your CEO needs extra advising or guidance to make it through. Furthermore, they need a trusted advisor or wingman. Learn how you can be the best wingman with our free How to be a Wingman guide!

Should You Cut Marketing Expense in a Recession?

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