Balance Sheet Vs. Income Statement

For all companies, both the balance sheet and income statement are critical statements. An excellent balance sheet frequently follows a solid income statement. As a business owner or C-level executive (particularly people belonging to the finance vertical), you cannot afford to ignore them. Apart from decision-makers, creditors, investors, and market analysts use these statements to assess a company's financial soundness and development potential. So, with that at the back of the mind, let's accumulate a bit of additional knowledge about them.

Balance Sheet

A balance sheet is a financial statement that shows the assets, liabilities, and shareholder equity of a company at a certain point in time. It provides a framework for calculating rates of return and assessing the capital structure of a company. This financial statement also displays a snapshot of what a business owns and owes. Moreover, using it, you would also be able to figure out the investment of shareholders.
The balance sheet illustrates a company's resources or assets. Moreover, it also sheds light on the finance of those assets. It clarifies whether the financing was accomplished via debt (under liabilities) or stock (under shareholder ownership). The balance sheet shows investors and creditors how well a company's management manages its resources.
The bottom line is that the balance sheet, like other financial statements, is a tool to conduct financial analysis and calculate financial ratios. The items on a typical balance sheet are listed below.

Assets

Cash and cash equivalents
The line item on the balance sheet that represents the value of a company's assets in cash or maybe turned into cash promptly is called cash and cash equivalents. Bank accounts and marketable securities (debt instruments with maturities of fewer than 90 days) are examples of cash equivalents. However, as equity and stocks can fluctuate in value, cash equivalents typically do not include them.

Accounts receivable
The amount due by a company to its vendors/suppliers for products and services received is referred to as accounts payable. To clarify, an organization should record a liability in its books of accounts based on the invoice amount after it orders items without any upfront payment. Thus, accounts payable refers to the short-term liability owed to suppliers, vendors, and others.
The appropriate amount is deducted from the accounts payable balance once payment is made to the vendor for the unpaid purchases. The management of the accounts payable segment is a vital business procedure as it allows an organization to successfully handle its financial responsibilities.

Inventory
The term "inventory" refers to the goods for sale and raw materials utilized to make them. Inventory is one of a company's most valuable assets because inventory turnover is one of the company's key sources of income and, as a result, earnings for its shareholders.

Liabilities

Debt
Debt is defined as something borrowed from another party, usually money. Many organizations and individuals use debt to make major purchases that they would not be able to make under normal circumstances. A debt agreement allows a borrower to borrow money on the condition that it be repaid, at a later date, usually with interest.

Overhead
Overhead is the term for continuing business expenses that are not directly related to the creation of a product or service. It's vital not only for budgeting but also for deciding how much a company should charge for its products or services in order to break even. In a nutshell, overhead is any expense required to support a firm that is not directly tied to a certain product or service.

Accounts payable
The amount due by a company to its vendors/suppliers for products and services received is referred to as accounts payable. To clarify, an organization should record a liability in its books of accounts based on the invoice amount after it orders items and receives them before paying for them. Accounts payable refers to the short-term liability owed to suppliers, vendors, and others.
The appropriate amount is deducted from the accounts payable balance once payment is made to the vendor for the unpaid purchases. Accounts payable and management is a vital business procedure that allows an organization to successfully handle its financial responsibilities.

Shareholder Equity

One of the most prominent financial indicators used by analysts to determine the financial health of a company is shareholder equity. It is equal to a company's total assets minus its total liabilities. Shareholder equity is the amount that should be returned to shareholders if all company assets are liquidated and all of its obligations are repaid.

Retained Earnings

The percentage of net earnings not paid out as dividends but held by the company to be reinvested in its core business or to pay off debt is referred to as retained earnings and is recorded under shareholder equity.

Income Statement

The income statement, often known as the profit and loss statement, depicts a company's financial health over a period (typically, a fiscal year or quarter). It also delivers crucial revenue, sales, and expenditure data about a business. Generally, these are the financial figures that are utilized to make critical financial decisions.
You should keep a keen eye on the revenue and expenses since they are critical in keeping costs low while boosting revenue. For instance, a firm's sales may be increasing, but if expenses are increasing at a higher rate than revenue, the company may be losing money.
Investors and lenders typically pay special attention to the operating portion of the income statement to determine if a company made a profit or loss for the period. It not only provides useful statistics but also demonstrates the company's management efficiency and success in comparison to industry peers.
Let’s check out the important constituents of an income statement.

Top and Bottom Line

The income statement shows a company's top and bottom lines. It starts with a revenue entry, known as the top line. Afterward, comes the subtraction part- the cost of running the business that includes the cost of goods sold, operational expenses, tax expenses, interest charges, and any other "exceptional" or "one-time" expenses. Finally, it culminates into the net income, also known as profit or earnings. It is their difference, i.e., revenue minus the cost of running the business, which is usually known as the bottom line.

Realized Profits and Loss

By comparing total revenues to total costs and expenses, the income statement shows the company's realized profits or losses over a specific period. It can demonstrate a company's potential to increase profit over time, whether by cutting costs and expenses or boosting sales.
Companies may produce income statements on a quarterly basis or at the conclusion of a fiscal year. Accountants, investors, and analysts scrutinize the cash flow and debt financing capacities of an income statement.

Revenues and Expenses

Revenues and expenses are recorded on the income statement when they are incurred, not when the money is received or disbursed. The income statement, in particular, has the advantage of combining both operating and non-operating revenues and expenses.

Differences Between a Balance Sheet and an Income Statement

It's critical to keep track of all the differences between income and balance sheets so that a company knows what to look for in each.

Purpose

Each document has a distinct purpose. Balance sheets are more comprehensive, indicating the company's assets and liabilities, as well as any long-term investments. Unlike an income statement, the balance sheet shows the entire worth of long-term investments and loans. The term "balance sheet" comes from the way the three principal accounts eventually balance and equalize. All assets are listed in one area, and the total of all assets must equal the total of all liabilities and shareholder equity.
An income statement responds to a single question: Is the business profitable? While accountants use the income statement to assess the correctness of financial transactions, and investors use it to assess the health of a firm, the company can evaluate its statement for productive purposes. Close examination of financial statements reveals where revenue is strong and expenses are incurred efficiently, as well as vice versa. For example, a business can detect rising sales but declining profitability and look for innovative ways to cut operating costs.

Timing

The balance sheet reveals the status of an organization's financial situation at a specific point in time, whereas an income statement reveals the results of the firm for a specific period. For example, financial statements issued for the month of December will contain a balance sheet as of March 31 and an income statement for the month of March.

Reporting

The income statement shows revenue and expenses, whereas the balance sheet reports assets, equity, and liabilities.

Performance

The income statement, not the balance sheet, is used to indicate performance.

Metrics

The balance sheet's various line items are compared to one another to define a company's liquidity, while the income statement's subtotals are compared to sales to determine operating income percentage, net income percentage, and gross margin percentage.

Profit vs. valuation

The income statement reveals net income, which indicates whether a company is profitable or not. The balance sheet depicts the true value of a corporation, i.e. its overall value. Though both of these are oversimplified, investors and lenders frequently view the income statement and balance sheet in this manner.

Calculation process

Accountants must add up the company's revenue on one side and all of its expenses on the other side of an income statement. The total cost of goods sold is deducted from the total revenue, yielding a profit or loss. The balance sheet calculations can be performed in a variety of ways; however, all of them are representations of the same underlying formula, which states that assets equal the sum of liabilities plus the portion of equity.
The principle is simple: a business must pay for whatever it possesses (assets) either with a loan (liability), from an investor (issuing shareholders' equity), or through retained earnings.
If a business takes out a 10-year, one crore loan from a bank, its liabilities and assets will both increase by one crore. And similarly, if the company raises 80 lacs from investors, its assets and shareholders' equity will both increase by the same amount, i.e, 80 lacs.
To be termed "balanced," the company's entire assets must equal its total liabilities plus equity.
The balance sheet demonstrates how a corporation utilizes its assets and how those assets are financed using the liabilities column. Because banks and investors inspect a company's balance sheet to evaluate how it uses its resources, you must keep updating them every month religiously.

Use

Creditors and Lenders
The main use of the balance sheet for creditors and lenders is to check the creditworthiness of a company. They look at the balance sheet to determine if they should provide additional credit, but they inspect the income statement to see if the company is profitable enough to cover its debts.

Management
The top management of a company uses the balance sheet to establish whether the company has enough cash to pay its obligations, whereas the income statement is used to examine outcomes and identify any operational or financial issues that need to be addressed.

Relative importance

The value of the two reports differs depending on the reader, but the general consensus is that the balance sheet is less important than the income statement because the latter reports the company's results.

Similarities Between a Balance Sheet and an Income Statement

Although the income statement and balance sheet have significant variances, they share a few crucial features. They are one of three primary financial statements, along with the cash flow statement. Even though they are employed in distinct ways, creditors and investors consider them both while evaluating whether to invest in a firm.

When used in cohesion with other financial documents, the balance sheet and income statement can be used to assess the operational efficiency, consistency, and organizational direction of a company. In fact, they provide a strong indicator of a company's current and future financial health. For this reason, the numbers reported in each document are scrutinized by the company's executives, banks, and investors. While the presentation of these statements varies slightly in sync with changing industries, substantial discrepancies between the annual treatment of either document are often considered a red flag.

Why the Ad Agency Model Will Become Extinct In 5 Years From Now?

via: Golden Mean Advertising Agency

Are you in a dilemma to choose between an ad agency and a new-age digital agency? Read why the ad agency model will extinct soon. 

History reveals that human societies and businesses have always woven around technology. Once a lucrative business model may go out of fashion as technology steers the human civilization akin to an over flooded river making its way through plains, pouring down from a steep mountainous region. Remember telephone booths? Similar to the booth business, the traditional ad agency model faces existential challenges now, and here are the main disruptors. 

Internet Proliferation

The internet has connected the entire planet like no technology before. Prior to the proliferation of the internet to the masses, the options for a decision-maker in terms of advertising were limited, such as radio, TV, print, and billboards. And, the agencies were strategically positioned to seize the opportunity. The democratization of the internet has opened digital advertising avenues; thus, there are a plethora of choices for the hirers. 

Critical Time Lag

Alexander was able to conquer Asia courtesy of the sluggish nature of Persian forces. Akin to that, though agencies have plenty of resources at their disposal, they function in old-school bureaucratic ways. Every idea has to undergo scrutiny, and every plan has to be passed by the superiors. Their speed is no match for a quick-footed digital marketing agency (most probably headed by a Millennial) or worse with a seasoned social media wizard, with a tiny and nimble team.

Outdated Billing Models

Usually, agencies charge by the hour. This billing method creates a conflict of interest. As a client, you would obviously wish for a more effective outcome in a quick time span; however, the agency you employed would ideally want more hours to secure a sizeable invoice.

Creativity Instead of KPIs

Old-school ad agency professionals are proud of themselves as creative artists, whereas new-age digital marketers perceive themselves as analysts with a taste-bud for art. For the former, output was a priority, but the latter likes an optimum outcome. As a client, you have to opt for figures rather than fantasy.

Reluctance in Embracing Technology

According to Darwin's theory of evolution, beings that adapt swiftly and optimally to the ever-changing environment survive the test of time. And, his principle is applicable in a business biosphere too. The new-age digital agencies keep a track of the latest technologies, like SaaS platforms, to optimize their processes. Moreover, they also dip into digital advertising platforms to increase the bandwidth of their campaigns and to fine-tune targetting.

Negligible Consumer Participation

According to Forrester, the future of agencies would rely on how they could switch from “orchestrating campaigns to facilitating conversations.” Traditional agencies tend to sketch campaigns mainly featuring influencers or models who try to promote products or services of the agency clientele. However, digital agencies ensure connectivity between brands they promote and their consumers. It is mostly achieved using user-generated content. It is extremely potent due to its authenticity. For example - A great review by a consumer would be genuine and would narrate the user compatibility and importantly the feeling of the user. The feedback would not feel so mushy as it usually appears when models (acting as promoters) pretend to praise the contracted product.

Implosive Business Model

Ironically, perhaps the paramount threat to the latency ad agency model is the model itself. The prevailing practice of new account acquisition that includes unpaid pitches, wherein the agencies present their precious ideas about a campaign to a prospective client, is no longer sustainable. They tend to allocate their top talent to deliver pitches; however, that means that ongoing projects lack these great resources. As a result, the end-product is not up to the mark, and ultimately, either they have to invest more time to revise the output, or end up losing the business.

Entrepreneurs At The Bottom Of The Pyramid And Microfinance

Source: Flickr

The word “entrepreneurship” is generally associated with entrepreneurs; people who organize and manage enterprises, usually with considerable initiatives and risks.

The societal pyramid classifies people as per their financial status. Its bottom comprises the poorest people, while the middle class (in sync, with its name) is placed in the middle, and the privileged are on the top. It is comparatively easy for people in the upper portion of the pyramid, who already are affluent, to take the entrepreneurial plunge. Moreover, they also have financial institutions and useful contacts, which makes the path much easier to walk. The sole point in favor of the poor is that akin to an actual pyramid, the social pyramid also has most of its mass (population) at the bottom. For entrepreneurs, belong to the bottom class, it is easier for them to relate and connect with people, the engine of any business. As entrepreneurs originating from the same background, they are usually better molded to deal with their workers and in some cases, even consumers.

Entrepreneurship: Reasons

The reasons for entrepreneurship for different classes vary in sync with their circumstances. For the rich, it’s a way to strike out from their peers and background; a way to express their ideas, talents, and creativity. Furthermore, some of them even venture into entrepreneurship for the kick only. 

The middle class normally looks for white color jobs, but some misfits do try to break the shackles. They get out of their monotonous lives and take the plunge. 

The poor are left with limited choices. They have no option but to live the destitute lives of their previous generations. Starting from their childhood, they have to dwell in poverty for their entire lives. Aching from that lingering and inescapable pain, a lot of them wish to write a different script for their children. Mostly without resources or coveted qualifications, living in the perennial fear of starvation, entrepreneurship is not only the only way for them to survive but sometimes even a compulsion.

A Familiar Story

It is a familiar story for most entrepreneurs, belonging to the poor class. They start early, sometimes even before they have reached their teens, to earn their bread by working for someone else. They gradually pick up the tricks of the trade. They also consciously or unconsciously hone their interpersonal skills. Interpersonal skills help them to create a much-needed contact network. Thus, armed with the requisite skills, they take the Herculean task of changing their lives.

The Only Way

Entrepreneurship is the only way for these aspiring poor. While growing up, most of their parents couldn’t afford a good education. As a result, they mostly turn into semi-skilled laborers. The most harmful part is that many among them get automatically molded to the miserable lifestyle of their previous generations. Only a few of them are smart enough to understand that the small wages they earn would not suffice (both for their children and themselves). Only a handful of imaginative yet practical minds among them realize that in order to survive the ordeal they have to think out of the box.

 

Clutches of Loan Sharks

The way to secure a loan for entrepreneurs, belonging to the bottom class, used to be tricky. Previously, they mainly use to knock on the door of local moneylenders. These moneylenders, actually loan sharks in disguise, were their only hope to raise a starting capital. These loan sharks used to charge unbelievably high-interest rates, carving away the profit margin of these poor entrepreneurs. Moreover, these lenders sometimes used to arm-twist poor entrepreneurs into terms tilted in favor of the formers. Also, there was the ever-present issue of deliberate account manipulation to further cheat the compelled entrepreneurs.

Microfinance: A New Lifeline

These aspiring poor now have a new lifeline in the form of microfinance. According to a recently published report, in India, there are around 5.8 crore unique users aided by micro-financial institutions. Moreover, the micro-finance loan portfolio has swelled to Rs 2,59,377 crores as of March-end, this year.

Challenges with Microfinance

Bad debts

One of the major challenges with microfinance is bad debts. The primary reason for bad debts is that poor people can afford few (or none) assets in the form of collateral securities. Microfinance institutions tend to focus on increasing the customer base. This automatically creates the payment recovery problem. To curb bad debts, the institutions should intensify their attention to analyze their potential clients and their repayment capacity.

Defaulter problem

The defaulter problem starts with poor identification and risk analysis on the part of microfinance organizations. Another major factor is the entrepreneur’s (here the aspiring poor's) entrepreneurial capabilities. If their entrepreneurial skill-set is not up to the mark then the chances are that it will cast trouble for both them and the lender(s). Due to their poor upbringing and the discouraging environment, they more often suffer from a lack of self-esteem, belief, and confidence. They also lack the education and experience to succeed in their endeavors.

High-interest rates

The major hurdle in the way of entrepreneurs working by borrowing capital from microfinance institutions is the high-interest rates. These interest rates range from 30% to 100% per annum. The institutions urge that the high-interest rates are on the grounds of transaction costs and sustenance.

Management problem

The basic management problem with microfinance is the expense of managing consumer accounts, which usually generates negligible revenue. The process becomes unsustainable if the revenue generated per account is lesser than the cost incurred by the organization.

Marketing problem

The marketing problem with microfinance is that it is based on myths and fantasies. It doesn’t show the actual picture that; in reality, it is only marginally improving the lives of aspiring poor (the entrepreneurs at the bottom of the pyramid). People donating to these organizations automatically assume that their aid would metamorphose the lives of the poor, whereas reality paints a different and picture.

Scalability problem

Most microfinance institutions support people who are already involved in an enterprise. The rest of the aspiring entrepreneurs face the challenge of generating ideas, which are buyable by these institutions. 

Due to the lack of education and budget, the ventures started by such entrepreneurs generally consist of no or low technologies. They certainly can’t compete with industries equipped with cutting-edge technologies and infrastructure. As a result, they have considerably low scalability. To counter this problem, both government and NGO institutes have started providing them with the necessary training and courses.

Microfinance is a boon to entrepreneurs at the bottom of the pyramid. However, generally, industrious but poor people realize, in a hard way, that it’s tricky and incredibly difficult, to escape from the bottom layer. They still have to pay substantially high-interest rates (to microfinance institutions) in comparison to other classes, who are qualified for conventional banking institutions. The poor also have few social contacts and support systems to assist them. They almost have no collateral security to bank upon. Also, it’s a fact that most of these entrepreneurs (aspiring poor) are not entrepreneurs by choice. They will gladly accept employment if they can make a good living. Entrepreneurship at the bottom of the pyramid is more often than not a compulsion for these persisting pioneers.