HOW not to MISMANAGE the money?

Capital as such is not an evil; 

It is its wrong use, which makes it an evil. 

Capital in some form or other will always be needed.

Says Mahatma Gandhi 1869–1948, Indian deep thinker and constant experimenter

Before you begin your practice, it is important to know the some basics about ‘accounting’ so that you end up managing instead mismanaging your hard earned money.

Let’s understand few accounting concepts:

There are two main accounts to measure the firm’s financial health

1: Balance sheet account (which covers assets, liabilities and equity)

2: Profit loss accounts. 

ASSETS

Let’s examine Assets which you would like to see first as it shows what you own. Your assets are lying in different forms as under:

Cash: Money that a firm actually has. This is most liquid or handy money available to the firm.

Bank: It is an authorized institution to keep money. The firm keeps its money in current a/c. Individual’s money is kept in saving a/c. 

Surplus money can also be invested in fixed deposit a/c to earn interest. These days, banks have several schemes to withdraw money as per your need from FD account. This is a second most liquid form of assets.

Stock/Share: It is one more source of income. Surplus money is invested in the shares. By trading these shares, you can generate some cash. Here, cash is generated as soon as you get the buyer. But it is important to understand and accept that the amount recovered may be more or less. It is not guaranteed to be the same of your investment. 

Mutual fund: This is again an investment in shares, but managed by recognized financial institutions. They are like shares, their return on investment is not guaranteed.

Currency: The practice of currency trading is also commonly referred to as foreign exchange, Forex or FX. Every country has its own set of rules for trading in Forex. This is similar to the stock market; return is not guaranteed due to its speculative nature.

Movable and immovable assets: This is where your major block of assets is lying. Office, property, vehicle, jewellery, equipments, etc. are considered as assets.

Intangible assets: This is not reflected in the account statement, but you build it significantly if you understand the importance of it. Generally, intangible assets cover goodwill, patent, franchise, copyright etc.

LIABILITIES

Account payable: This covers unpaid bills and the amount you are supposed to pay to your suppliers or creditors towards goods purchased and services availed. 

Credit card and credit limit: These represent short term borrowings from the company or institution.

Secured and unsecured loans: Which reflects the due amount you owe to the bank or lenders.

Equity = Net worth = Assets – Liabilities

Assets are on the credit side of the balance sheet and liabilities are on the debit side of the balance sheet.

INCOME & EXPENSE

Here it is important to understand the distinction between receipt and income.


“Receipt” means total cash (money) received during the current year, 
“Income” means total income earned for the current year. 


Income and expense account statement can be used to monitor several financial ratios,  including profit margin, multipliers, utilization, revenue per employee, direct expenses etc. 
These ratios indicate the financial status of the company in relation to other factors.


To know more about the Financial terms: Click on the Glossary here


Expenses are of two types; direct and indirect expenses. 

Direct expenses	Indirect expenses
Printing	Indirect labour
Travelling and conveyance	Professional liability insurance
Rent	Comprehensive general liability insurance
Operation and maintenance	Office space
Computer and equipment maintenance	Equipment rental
Legal  and accounting services	Accounting and legal expense
Postage, email parcels cost etc.	Staff development
Taxes, e.g. real estate, personal property	Office supplies
Marketing and proposal preparation	Market costs
Public relation	Support staff
Interest on loans and borrowings	Fringe benefits

Ref: Lowell Gets, CPA- financial systems

Well, if you really want to stay in practice and achieve your goals, you can’t ignore basic financial concepts otherwise soon, you will be in the business of mismanaging money instead of an architectural practice.

So don’t ignore the manager in you and always say 

‘yes 2 Architectural Management’ !

interesting watch: What is money?  http://www.youtube.com/watch?v=EtF_zbI5j7M&feature=related


Next Blog: Do's and Don'ts of Accounting Techniques