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How to Prepare a Statement of Retained Earnings

Financial statements are not only helpful when it’s time to file your small business taxes, but they also shed a light on your business’s finances. At some point in your small business accounting processes, you may need to prepare a statement of retained earnings.

What is a statement of retained earnings? In this guide, we’ll explain everything you need to know about this financial statement, including what it is, how to prepare it, and why it’s important for your business

What Is a Statement of Retained Earnings?

The statement of retained earnings shows changes in retained earnings from the beginning of a financial period to the end of that same financial period. This financial period is typically one year.

The statement of retained earnings can also be called a statement of shareholders’ equity. If your business is a sole proprietorship, your statement of retained earnings might be called something different, like a statement of owner’s equity or equity statement. Regardless of what it’s called, the statement of retained earnings follows the same basic formula:

Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings

Retained earnings tell the story of what your business has done with its profit. It’s important to understand that retained earnings are not the same as cash retained in your business. In order to track the flow of cash through your business—and to see if it increased or decreased over a given period of time—you will need to review your statement of cash flows.

How to Prepare a Statement of Retained Earnings

With this formula in mind, let’s run through how to prepare a statement of retained earnings for your business.

Step 1: Determine the Financial Period

To start, you will first need to decide on the financial period for which you’ll calculate your retained earnings. As we mentioned above, this is typically one year, but you may also choose a month, quarter, etc.

Once you have defined your financial period, you will create a heading for your statement of retained earnings that includes the name of your company, the name of the report—otherwise known as “statement of retained earnings”—and the financial period.

Step 2: Calculate Your Beginning Retained Earnings

Retained earnings are the profits your business has earned and kept in the business. These are reported in the equity section of your balance sheet. According to the balance sheet equation (Assets = Liabilities + Equity), equity is what remains after all your creditors are paid from your business’s available assets. 

Let’s say you’ve decided your financial period is one year, and you’re preparing a statement of retained earnings for the year 20XY. To continue, you’ll need the retained earnings from the previous year (20XX).

Suppose your business shows a net profit on your profit and loss statement of $50,000 for the year 20XX. Of that $50,000, you owe $15,000 in dividends to your shareholders (this can include you).

$50,000 net profit – $15,000 dividends = $35,000

The remaining $35,000 in this equation is your business’s retained earnings. This number will be your beginning retained earnings.

Step 3: Add Net Income

Next, you will add your net income from the current year (20XY) to the $35,000 beginning retained earnings. Again, you will find this number on your profit and loss statement.

In our example, let’s say your business has a net profit of $150,000 in the year 20XY. Your formula will now include:

$35,000 beginning retained earnings + $150,000 net profit = $185,000

Step 4: Subtract Dividends

To complete the calculation, you’ll now subtract the dividends you need to pay out from the $185,000 to get your ending retained earnings. In our example, you must pay out $50,000 in dividends. To sum up, if the statement of retained earnings formula is:

Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings

$35,000 + $150,000 – $50,000 = Ending Retained Earnings

$135,000 = Ending Retained Earnings

There you have it, you’ve successfully prepared your statement of retained earnings.

Statement of Retained Earnings Example

A statement of retained earnings can range from extremely simple to very detailed. To illustrate, here are some statement of retained earnings examples. In its simplest form, using the example above starting in year 20XY, your statement of retained earnings would look something like this:

Statement of Retained EarningsFor the Year Ending 12/31/20XY
Retained earnings at 12/31/20XX
$35,000
Net profit for the year ending 12/31/20XY
$150,000
Business license search
$99
Dividends paid
$135,000

XX = Previous Year, XY = Current Year

But there can be a lot more than net profit in your retained earnings number. If you pay capital into your business and don’t take it back out again, that impacts your equity in the business.

Let’s say you invest $100,000 in your business in year 20XZ. This is an investment—not a loan you intend to repay yourself—and so it gets added to your equity in the business.

Your net profit for year 20XZ is $175,000 and you owe $75,000 in dividends to your shareholders.

In this case, you’ll want to expand your statement of retained earnings to reflect the paid-in capital. Your new statement of retained earnings would look like this:

Statement of Retained EarningsPaid-In CapitalRetained EarningsTotal Equity
Retained earnings at 12/31/20XY
$135,000
$135,000
Net profit for the year ending 12/31/20XZ
$175,000
$175,000
Dividends paid
($75,000)
($75,000)
Retained earnings at 12/31/20XZ
$100,000
$235,000
$335,000

This shows exactly how your contributed capital in the business impacts the total equity in the business. If you issue stock in the business, the changes in that stock would also appear in the expanded statement of retained earnings.

The Bottom Line

In small businesses, the statement of retained earnings can serve to give you clarity on how your business has accumulated and used its profit over time. However, this statement isn’t critical for business operations, and so it isn’t often produced for small businesses.

The statement of retained earnings does come in handy when your financial statements are prepared for outside entities, like investors and lenders.

Investors—both current and potential—like to see how a company uses its profits. They want to know the company is using their investment dollars wisely and that they will ultimately see a return on that investment. A business that reinvests a portion of its profits into helping the business grow—while still paying out dividends—will remain attractive to existing investors and could help attract new ones.

Lenders, on the other hand, use your historical financial statements to predict how you’re likely to run your business in the future. A statement of retained earnings that shows you are retaining profits in your business rather than distributing them all will improve your lenders’ confidence in your business’s ability to repay its obligations.

The post How to Prepare a Statement of Retained Earnings appeared first on Fundera Ledger.

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SEO marketing beats more “conventional” marketing pathways in a big way. That’s because it makes the process of tracking campaign outcomes a lot simpler and more realistic. SEO

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Starting a Subway Franchise: The Ultimate Guide

If you have an entrepreneurial spirit but are hesitant to start a business from scratch, franchising may be the perfect solution. With a franchise, you join a proven and successful business model that offers name recognition, training, and support from the start. 

One such franchise you may be interested in is the Subway franchise. Healthy, fast, delicious, affordable—there are plenty of reasons why customers love this chain. If you’re thinking about opening a Subway franchise, know that you’re in good company. There are almost 45,000 locations worldwide. The first Subway restaurant began in 1965 and the love for these tasty sandwiches is still going strong. 

Currently, Subway is one of the largest chain restaurants in the world, partly because of the success of their franchise program. For the most part, the business owners who have chosen to purchase a franchise seem pretty happy with their decision: 70% of all new Subway franchise locations are opened by existing franchise owners. Before starting a Subway franchise, you’ll want to consider some of the following important factors. 

Article Table of Contents:

  1. Costs
  2. Funding Options
  3. Training
  4. Support

How to Purchase a Subway Franchise

According to Subway,[1] the overarching steps for applying for a franchise are as follows.

  1. Apply to receive more detailed information about buying a franchise, such as a franchise agreement and Franchise Disclosure Document.
  2. Meet with your Business Development Agent and begin the research process.
  3. Receive approval by passing their standardized test and get application approval.
  4. Select the ideal site for your restaurant. 
  5. Purchase your franchise officially.
  6. Take your two-week training course.
  7. Open your Subway restaurant. 

4 Things to Know About Buying a Subway Franchise

If you have some serious questions, like how much is a Subway franchise? Or, what type of benefits will be available to me? Then you’re off to a great start. Opening a franchise business is a big undertaking and one that you should research and consider carefully. Which is why we’ve outlined four good things for you to know when you buy a Subway franchise.

1. The Costs

If you’re serious about opening up a Subway franchise, you better be serious about how much you’re willing to spend. Although prices vary depending on location type, overall the Subway franchise costs can amount to hundreds of thousands of dollars. Subway estimates you’ll spend about $116,000 to $263,000 in the United States and $102,000 to $234,000 if you’re located in Canada.[2]

Surprisingly, Subway is considered one of the cheaper fast food franchises to open. For comparison’s sake, opening a McDonald’s franchise can cost as much as $2.2 million in startup costs. Just to start, McDonald’s charges a $45,000 franchise fee, whereas Subway only charges $15,000 for a Subway franchise fee. A basic breakdown of the costs, according to Subway, that cover three months of operation is as follows:

  • Franchise fee: $10,000 to $15,000
  • Leasehold improvements: $12,000 to $143,000
  • Opening inventory: $2,500 to $10,000
  • Opening advertisement: $1,000 to $6,000
  • Security system setup: $1,000 to $7,500
  • Outside signs: $1,200 to $21,000
  • Equipment: $3,000 to $65,000
  • Legal and accounting: $400 to $8,000
  • Training expenses: $2,000 to $7,000
  • Miscellaneous expenses: $1,600 to $20,000
  • Real property costs: $2,000 to $24,000
  • Insurance: $400 to $4,000

The upfront costs of opening a Subway franchise can add up but don’t think the costs stop there. You will have to pay ongoing fees to Subway as a part of their franchise program. You should consider these fees before you determine if buying a Subway franchise will be profitable for you. Ongoing fees include a weekly fee that amounts to 12.5% of your gross sales (minus sales tax). According to Subway, 8% of what you pay in fees goes toward covering franchise royalties and the other 4.5% is allocated to advertising. 

2. Funding Options

While these Subway franchise fees may sound a bit scary, it’s worth noting that on average, individual Subway restaurants generate $417,000 in sales annually. If you need help securing the cash required to buy a Subway franchise, consider pursuing franchise financing options. The following options may help make your franchise dreams a reality.

  • Startup business loans: If you have no experience as a business owner, then a startup business loan could be an ideal solution. An SBA microloan or small business grant can help brand-new businesses receive funding. Typically, you should prioritize SBA microloans as they can have lower interest rates and long repayment terms. Be warned, though, obtaining this type of loan is competitive. 
  • Business line of credit: A business line of credit is helpful if you don’t want to pay interest on money you don’t need to borrow. Unlike a loan, which gives you a lump sum to utilize, you can pull money from a business line of credit only when you need it. You’ll still have a set loan amount, but whatever money you don’t borrow won’t cost you in interest.
  • Business credit cards: A business credit card requires less credit history to apply for than a loan, so newer business owners may have better luck with this funding source. Aim to apply for credit cards with a 0% introductory APR, that way as long as you pay off your balance by the time the introductory period ends (and a variable APR sets in), you won’t pay any interest.
  • Equipment financing: As any type of restaurant franchise will require equipment, you may want to pursue equipment financing. This type of financing will use the equipment you purchase as collateral, which can make it easier to qualify for.  

You may also be able to turn to Subway for help with financing. Subway will offer to finance $10,000 of your franchise fee if you are purchasing your first franchise and if you qualify under their minority loan program. Another loan program exists for franchises located in a low-density market. You may also be able to qualify for reduced fees if you open a satellite restaurant. Your franchise fee will be reduced to $5,000 if your satellite restaurant will be in operation for over a year or $1,000 if in operation for less than a year.

3. The Training

One of the main advantages of franchising is that you’re not alone—you have the experts at your disposal. When you open a Subway franchise, you will be provided with the necessary training to help your franchise succeed. Remember, the better your franchise performs, the more money Subway makes. That means they have plenty of motivation to help you succeed. 

The support and training you receive will begin before you open your store and continue afterward. They offer systems that will continuously help your franchise operate efficiently and effectively. To start, when you first buy a Subway franchise, both you and whomever your designee or manager is, will be given the opportunity to participate in a two-week training program. 

During these two weeks, you’ll learn about basic business concepts, how to be an effective manager, and methods of operation straight from the franchising experts. You’ll head to class on-site at a local Subway franchise location where you’ll be given hands-on educational experience. At the end of your training, you’ll need to pass an exam that proves you’re ready to own and run your own Subway franchise. 

4. The Support

One of the main appeals of opening a franchise, is that a lot of the necessary infrastructure required to run a successful business is already in place. Product development, brand awareness, and operational systems have been mastered before you even thought of opening a franchise. The Subway franchise system offers a variety of these benefits that can make running your business more efficient and more profitable. Subway offers the following helpful benefits to franchise owners.

Initial Support:

  • Training programs
  • Required formulas and operational systems
  • Assistance with store design and how to order equipment
  • Help with site selection
  • Operations manuals
  • A Subway representative will be on-site during your opening

Ongoing Support:

  • Support and periodic evaluations
  • Menu research and development
  • Informative and guiding publications
  • Continuous education resources

You’ll be able to access training and support through a variety of avenues. There is a toll-free support line, ongoing meetings, newsletters, field support, and digital support offered to franchisees. 

Another area you’ll receive ongoing support in is advertising. While your franchise may not directly be involved in marketing efforts, Subway spends ample time, resources, and money planning cooperative advertising. Your franchise will benefit from their access to both national and regional media, as well as any good PR the company receives as a whole. It’s worth noting though, that anytime Subway as a whole is negatively affected by bad press or poor public opinion, your franchise could suffer as a result.

Pros and Cons of Buying a Subway Franchise

While your list of pros and cons may vary based on your financial and business needs, we’ve outlined a few typical benefits and concerns of buying a Subway franchise.

Pros:

  • You can leverage an established brand
  • You inherit customer trust
  • Intensive operational systems are already in place
  • Your advertising efforts will be handled by experts
  • There are support systems in place designed to help you succeed
  • You won’t need to oversee new product development

Cons:

  • You’ll pay extensive upfront costs
  • There are ongoing fees you will be required to pay weekly
  • You’ll have less flexibility then you would if you started your own freestanding business
  • If the Subway brand receives negative press, your franchise location could suffer

The Takeaway

With a little elbow grease and a major love of sandwiches, your Subway franchise will surely be a hit. You know you already have the literal recipes for success, so as long as you take advantage of the support offered to you and avoid any of the hidden costs associated with being a franchise owner, you should be good to go. 

Article Sources:

  1. Subway.com. “Your Future in Franchise
  2. Subway.com. “Frequently Asked Questions

The post Starting a Subway Franchise: The Ultimate Guide appeared first on Fundera Ledger.

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The post 3 Easy Tips to Support Employees When the Economy Reopens  appeared first on SmallBizClub.

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The post When & How to Use a Payday Lender & Other Financial Tips appeared first on SmallBizClub.

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The post How to Get Your Commercial Property Ready to Sell in 2020 appeared first on SmallBizClub.

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The post 5 Red Flags of Deceptive Financial Statements You Need to Know appeared first on SmallBizClub.

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Mobile-friendly Website Design: Is It Really Important?

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