There are many reasons for the success and failure of pioneering projects, even stable ones, around the world.
And without a doubt, financial management is the common factor among all these causes of failure or success.
From the moment an entrepreneur decides to launch his project through a simple and unprofessional economic feasibility study or relying on intuition and similar experiences he has gone a long way to the inevitable failure.
Through our long years of experience in the financial management of emerging, medium, and even large projects, we find that what distinguishes the manager most Successful is his understanding of the financial statements and their implications, and making appropriate decisions based on these statements.
On the contrary, the main reason for wasting resources and wasting money is to make decisions that are not based on a sound financial basis or understanding.
And since accounting, like other sciences, has its own terms, principles, and language, the reason for the lack of knowledge of this science may be The lack of an effective language of communication between the accountant and the entrepreneur.
And it may be the result of an entrepreneur’s lack of awareness of this ancient science.
In order to bridge this gap between the entrepreneur and the financial management, we have taken it upon ourselves to raise the financial awareness of the manager by explaining Simple and effective financial statements, their terminology, meaning, and method of preparing them.
To become an entrepreneur to be able to understand these lists and their inputs and outputs and make the appropriate decision based on their results.
For the entrepreneur, there may be confusion in the concepts between sales and the movement of liquidity or between profit and the availability of liquidity in the bank.
The entrepreneur may forget the existence of indirect costs for his main product and price the product on the basis of cost only, which results in it.
A sure loss that he will pay attention to when it is too late.
In addition a miscalculation of the liquidity necessary to start a business, which will result in the failure of the project even if it proves its feasibility on the ground.
Accordingly, even with the availability of the conditions for the success of the project, such as marketing and availability of qualified staff and distinguished goods/services, the financial factor is the decisive factor.
The project has succeeded or not.
The entrepreneur must take into consideration the following financial factors:
The amount of liquidity required to start the project until achieving the first revenue,
taking into account the necessary period of time.
A correct, accurate, and conservative forecast of all costs.
Not expecting large sales during the first period and the worst during the first 6 months of work.
Flexibility to change plans based on renewed reality and changes taking place.
Correct product pricing based on total costs, not just direct costs.
Adequate customer collection terms.
Connect the additional costs to additional sales.
Avoid hiring redundant staff or vice versa.
Today we will start by explaining one of the most important outputs of accounting work, which is the income statement:
Income statement (profit and loss statement):
The income statement is one of the most important financial statements that explain simply the effectiveness of the main activity of the company, during a specific period of time Monthly, quarterly, or yearly.
The most important components of the income statement:
Revenue (Sales): It is the value of sales of the company’s products or services to customers during a specified period of time.
Example: Sales of 2019 are for the period from 1/1/2019 to 12/31/2019
Sales/services are calculated when the goods are delivered or the service is rendered to the customer, regardless of whether the sales are cash or credit.
And it is the most important point of difference in viewpoints between accounting and management.
For example: when selling any product on credit and delivering it to the customer, it will be considered sales in the income statement for that period.
On the contrary, the subsequent collection of any cash will not be recorded as sales, but rather as amortization of the customer’s liability.
Cost of Sales: It is the sum of the direct cost values ​​resulting from selling the mentioned sales within the period
It is only present in the lists of commercial and industrial companies whose activity is buying from a supplier and then selling to a customer or buying, manufacturing, and selling To a client.
Gross Profit: It is the total revenue minus the total cost of sales and is usually taken as a percentage to measure the Efficiency of operating profit.
Example:
The sales price of the item = $ 100.
Cost of Sales = $ 70
The gross profit = $ 30
Gross profit as a percentage (gross profit/sales) = 30%
Administrative Expenses: These are the current period costs that the project incurs to complete the operational process. And the The decisive factor in calculating these expenses or not is the use of the benefit or not during the period and is not related to the completion of the cash payment.
For example: The project benefits from electricity (phone-internet -…) monthly, and the payment will be made in the next month or later. But the accountant must be charged The current period with its expenses and recording the expense on the accrual principle regardless of the completion of the payment.
Depreciation expense: is an inevitable decrease in the value of the asset. It should be calculated and reduced from its value as depreciation expense. Periodically, in order for the financial statements to be close to reality .. the depreciation expense in the income statement will be reduced from the asset values ​​in the center Financial. Because it is illogical to fix the value of the asset in the financial position over the years
Example. Buying a car for 10 thousand dollars, the first purchase will be worth 10 thousand dollars in the financial center, and next year it should be Its value is lower because if the car is sold because it gets 10 thousand dollars, we are here through depreciation trying to show the real value Of the asset in the financial statements and to avoid sudden loss in the event of a sale.
Profit before tax: Total profit minus administrative and miscellaneous expenses and a sum of other revenues If any.
The following is an example of the income statement with reference to the most important points related to:
The list starts with the sales value minus the cost of sales. Therefore, the gross profit here is $ 32,101.99.
Administrative expenses are subtracted from the gross profit up to the operational profit expressed in the amount of $ 21,052.
Finally, interest and due taxes are subtracted from it, up to a net profit expressed in the amount of US $ 6,052.44.
And if the expenses exceed the total profit, the business will result in a loss.
Examples of differences in concepts between an accountant and a manager:
Ghazi Al Mahaini
CMA-CFM
CEO of ACCYBER