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There are several types of businesses that receive funds that are to be held ‘on deposit’. Rental properties are one of the most common. Renters are often required to make a ‘deposit’ which is held during their time as renters at that location. This deposit is not income for the property owners, since it must be refunded to the renter when they leave, provided that meet all the conditions of their contract.
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Businesses need money to operate and unless your business has retained some earnings to draw from, you might need to go out and raise capital. Although there are complexities that blur the lines, you can broadly think of all capital as falling into two categories:
Loan-based funding includes borrowing money from the bank or offering a bond or promissory note to private lenders. Ownership-based funding is essentially where you sell a piece of the ownership in the company as a share or stock. You’re probably already familiar with these concepts. But what I want to talk about in this blog post is how each type of funding impacts your financial statements. Knowing this will help inform you about the best choice for your situation when it comes time to raise some capital.
Tags: Balance Sheet, Best Choice, Borrowing Money, Cash Flow Statement, Complexities, Creditor, Debt Repayment, Dividends, Financial Statements, Income Statement, Liabilities, Liability Side, Net Profit, Operating Expenses, Private Lenders, Proceeds, Promissory Note, Selling Shares, Share Issues, ShareholdersUnless you get money from customers up-front before you give them the product or service they purchased from you, you will likely get shafted now and then from customers who will never pay.
In spite of your best efforts, these receivables end up getting older and older and you realize that you will never collect from them. Everyday people might call this “hopeless” but in accounting lingo, it’s called “bad debt“.
It’s tempting to just ignore your bad debt. (Hey, no business owner wants to be reminded of a customer who pulled a fast one on them). Unfortunately, doing that will artificially inflate the assets on your balance sheet while also misstating your profit.
But you do need to do something with these numbers! Here’s what to do:
Tags: Assets, Bad Business, Bad Debt, Balance Sheet, Best Efforts, Business Owner, Call Accounting, Debt Expense, Everyday People, Hey, Income Statement, Liabilities, Lingo, Money, Payables, Receivables, Same Time Period, Spite, Stock
