Basic accounting help
Discussion
I'm trying to get an understanding of some accounts to get an understanding of the current financial state of a business where records are woeful. The business is paid in advance by holiday makers travelling on their tours.
The hard part for me is to understand how to unwind the numbers and get a clear picture of the health of the business.
You have the amount of cash in the bank (a). The figures for how many people have paid for an upcoming tour (b) and how much is expected when they have paid the outstanding balance (c), cost of running tours (d), overheads/salaries/etc (e)
How do you get a handle on the current state of finances?
Current cash in bank (a+b) + expected outstanding balances to be paid (c) - cost of running those outstanding tours (d) - overheads (e) = Current ProfitLoss
Am I missing something significant here?
The hard part for me is to understand how to unwind the numbers and get a clear picture of the health of the business.
You have the amount of cash in the bank (a). The figures for how many people have paid for an upcoming tour (b) and how much is expected when they have paid the outstanding balance (c), cost of running tours (d), overheads/salaries/etc (e)
How do you get a handle on the current state of finances?
Current cash in bank (a+b) + expected outstanding balances to be paid (c) - cost of running those outstanding tours (d) - overheads (e) = Current ProfitLoss
Am I missing something significant here?
digger_R said:
I'm trying to get an understanding of some accounts to get an understanding of the current financial state of a business where records are woeful. The business is paid in advance by holiday makers travelling on their tours.
The hard part for me is to understand how to unwind the numbers and get a clear picture of the health of the business.
You have the amount of cash in the bank (a). The figures for how many people have paid for an upcoming tour (b) and how much is expected when they have paid the outstanding balance (c), cost of running tours (d), overheads/salaries/etc (e)
How do you get a handle on the current state of finances?
Current cash in bank (a+b) + expected outstanding balances to be paid (c) - cost of running those outstanding tours (d) - overheads (e) = Current ProfitLoss
Am I missing something significant here?
Won't the accounts be massively out of date and hence unsuitable for your purpose?!The hard part for me is to understand how to unwind the numbers and get a clear picture of the health of the business.
You have the amount of cash in the bank (a). The figures for how many people have paid for an upcoming tour (b) and how much is expected when they have paid the outstanding balance (c), cost of running tours (d), overheads/salaries/etc (e)
How do you get a handle on the current state of finances?
Current cash in bank (a+b) + expected outstanding balances to be paid (c) - cost of running those outstanding tours (d) - overheads (e) = Current ProfitLoss
Am I missing something significant here?
With holiday companies, they receive a huge amount of money up front from their customers. Some of this money is refundable deposits and some will be non refundable deposits. And depending on the year end date of the business, some of the income will have been ""in advance" and will therefore not show as "Income" in the profit and loss account but as "accrued income" in the balance sheet.
That's if the records are recording things correctly. You seem to be saying they don't. How do you know this?
The important thing is that the cash in the bank may not give an indication of the health of the business.
That's if the records are recording things correctly. You seem to be saying they don't. How do you know this?
The important thing is that the cash in the bank may not give an indication of the health of the business.
There is nowhere near enough to get a good picture however with JUST those available figures you should do the following:
Ask yourself how much of the cash in the bank is "free" cash vs. upfront payments.
That's A minus B - that is your unencumbered cash and could be significant (or negative!).
Let's pretend that you have £6,000 in the bank but £5,000 is from upfront payments so the "free" balance is £1,000.
So now you need to consider the PROFITABILITY of the business.
That is the income from the tours, less the cost of the tours and less the overheads.
That is B+C minus D minus E.
Perhaps £5,000 + £5,000 - £7,000 - £1,000 = £2,000.
In that case, you have a profitable business returning £2,000 per period (whatever the period is we have looked at) AND you have £1,000 in the bank on top.
Some complications:
- Businesses have bad debt. People who don't pay what they owe. That means while you THINK you might get £5,000 in from outstanding balances, you might not - AND you may still have to cover the cost of those tours even when people don't turn up.
- Refunds - what if people don't turn up and ask for their money back...?
- Depreciation - is there much capital equipment in the business? e.g. computers, cars etc... you won't necessarily need to pay for these in cash every year (so may not appear in the above numbers) but then they end up being BIG less frequent purchases and could push a profitable business into the red. To account for these costs you need to include depreciation. Although for this sort of business it is likely very small or zero.
Ask yourself how much of the cash in the bank is "free" cash vs. upfront payments.
That's A minus B - that is your unencumbered cash and could be significant (or negative!).
Let's pretend that you have £6,000 in the bank but £5,000 is from upfront payments so the "free" balance is £1,000.
So now you need to consider the PROFITABILITY of the business.
That is the income from the tours, less the cost of the tours and less the overheads.
That is B+C minus D minus E.
Perhaps £5,000 + £5,000 - £7,000 - £1,000 = £2,000.
In that case, you have a profitable business returning £2,000 per period (whatever the period is we have looked at) AND you have £1,000 in the bank on top.
Some complications:
- Businesses have bad debt. People who don't pay what they owe. That means while you THINK you might get £5,000 in from outstanding balances, you might not - AND you may still have to cover the cost of those tours even when people don't turn up.
- Refunds - what if people don't turn up and ask for their money back...?
- Depreciation - is there much capital equipment in the business? e.g. computers, cars etc... you won't necessarily need to pay for these in cash every year (so may not appear in the above numbers) but then they end up being BIG less frequent purchases and could push a profitable business into the red. To account for these costs you need to include depreciation. Although for this sort of business it is likely very small or zero.
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