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| | The Business Finance,Taxes and Business Operations Network is not currently active and cannot accept new posts | | In the Red or In the Black | Views: 1120 | | Jul 23, 2007 10:11 pm | | In the Red or In the Black | # | 
Suzette Flemming | | Hello, fellow Ryzers ~
I was just reviewing the second quarter financials for a client. It's a good time for you to review your 2nd quarter as well.
When I'm reviewing a Profit/Loss Statement or Balance Sheet there are some things that I look for that are fairly big red flags for me.
1) Revenue categories with negative numbers. This usually happens with an expense category has the same or similar name to a revenue category. When entering data it is easy to misplace items.
2) Liability accounts with negative numbers. This generally means that more has been paid on the liability (i.e. sales tax, payroll, loans, etc.) then was due. This usually happens when not all the interest is entered into the liability account.
3) Expense categories with negative numbers. This often means that an item or several items were purchased in one period such as 1st quarter then returned in another period such as 2nd quarter.
4) Gross Profit in the red. Gross Profit is Revenue minus Cost of Goods Sold (COGS). So if the GP is negative then more Goods were purchased then were sold. Not a good trend but it happens from time to time.
5) Net Income in the red. This is Gross Profit minus Expenses. If this is negative the company spent more than it made. Also not a good trend but it happens.
After I make note of the red flags, I compare some figures. I have an Excel spreadsheet for this (please feel free to PM me and I will send it to you). I like to look at 1st and 2nd quarter totals for Revenue, COGS, GP, Expenses and Net Income. Trends appear. My client had less Revenue and more COGS leading to negative Net Income in the 2nd quarter. Why did that happen? Good Question.
What about your Net Income? Were you in the red or black 1st and 2nd quarter? What influenced your bottom line?
Why should you care? Good Question. I will tackle that one the next time.
Suzette
*****
http://www.FlemmingBusinessServices.com
Saving Money - Increasing ProfitsPrivate Reply to Suzette Flemming | | Jul 23, 2007 11:00 pm | | re: In the Red or In the Black | # | 
HART (1-800-HART) | | Sound advice Suzette! I know here in Canada the Q2 GST Returns and due July 31st and getting current with monthly financial statements makes it the best time to do a semi-annual review as it happens, then with a final Year-End tax review with the accountant 9-12 months later.
I thought I would add a few possible scenarios about some of your situations/points you mentioned above:
1) Revenues have negative numbers - It could be the reversal of accounts receivable setup from subsequent deposits. The A/R list may be overstated due to coding errors. Alternatively, if most of the sales are collected in the following month, there may be no receivables set up at June 30th..
3) Expenses with negative numbers - Sometimes, payables at the year end would be setup and then reversed against the expense account January 1 in order to offset cheques issued in subsequent periods. There could be a coding error.
4) Negative Gross Profit - Perhaps ending inventory needs to be set up!
Take care.
HART (1-800-HART)
http://HBSMC.com/Private Reply to HART (1-800-HART) | | Jul 23, 2007 11:20 pm | | re: In the Red or In the Black | # | 
Donna Gibson | | Just as a matter of discussion - I also look at liability accounts that should be empty or close to empty. Too often those who are not really trained in accounting will write a liability check from the related expense account, such as payroll tax EXPENSES when QB and Peachtree will have already moved the employer's share to a liability account. Same for health or other employee benefits deducted during payroll.
This creates a double negative effect on the looks of the books - it's sitting there to be paid as money owed and it's been deducted twice from the expense account.
The same can hold true for asset accounts - the numbers should probably change from month to month on the majority of asset accounts. If it's employee advances, money should be coming back to pay it back; if it's accounts receivable, it can appear to grow if payments are not recorded as such, but just deposited directly via "make deposits" - believe it or not, I've had that happen with clients.
The third weirdness that tends to catch my eye are negative income accounts, particularly a favorite of non-accounting types: Refunds. The sales tax due balances were very out of skew recently due to refunds from vendors being put there instead of put back into the actual COG expense account and sales tax expense account (sales taxes paid on COGs are deductible from the balance owed the state here).
-DPrivate Reply to Donna Gibson | | Jul 24, 2007 2:35 am | | re: In the Red or In the Black | # | 
Steve Novak | | Refresh my memory here, but is #4 correct?
"4) Gross Profit in the red. Gross Profit is Revenue minus Cost of Goods Sold (COGS). So if the GP is negative then more Goods were purchased then were sold. Not a good trend but it happens from time to time."
Just because you bought materials/items but didn't sell them wouldn't affect Gross Profit. If you sold items below cost, GP would be negative, but if you bought items and didn't sell them, you just have inventory. Or am I missing something?
Steve Novak
PPR Management Services
Improving Profits by Improving Performance
http://www.pprmanagementservices.com
Private Reply to Steve Novak | | Jul 24, 2007 3:07 am | | Statement of Cash Flow | # |
HART (1-800-HART) | | I meant to add this in my previous comment, but I posted an article awhile back related to preparing a Statement of Cash Flows, and even have an Excel Spreadsheet that you can just plug in the numbers ... over on my website..
http://1800hart.com/blog/2005/12/how-to-do-a-statement-of-cash-flow/
Feel free to download/open/read/etc etc.
HARTPrivate Reply to HART (1-800-HART) | | Jul 24, 2007 4:38 am | | re: Statement of Cash Flow | # | 
Mario Perez Lopez | | Hart,
Good evening. After reading messages for a while, I'll try not continue as a lurker and interact with the community on a more regular basis.
Thank you for allowing me to download your Excel spreadsheet. It would be an honor to talk with you again and maybe discuss common technical issues.
Kind regards.
Mario Lopez, CPA
Mexico City, MexicoPrivate Reply to Mario Perez Lopez | | Jul 24, 2007 4:47 pm | | re: re: Statement of Cash Flow | # |
HART (1-800-HART) | | Welcome to the community from Lurksville :)
Feel free to find me at any of my blogs in the sidebar or at my main 'business' blog .. http://1800HART.com/blog/ .. You can also email me or respond through any of my contact forms or even these private messages although, because I'm not a 'upgraded member' here, I don't think I can even answer private messages in here .. so, maybe scrap that last one.
I signed up here to join in on the conversations and help people if I can; and also learn from people if I can; and also just to see what the world is doing 'out there'; oh, and YES to promote myself and my sites if I can, although I've always been fool of thought that if I speak something worth interesting, I wouldn't have to promote myself as people will find me anyway.
If you have any topics that you wanted to discuss (common technical issues) .. can the discussion benefit the entire community? If it's related to this topic, feel free to go ahead and comment away. But, if it's not really related .. just start a new topic and give me a heads up about it.
PS: if you liked that excel spreadsheet, I have more and recapped them recently on http://www.hbsmc.com/
Take care
HART (1-800-HART)
Private Reply to HART (1-800-HART) | | Aug 02, 2007 12:32 am | | Net income in the red???/ In the Red or In the Black | # | 
Paul Finkelstein Early bird Entrepreneur - omgtalk.com | |
Hi Suzette and ALL,
re:
Net Income in the red.
starting a business..I understand...
but established....uh...where is the money going???
good question?
:)
Good stuff Suzette!
p
Kindest regards,
Paul
"Put your best face forward!"
http://www.putyourbestfaceforward.netPrivate Reply to Paul Finkelstein Early bird Entrepreneur - omgtalk.com | | |
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