Balance Sheet Components

How Financial Statements Work 👇 Did you know that all financial statements are deeply connected to each other? Understanding these connections has been one of the most impactful things in my career as a finance professional. When people start their finance journey, they often learn about each statement in isolation. But the real magic happens when you see how they work together. Let's break it down... ➡️ THE THREE FINANCIAL STATEMENTS Financial statements tell the complete story of a business from different angles: The Profit & Loss shows PERFORMANCE The Balance Sheet shows POSITION The Statement of Cash Flows shows MOVEMENT (You might also hear about the Statement of Changes in Equity and Notes to Financial Statements, but today we're focusing on the big three) ➡️ THE PROFIT & LOSS The P&L is the starting point. It tells you what you're generating in income vs what you're spending on expenses. It showcases profitability at different levels: - Revenue minus COGS gives Gross Profit - Gross Profit minus OPEX gives Net Operating Income - Add Other Income, subtract Other Expense to get Net Income The P&L is unique because it doesn't pull from other statements, though journal entries might be affected by your Balance Sheet. But here's where the connection starts: The P&L PUSHES your Net Income to both your Balance Sheet (via Retained Earnings) and your Statement of Cash Flows (via Cash from Operating Activities). ➡️ THE BALANCE SHEET The Balance Sheet shows the net worth of your business through three components: - Assets (what you own) - Liabilities (what you owe) - Equity (what's left for owners) It PULLS from the P&L via Retained Earnings. Many accounts overlap with the P&L through journal entries. The Balance Sheet then PUSHES information to the Statement of Cash Flows for most accounts except Cash, Accumulated Depreciation/Amortization, and Retained Earnings. ➡️ THE STATEMENT OF CASH FLOWS This statement shows how cash moves through your business, typically presented using the Indirect Method (because it's easier to prepare). Here's what's fascinating: The Statement of Cash Flows doesn't actually contain any new information. Everything can be derived from the P&L and Balance Sheet! It PULLS from: - P&L: Net Income, Depreciation, and Amortization feed into Cash from Operating Activities - Balance Sheet: Changes in balance sheet items from period to period The Cash from Operating Activities section pulls from changes in current assets/liabilities. The Cash from Investing Activities section pulls from changes in fixed, intangible, and long-term assets. The Cash from Financing Activities section pulls from changes in long-term liabilities and owners' equity. === Have you ever had an "aha moment" when you finally understood how these statements connect? What financial statement connection was most surprising to you? Share your thoughts in the comments below 👇

MASTERING ACCOUNTS PAYABLE: A KEY TO FINANCIAL EFFICIENCY💡 Accounts payable (AP) is more than just paying bills it's about managing cash flow, maintaining vendor relationships, and ensuring financial accuracy. But what does this look like in real life? Let’s break it down with examples! 1. Invoice Accuracy Matters! Imagine your company orders office supplies worth $5,000. The invoice arrives, but the amount is $5,500. Without proper verification, this could lead to overpayment. A strong AP process ensures invoices are checked against purchase orders and delivery receipts before approval. 2. Vendor Relationships Build Trust A manufacturing company relies on a key supplier for raw materials. By keeping vendor details updated and ensuring timely payments, the company maintains a good relationship, leading to priority deliveries and potential discounts. 3. Payment Terms Can Save Cash A retail business negotiates a 2/10, net 30 payment term with its supplier meaning if they pay within 10 days, they get a 2% discount. By managing AP efficiently, they save thousands annually in early payment discounts! 4. Approval Workflows Prevent Fraud A company receives a suspicious invoice from an unknown vendor. Instead of processing it immediately, their AP workflow requires manager approval for new vendors. Upon review, they realize it’s a fraudulent invoice saving the company from a financial scam. 5. Efficient Payment Processing Keeps Operations Smooth A tech startup ensures its software subscriptions and office rent are paid on time through automated AP processes. This prevents service disruptions and allows the finance team to focus on strategic growth rather than chasing due payments. Final Thought A well structured accounts payable system is not just about processing payments it’s about financial control, risk management, and strategic planning. How does your organization manage AP? Any challenges or success stories to share? Let’s discuss in the comments! #AccountsPayable #Finance #BusinessGrowth #CashFlowManagement #VendorRelations #InnocentTax #InnocentAccountant #InnocentMotivated #InnocentLinkedin

Accounts Payable: A Comprehensive Guide Definition Accounts Payable (AP) refers to the money a company owes to suppliers for goods and services received but not yet paid for. Accounts Payable vs. Accounts Receivable Key AP Ratios and Formulas Accounts Payable Turnover = Net Credit Purchases / Average Accounts Payable Shows how quickly a company pays suppliers. Days Payable Outstanding = (Accounts Payable x Number of Days) / Cost of Goods Sold (COGS) Indicates how many days a company takes to pay suppliers. Current Ratio = Current Assets / Current Liabilities Measures liquidity and the ability to pay short-term obligations. Accounts Payable Process 1. Receive Invoice - Supplier sends an invoice for goods/services. 2. Verify Invoice - Match with purchase order and received items. 3. Get Approval - Approved by the relevant department. 4. Record Invoice - Enter into the accounting system. 5. Schedule Payment - Plan based on due date and cash flow. 6. Make Payment - Process via bank transfer, check, etc. 7. Update Records - Mark as paid and update books. 8. Review Reports - Track outstanding invoices and cash flow. Examples of Accounts Payable Utility bills Rent expenses Software subscription fees Payments to suppliers for raw materials Professional service invoices (legal, consulting, etc.) This guide provides essential insights into managing Accounts Payable efficiently for better cash flow and financial stability.

Simple way to understand the AP process. What is Accounts Payable? Accounts Payable (AP) refers to the money a company owes to its vendors or suppliers for goods or services received but not yet paid for. 🔄 Accounts Payable Process (Step-by-Step) Purchase Order (PO): official order is placed for goods or services. Receive Goods/Services (GRN): ordered items or services are received and documented. Invoice from Vendor: vendor sends a bill for the goods or services provided. Match Documents (3-way match): Match PO + Goods Receipt + Invoice to check everything is correct. Approval: Someone in charge checks and approves payment. Payment : vendor is paid according to the agreed terms. Example: Net 30 : Payment is due 30 days after the invoice date. Net 60 : Payment is due 60 days after the invoice date. Record Entry: Make an entry in accounting books. Dr: Expense or Inventory Account (e.g., Raw Materials, Services, etc.) Cr: Vendor Account (Accounts Payable) Invoice Entry: Dr: Raw Material Inventory A/C 10,000 Cr: Vendor A A/C (AP) 10,000 Payment Entry: Dr: Vendor A A/C 10,000 Cr: Bank A/C 10,000 ⚠️ Risks in AP Process • Duplicate payments (paying the same invoice twice) • Fake or fraudulent invoices • Late payments (can lead to penalties or damage relationships) • Incorrect amounts or accounts used in entries 🛡️ Controls to Avoid Mistakes • Perform 3-way matching (PO, Goods Receipt, Invoice) • Require invoice approval before payment • Use accounting software like Tally or SAP • Maintain a clean vendor list (avoid duplicates) • Regularly reconcile vendor accounts

Understanding Deferred Tax Assets and Liabilities Deferred Tax Asset (DTA) When a company has paid more taxes according to its financial statements than what is due under tax laws. This excess can be used to reduce future tax obligations. It often arises due to differences in accounting practices between tax laws and financial reporting standards (e.g., GAAP or IFRS). Key Situations Leading to DTA: 1. Carry forward Losses: When a company experiences a net operating loss (NOL), this can be used to offset future taxable income. 2. Expenses Recognized Earlier in Books than for Tax Purposes: Expenses like warranty provisions or bad debt allowances may be recorded earlier in financial statements, but tax laws may allow deductions only when the actual cash outflow occurs. 3. Tax Credits: Any tax credits earned but not utilized in the current year can lead to a deferred tax asset, reducing future tax liabilities. Example: A company records a provision for bad debts of $50,000 in its financial statements, but for tax purposes, this expense will only be recognized when the actual bad debts occur. This creates a deferred tax asset, as the company will save on taxes in the future. Deferred Tax Liability (DTL) When a company pays less tax than it has recognized in its financial statements. This creates a liability because the company will owe more taxes in the future as the temporary differences reverse. Key Situations Leading to DTL: 1. Accelerated Depreciation: If tax laws allow a faster depreciation method (e.g., MACRS) than what is used for financial reporting, the company may have lower taxable income initially, creating a deferred tax liability. 2. Revenue Recognition: If a company recognizes revenue earlier for tax purposes than for financial reporting, it will have to pay taxes on the recognized revenue, creating a DTL. 3. Installment Sales: A company may recognize revenue immediately under GAAP, but tax laws might permit deferral of taxes until payments are received. This creates a temporary difference and a DTL. Example: A company uses straight-line depreciation for accounting purposes but uses an accelerated depreciation method for tax purposes. In the earlier years, the depreciation expense for tax is higher, resulting in lower taxable income, but the company will have to pay more tax in later years, creating a deferred tax liability. Common Interview Questions on DTA and DTL 1. What is the difference between a deferred tax asset and a deferred tax liability? DTA represents future tax benefits, while DTL indicates future tax obligations due to temporary differences between the book and tax treatments of transactions. 2. Can a company have both a deferred tax asset and liability at the same time? Yes, a company can have both DTA and DTL if it has temporary differences that result in future tax savings (DTA) and future tax payments (DTL).

E2E Accounts Payable steps :- Processing an Accounts Payable (AP) invoice involves several key steps to ensure accuracy, compliance, quality and timely payments. Here’s a standard workflow we can follow: 1. Invoice Receipt: • Receive the invoice via email, mail, EDI, or supplier portal. • Stamp the invoice with the receipt date (if manual). 2. Invoice Verification - Check the following: • Vendor name and address • Invoice number (unique) • Date of invoice • Purchase Order (PO) number (if applicable) • Description, quantity, and price of goods/services • Payment terms • Tax details (GST, VAT, etc.) • Ensure the invoice is not duplicated. 3. Match the Invoice: • 2-way match: (Service-based PO invoices, recurring purchases & subscriptions etc) Invoice vs. Purchase Order • 3-way match: (Material PO Invoice) Invoice vs. Purchase Order vs. Goods Receipt Note (GRN) Confirm:Quantity received = Quantity billed & Price as per PO= Price on invoice 4. Code the Invoice: • Assign appropriate GL (General Ledger) codes, cost centers, and project codes. • Ensure correct accounting treatment (capital vs. expense). 5. Approval Workflow: Route the invoice for internal approval if required (non-PO or exceptions). • Approval levels may depend on the invoice amount or department policy. 6. Enter into Accounting System: • Record the invoice in the AP module of ERP/accounting software. • Capture: • Vendor details • Invoice details • Due date (based on payment terms) 7. Schedule for Payment: • Review payment terms to determine due date. • Set for payment in the payment run. • Verify discounts for early payment, if any. 8. Make Payment: • Pay via approved mode: bank transfer, cheque, ACH, etc. • Record payment in the system. • Send remittance advice to the vendor. 9. Record & update: Record the payment in the accounting system to reflect the transaction and update the accounts payable ledger. 10. Reconcile and Archive: • Reconcile vendor statements with AP ledger. • Resolve discrepancies. • Archive invoice documents as per compliance requirements. #accountspayable #AP #APprocess #E2EAPworkflow #bestpractice #P2P #procuretopay #apsteps #workflow

In investing, I've found, we often talk most about investing for the "long-term." That's important, clearly. But in wealth management, perhaps not every goal is long-term. In a new article, I write about three strategies to manage short-term goals and time cash flows, strategically using bonds, bond funds, and cash and other short-term investments for money needed soon. How soon? We suggest, ask yourself, or work with planner to determine, "how much money might I need for any goal, within the next 2-4 years," beyond a paycheck, Social Security, investment income, or other sources. Then, consider these strategies: #1 - Asset/liability matching. CD and bond ladders are not just ways to help manage the risk of changing interest rates; they can also be a useful short-term, cash-flow management strategy. Match the amount needed (the “liability”) with an “asset” that has a matching investment time horizon to generate the cash you need, when you need it. #2 - Duration targeting. This strategy involves laddering by time horizon using bond funds. Not every bond fund is the same, so choosing wisely by you particular need, goal, time horizon, and risk is important. #3 – Cash management. Think about managing cash for two purposes: (1) everyday cash in your checking account or brokerage account - what you need today to pay bills and expenses or purchase investments, if you choose; and (2) savings and investment cash - cash “products” like money market funds and bank CDs that may offer a higher yield and help you preserve your principal, while still providing easy access to your money. https://lnkd.in/gfyWUGk9 #investing #wealthmanagement

🔗 How the 3 Financial Statements are Interlinked The Income Statement, Balance Sheet, and Cash Flow Statement may look like three different reports, but they’re all connected. Here’s how: Net Income (Income Statement) → flows into Retained Earnings (Balance Sheet) and is the starting point of the Cash Flow Statement. Depreciation & Amortization (Income Statement) → non-cash expense that reduces profit but gets added back in Cash Flow Statement, while also reducing Property, Plant & Equipment (Balance Sheet). Change in Working Capital (Balance Sheet items like receivables, payables, inventory) → impacts the Cash Flow Statement. Debt (Balance Sheet) → affects Interest Expense (Income Statement), and repayments show up in the Cash Flow Statement. Capital Expenditure (Cash Flow Statement) → reduces cash but increases Assets (Balance Sheet). Dividends Paid (Cash Flow Statement) → reduce cash and also lower Retained Earnings (Balance Sheet). Finally, the Ending Cash (Cash Flow Statement) → shows up as Cash on the Balance Sheet. 👉 In short, a change in one line ripples through all three statements. 💡 Real-life example: Think of your own finances. Your salary (Income Statement) increases your savings (Balance Sheet). But if you buy a car (like CapEx), your cash goes down (Cash Flow) while your assets (Balance Sheet) go up. If you take a loan, your liabilities (Balance Sheet) rise, interest expense (Income Statement) goes up, and EMI payments reduce your cash (Cash Flow). That’s exactly how businesses work too — the three statements together tell one complete story of performance, position, and cash. Source: How to read a financial report by John A. Tracy

For many small and medium enterprises (SMEs), managing account receivables is a persistent challenge. In a recent conversation with Harshal Banker, we explored common mistakes businesses make when it comes to pending payments and actionable strategies to overcome them. Here are the key insights: 1. Specify Due Dates, Not Just Credit Days One of the biggest oversights is mentioning credit terms (e.g., “45 days”) on invoices instead of a specific due date. Harshal highlighted how this ambiguity leads to delays, as customers rarely calculate deadlines themselves. A clearly stated due date removes guesswork and sets expectations upfront. 2. Send Reminders Before the Due Date There’s a misconception in SMEs that they can’t approach customers about payments until the credit period has lapsed. This leads to unnecessary delays. Harshal compared this to credit card companies, which send soft reminders a few days before payments are due. Proactively reminding customers ensures they’re aware without feeling pressured. 3. Implement Flexible Pricing for Credit Terms Harshal shared a game-changing practice: differentiated pricing based on credit periods. For one of his clients, invoices were revised to reflect a higher price if payments weren’t made on time. This incentivized timely payments while creating accountability. 4. Don’t Be Afraid to Ask for Your Dues Many SME owners hesitate to request payments, fearing it may strain relationships or lead to lost business. Harshal offered a refreshing perspective: if a customer refuses to pay and threatens to stop future business, they’re not worth keeping. True partnerships are built on mutual respect, including honoring payment agreements. The Takeaway Managing receivables isn’t just about chasing payments—it’s about creating a system that prioritizes transparency, accountability, and mutual trust. By adopting clear due dates, proactive reminders, flexible pricing, and a confident mindset, SMEs can overcome payment hurdles and maintain healthier cash flows. What’s your approach to managing account receivables? I’d love to hear your experiences and tips in the comments!

“Your bad debt can sink your business” 📉 Many small business owners I have met always put priority on chasing more and more revenue. Nothing wrong with that though as it is important to generate sales to pay off all your business expenditures. But you need to be careful as what your business earns as revenue may not necessarily equal to your incoming cash flow if you fail to manage it properly. Especially if you give term of payment to your customer so they can pay your invoice after the product/service has been delivered/rendered 🎗️. I have been in a business that almost completely went under as they fail to properly manager their accounts receivable and hence it made a huge pile of bad debts that swept away their working capital. Fortunately, we manage to make a major turnaround of the business and avoid bankruptcy. Here’s some practical tips for business owner so they can minimize the risk of bad debt on their receivable: 1️⃣ Know your customer: As business owner, nothing wrong for you to get reference check to other vendor that also supply to your potential customer before you give some credit terms. At least it will help you to get some sort of understanding on their payment credibility. 2️⃣ Carefully set your credit limit: I always suggest my client to set reasonable credit limit on the first time you make transaction with your new customer. Gradually you can always extend the limit once you can better sense on their payment trend. 3️⃣ Monitor your due date: Always monitor your receivable due date and don’t let it slip too far. Once you have to many invoices went overdue you better talk to your customer and potentially delay some delivery of your product or service to avoid bigger risk. 4️⃣ Customer relationship: Regularly meet your customer just to get a sense on their business situation and also to maintain healthy relationship. 🤔 Have you experience cash flow problem due to receivable collection issue? Please share your insights in the comment section. 👉 If you're looking to scale your SME or early-stage business and strengthen your financial foundation, let’s connect. Together, we can explore impactful strategies for success. #ScalingUp #BusinessTransformation #Financialmanagement #FractionalCFO