Hi, everyone, I'm Astrid Daniella Galvez.
As a fellow business
owner, I'm passionate about helping other small businesses succeed.
I've partner with Quickbooks to help demystify accounting,
because I'm pretty sure that's not why you started your business.
I have just the thing to make your life a lot easier.
Accounting equations that every small business should know
to check the financial health.
If you want to read more about it,
check out the article linked in the description below.
But before we get down to the bottom line.
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If you're a business owner,
it is essential to have your finger on the pulse as a business owner.
There are eight simple accounting formulas that you need
in order to understand the health and viability of your enterprise.
Even if you have someone else handling your accounting,
having a good grasp of these eight accounting equations
will better equipped you to manage your business.
Let's start with the accounting equation.
Simply, it's the value of all the assets of your business,
including property, equipment, inventory and cash,
minus all liabilities such as bank loans,
lease payments and or outstanding debt.
The difference is that business owners equity
or how much they own in the business.
Next, we need to look at your net income.
It's the total profits after deducting all of your business expenses.
If you subtract the cost of making a sale
from the sales revenue, then you get net income.
If this value is positive, then your business is profitable.
But if the value is negative, then you're losing money.
When you're making something.
It's good to know how much product
you have to produce to cover the cost of making that product.
That's called the break even point.
We start with the fixed cost, such as rent, insurance and payroll.
Divide that by the sales price of the product you're selling,
minus the cost of producing that single item.
The answer is the amount of product you have to sell in order
to cover the cost before making a profit.
We have a much simpler accounting formula next.
Cash ratio divide the cash or liquid assets
your company has at their disposal by the current liabilities.
The higher the number, the healthier your business.
Are you still with me? Good.
We're almost done with all these accounting formulas and equations.
Next up is an excellent metric for businesses.
The net profit margin to calculate net profit margin divide,
that net income that we worked out earlier by the total sales generated.
And again, the higher that net profit margin.
They better shape your business is in
if you need additional capital to run your business,
particularly in the early years .
Lenders like to look at the debt to equity ratio, which is measured by the buying,
the liabilities by the equity, the owners have in the business.
Keeping it low will make your business more attractive to banks and investors.
The cost of goods
sold is a good indicator of how the production costs
stack up against the revenue you earn from selling that product.
Subtract the total cost of cells from the cost of making the product.
To learn more about the cost of goods sold.
Visit the link here.
The last accounting equation is retained earnings
or the money that is kept within the business during an accounting period
with a new business.
It's the net income minus any cash dividends to the owners.
Those retained earnings are the starting point
for the next accounting period and so on.
So it's a figure that accrues over time.
I hope this has given you an insight into a few of the most important
accounting equations to help you run your business successfully.
Keeping track of this important numbers is simple with Quickbooks online.
A Quickbooks live expert can help you understand your financial performance
so you can make better business decisions.
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