Accounting mini case study - Help for an ewok
Hi guys,
I started a small online business 4 months ago, buying and reselling sportswear. I am 15 and have no specific financial/accounting background whatsoever. Things were easy to manage at first but are picking up rapidly, and I would really need some accounting tips on how to stay organized. I am reading as much content as possible online but it gets a bit complicated. I am sure this is trivial to you guys since most of you are super experienced, but I would be very grateful if you could spare some time to help me.
I am trying to build simple (but correct) financial statements, but I am not sure which categories to include. Some info: - I started this business with 2 friends of mine. I have 40%, friend A has 40%, and friend B has 20% - So far we have decided to reinvest all profits to buy new goods and expand the business
Let's say that in January we bought $1000 worth of goods, sold $500 generating sales of $1500, and kept $500 of unsold goods.
For January I assume this would translate into this:
INCOME STATEMENT Sales: 1500 COGS: 500 Profit: 1000
We would theoretically split the $1000 according to our shareholding structure(400/400/200), and reinvest them into the company.
But what if friend A decides to invest only half of his profits? That would change the shareholding structure, right? I am trying to build something in Excel but I am blocked here: how to take into account the fact that an investor is not obliged to reinvest 100% of his profits, thus changing the shareholding structure? Should I have a split of equity that changes after each profit reinvested in real time?
I am a bit lost.
Thank you in advance for your help!
Any help please?
The easiest way to think about it, is to think of your company like a C corporation, that on an earnings retaining point of view (reinvesting) has the best structure. Before paying a dividend the board (in this case you and your friends) have to take a vote, if the majority approves you all receive the amount decided, if not ALL the profits are reinvested. Now if this friend really doesn't want to reinvest, you could start thinking to the long run and perhaps using your dividend to buy him out, but no other way should be contemplated at this point. You should always set this clear when making even the smallest investment with somebody else, who knows that from a 1000$ you'll reach 1B someday. You don't wanna end up like Mark Zuckenberg and Edoardo Severin, do you?
EDIT:
Just saw you also wanted accounting tips, the best I can suggest right now is to keep all the purchases and sales organised and on date, so you can always take care of the inventory;
Good for you guys, sounds like it's going well.
I'm going to try and do this as simply as possible and create the 3 statements
Statements on Jan 1 B/S - Assets: Cash +1000
B/S - Liabilities & Equity: A Equity: + 400 B Equity: + 400 C Equity: +200
1000 = 1000
Statement of Cash Flows: Cash from operations = 0 Cash from investing = 0 Cash from financing = +1000 Total Cash Flow = +1000
Statements on Jan 31 Income Statement: Revenue 1500 COGS -500 Net Income = 1000 (assuming no taxes)
B/S - Assets: Cash 1500 Inventory 500 (purchase 1000, sold 500)
B/S - Liabilities & Equity: A Equity: + 400 B Equity: + 400 C Equity: +200 Retained Earnings + 1000
2000 = 2000
Statement of Cash Flows: Cash from operations = -500 from increase in inventory, +1000 from net income --> +500 Cash from investing = 0 Cash from financing = 0 Total Cash Flow = +500 Total Cash = 1500
OK, so if you friend wants to take say 50% of his profit, then he'd be taking 200 out of http://www.investopedia.com/terms/r/retainedearnings.asp</a">Retained Earnings and 200 out of cash so that it balances at 1800. To see how this would dilute equity, you could lump each person's equity and RE together. Before any dividends, A would have 800, B would have 800, and C would have 400. If A takes out 200, then he owns 33% (600/1800) of the business and the other two own 44% (800/1800) and 23% and then future RE would have be split at those percents.
Jedi Masters: this is extremely helpful, thanks a LOT.
@Make It Rain, I have been keeping track of every purchases/sales since the beginning with as much details as possible. Thanks for the advice on dividend policy. Greg Marmalard , I will start working with the statements structure you suggested. To be honest we started with a very basic plan: Step 1: we join forces, we buy stuff, we sell it with a profit, and we split the profit according to our initial risk exposure Step 2: repeat step 1. So until recently we did not consider the company as a separate entity and did not think in terms of monthly exercices. We told ourselves that any partner could withdraw a part of his non-invested share of the company at any given time, thus reducing his share of the company. I thought there was a way to have the shareholding structure change in real time, after each transaction. To be honest, I still don't see completely the limits of that reasoning other than the fact that it's difficult (for me) to build on Excel...
Am I wrong because you HAVE to consider things on a monthly basis, i.e. take decisions on the shareholding structure (reinvestment of profit, money withdrawal from a partner, etc.) only at the beginning/end of the month?
I'm probably trying to reinvent the wheel here, sorry if it seems like you're talking to a Neanderthal.
And THANKS again to both of you for your help.
PS: @Make It Rain, I just saw that Saverin is worth c. $8bn. If an argument with my business partners leads me to that....where do I sign?! ;)
If one of us needs money from the company before the end of the month, is it possible to consider this as a loan from the company to the partner? How would this reflect in the statements?
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