Guide to Financial Statements

Imagine a long-established Native American arts gallery, a cherished trading post, deeply rooted in tradition. The owner, a seasoned trader, has always run the business the same way. Each year, they embark on buying trips with a set budget, traveling to various Native American art shows to sell their wares, connect with artists, and secure new wholesale contacts. Financial statements were never part of the equation; instead, they gauged success by the balance in the business checking account.

Now, the owner’s child, freshly graduated with a business degree, is stepping into the family business. Armed with modern ideas and a fresh perspective, the child sees the potential for growth and efficiency through organized financial management. They envision leveraging financial reports to understand the business’s performance better, improve marketing strategies, and ultimately drive success.

In this guide, we will explore the essential steps for transforming this traditional business approach into a structured monthly bookkeeping system. We’ll cover everything from understanding the current financial situation to setting up a bookkeeping system with the help of an accountant. By the end, you’ll be excited about the valuable insights that organized financials can provide, helping your Native American art business thrive in today’s competitive market.

The New Generation’s Perspective

The incoming child, enthusiastic about modernizing the family business, sits down with the owner to explain the basics of financial statements and their importance.

“Mom/Dad,” they begin, “let’s talk about what our financial statements can tell us. First, we have the balance sheet. This document shows our assets, liabilities, and equity. It’s like a snapshot of our business’s financial position at a specific point in time. It tells us what we own and what we owe, giving us a clear picture of our overall financial health.”

“Then, there’s the income statement, also known as the profit and loss statement. This report shows our revenues and expenses over a period, helping us understand our profitability. It lets us know how well we’re managing the business, highlighting areas where we’re doing well and areas that need improvement.”

Crucial Financial Metrics

The new graduate continues, “From these reports, we can derive important financial metrics. For instance:

• Current Ratio: This measures our ability to pay short-term obligations with our short-term assets. It helps us understand our liquidity.
• Quick Ratio: Similar to the current ratio but excludes inventory. It gives a stricter measure of liquidity.
• Gross Profit Margin: This tells us the percentage of revenue that exceeds the cost of goods sold, showing how efficiently we’re producing and selling our art.
• Inventory Turnover: This measures how often we sell and replace our inventory over a period. It helps us manage our stock better.

These metrics are crucial for making informed decisions that strengthen our business.”

The Benefits of Accurate Financial Information

The child emphasizes, “Accurate financial records are vital for several reasons:

1. Better Decision-Making: With clear financial data, we can make informed decisions about where to invest, where to cut costs, and how to grow our business.
2. Easier Tax Filing: Keeping our books in order throughout the year makes tax time much less stressful. We have all the information we need at our fingertips.
3. Improved Cash Flow Management: Understanding our cash flow helps us ensure we have enough money to cover expenses, invest in new opportunities, and weather any downturns.

A Real-Life Example

Consider a similar Native American art business that didn’t keep accurate financial records. They operated much like we used to, relying solely on their bank balance to gauge success. One year, they found themselves short on cash right before a major art show, unable to purchase enough inventory. This happened because they hadn’t tracked their expenses and didn’t realize their costs had increased over time. With proper financial statements, they would have seen the trend and adjusted their spending accordingly.

Proactive Bookkeeping

“This is why we need to adopt monthly bookkeeping,” the graduate explains. “It’s a proactive approach, allowing us to monitor our financial health regularly and make adjustments as needed. Waiting until year-end to look at our finances is reactive and leaves us vulnerable to surprises. By keeping our books up-to-date every month, we stay in control and can steer our business toward success.”

With this newfound understanding, the owner sees the value in transitioning to a structured bookkeeping system, appreciating how it will benefit their beloved trading post in the long run.

Section 3: Finding the Right Accountant

The Child’s Vision for the Next Steps

The child sits down with the owner to paint a clear picture of what the next steps will look like once they find the right accountant.

“Mom/Dad, after we find an accountant who understands our business, they’ll help us set up a bookkeeping system tailored to our needs. Here’s how we’ll go about it:

Choosing the Right Accounting Software

First, our accountant will help us choose the right accounting software. This choice depends on what we need the software to do. Do we want to pay bills directly from the accounting software? Should it track our inventory? Do we want it to handle payroll? The software we choose should meet our specific needs.

I’m familiar with Intuit’s QuickBooks Online and Xero. These are popular choices among small businesses and are likely options our accountant will recommend. Both systems offer robust features that can streamline our operations.

Creating a Chart of Accounts

Next, the accountant will set up a chart of accounts specific to our business. This chart will categorize all our financial transactions, making it easier to track income, expenses, assets, liabilities, and equity. It’s like creating a detailed map of our financial landscape, helping us see where our money comes from and where it goes.

For instance, we’ll have accounts for inventory purchases, art show expenses, sales revenue, and even travel expenses for our buying trips. This detailed categorization will give us a clear picture of our financial health and help us make informed decisions.

Tracking Income and Expenses

With the chart of accounts in place, the accounting software will track all our income and expenses automatically. Every time we make a sale or incur an expense, it’ll be recorded in the software. This system ensures that nothing slips through the cracks and that we have a comprehensive record of all our financial activities.

Reconciling Bank Statements

Another crucial step is reconciling our bank statements. The accounting software will help the accountant match our recorded transactions with those on our bank statements, ensuring that everything is accurate and up-to-date. This process helps identify any discrepancies and prevents errors that could affect our financial reports.

The Ease of Transitioning with Professional Help

The child reassures the owner, “While this might sound complex, transitioning to a monthly bookkeeping system is much easier with professional help. Our accountant will guide us through each step, ensuring that everything is set up correctly. They’ll provide training on how to use the software, making the whole process smooth and manageable.”

“This bookkeeping system will do much more than just track income and expenses,” the child adds. “It will give us real-time insights into our financial performance, help us manage our cash flow, and provide the data we need to make strategic decisions. It’s a proactive approach that will put us in control of our finances, rather than scrambling to figure things out at year-end.”

With this clear picture, the owner begins to see the value of setting up a structured bookkeeping system and the benefits it will bring to their Native American art business.

The Child Explains Monthly Bookkeeping Tasks

The child continues their explanation, outlining what will be required from the owner each month to keep their financials in order.

“Mom/Dad, once our accountant sets up the accounting software, we’ll need to handle a few essential tasks each month. Don’t worry, the accountant will make this process as easy as possible for us. Here’s what we need to do:

1. Recording All Financial Transactions

First, we need to record all our financial transactions. This includes sales, purchases, and any other money that comes in or goes out. The good news is, the accounting software will have live feeds to our bank statements and business credit cards. This means most transactions will be automatically recorded.

2. Categorizing Income and Expenses

Next, we’ll need to categorize our income and expenses. The software will help with this too. For example, it will automatically categorize common transactions. For anything unusual, the accountant might ask us to specify what it’s for. We can handle these questions over phone calls, office visits, secure email portals, or even during the accountant’s visits to our business.

3. Reconciling Bank Statements

Each month, our account will reconcile our bank statements. This means they will check that our recorded transactions match those on our bank statements. The software makes this straightforward by highlighting any discrepancies. Our accountant will help resolve any issues.

4. Reviewing Financial Statements

Finally, we’ll review our financial statements. The accountant will generate these reports from the recorded and categorized transactions. These statements include the balance sheet, income statement, and cash flow statement. Our accountant will review these with us, explaining what the numbers mean and how we can use this information to make better business decisions.

What’s Required from Us

“So, what’s required from us?” the child continues. “Here’s the good news:

• Minimal Data Entry: The live feeds from our bank and credit card accounts will handle most of the data entry.
• Communication: We’ll need to answer any questions from the accountant about unusual transactions. This can be done via phone calls, office visits, secure email, or the accountant’s visits to our business.
• Engagement: We’ll review the financial statements with the accountant. This is crucial because it helps us understand our business’s financial health and make informed decisions.

It’s usually that easy. The accountant will take care of the heavy lifting, and we’ll provide the information they need. By doing this, we’ll have accurate, up-to-date financials that give us valuable insights into our business.”

With this explanation, the owner sees that while there are some tasks they need to handle, the accountant and accounting software will make the process straightforward and manageable. This new system will empower them with the financial information needed to make smarter business decisions and drive growth.

The Child Explains the Value of Financial Reviews

The child, keen on showing the long-term benefits, explains why regular financial reviews are so important.

“Mom/Dad, once we have those financial statements, we can truly understand the health of our business. Reviewing these statements regularly brings a lot of value. Here’s why:

1. Identifying Trends

Regular reviews help us spot trends in our business. For example, we can see if our sales are increasing or decreasing over time. We can identify which products or services are performing well and which are not. This allows us to focus our efforts on what’s working and address any issues early on.

2. Managing Expenses

By reviewing our financial statements, we can manage our expenses more effectively. We can see where our money is going and find ways to cut costs without sacrificing quality. For instance, if we notice that travel expenses for art shows are too high, we might find more cost-effective ways to attend these events or even consider attending fewer but more profitable shows.

3. Planning for Growth

Financial reviews are crucial for planning growth. We can use our financial data to set realistic goals and make informed decisions about expanding our business. For example, if we see that a particular area of our business is growing steadily, we might decide to invest more resources there to accelerate that growth.

Practical Insights from Financial Reviews

The child gives practical examples to illustrate the benefits.

“For example, let’s say we review our income statement and notice that our sales from art shows are not covering the expenses of attending those shows. This might lead us to rethink our strategy, perhaps focusing more on online sales or finding more lucrative shows.

Similarly, if we see that our wholesale segment is growing while our retail segment is stagnant, we can allocate more resources to wholesale. This might mean investing in marketing targeted at wholesale buyers or expanding our wholesale product line.

Regular financial reviews also help us stay in touch with our business. Even though we work here every day, these reviews give us a clear, objective picture of how we’re doing. They allow us to step back and see the bigger picture, helping us make decisions that align with our long-term goals.”

It Matters

By emphasizing the benefits of regular financial reviews, the child helps the owner see the value in this practice. “Mom/Dad, these financial reviews are not just numbers on a page. They’re tools that will help us run our business more effectively, make better decisions, and ultimately achieve our goals. Even though it might seem like extra work, it’s an investment in the future of our business.”

With this explanation, the owner begins to appreciate the importance of regular financial reviews and how they can significantly impact their business’s success and growth.

Addressing Common Challenges

The child acknowledges the parents’ concerns about transitioning to a new bookkeeping system.

“Mom/Dad, I understand that we’ve been doing things a certain way for a long time, and change can be difficult. There will be growing pains, especially since someone besides us will now have access to our business activities and financial information. Our accountant will need to build everything from scratch because we’ve never kept financial statements. This means they will have a lot of questions in the beginning.

For instance, we might not have kept track of our inventory properly, so to get accurate data, we’ll need to take a detailed inventory. This process will be time-consuming initially, but I promise it will be worth the effort.

Practical Solutions and Encouragement

To make this transition smoother, here are some practical solutions:

1. Open Communication: Be prepared for a lot of questions from the accountant as they gather information. Answering these promptly and accurately will speed up the setup process.
2. Inventory Management: If we haven’t kept track of inventory, we’ll need to conduct a thorough inventory count. This might seem daunting, but it’s a crucial step for accurate financial records.
3. Patience and Persistence: Understand that this process will take time. The initial phase will require extra effort, but once everything is set up, it will become much easier to maintain.
4. Stay Motivated: Keep the bigger picture in mind. Regular financial records will help us grow and manage our business more effectively.

Remember, the effort we put in now will pay off in the long run. We’re not just improving our financial management; we’re setting the stage for future growth and success.

Testimonials from Successful Transitions

The child reassures the parents by sharing a testimonial from a current client who successfully made the transition to organized financial management:

“Here’s what one of Jason Arsenault’s clients, Allysa Esquibel, had to say:

‘We have been incredibly grateful to Jason this year as he has gone above and beyond for our business. As a startup, there has been so much that we needed to do to be in compliance, and Jason always made sure that we knew what would be needed and that we had the tools in place to be successful. We are very grateful for him and his team and will continue to recommend him to any small business!’

This shows that the transition, though challenging, brings significant benefits. With Jason’s help, we can achieve the same level of success.”

A Vision for the Future

The child concludes, “Mom/Dad, I want to continue and grow the amazing business you’ve built. Having accurate financial information is crucial for making that happen. Who knows, maybe someday I’ll pass this business on to my child. I want to ensure it’s in the best financial position possible when that time comes. Let’s embrace this change together and set our business up for a successful future.”

With these practical solutions and encouraging words, the parents start to see the value in overcoming the initial challenges of setting up a bookkeeping system. They understand that with the right help and a bit of effort, they can make their business stronger and more successful.

Get Started

Are you ready to transform your business and gain invaluable insights through organized financials? Let Jason Arsenault CPA, LLC help you make this transition smoothly and effectively. Our expertise in Native American art businesses ensures we understand your unique needs and challenges.

Contact Us Today for Personalized Assistance

Reach out to Jason Arsenault CPA, LLC for a consultation tailored to your business. We offer comprehensive accounting services that will set you on the path to financial clarity and growth.

Contact Details:

• Phone: (505) 722-3399
• Email: jason@payrollbookstaxes.com
• Address: 4325 Pill Hill Dr, Rehoboth, New Mexico

Schedule a Consultation: Click here to schedule a consultation

Motivational Statement

Organized financials are more than just numbers on a page—they are the roadmap to your business’s success. With accurate, up-to-date financial information, you can make informed decisions, manage your cash flow better, and plan for a prosperous future. Take the first step today and see the positive impact organized financials can have on your business.

Let us help you build a stronger, more successful business. Contact Jason Arsenault CPA, LLC now and take control of your financial future!