“All the accounting tasks have to be understood. Small business owners need to achieve an understanding of cash flow, revenue and expenses and how all of these work together. They need to gain a working understanding of the basics of small business accounting, preferably by taking a small business, rather than a general, accounting class.”
In addition to the basics of small business accounting, said Pinson, a small business class will also provide insight about income, cost of goods, expenses, assets and liability, and equity/net worth. “Everything a small business owner will do will fit into one of those five categories one way or the other. Then, when the numbers are plugged in, they can use this information to budget and plan and manage their cash flow.”
According to Pinson, one of the main reasons small businesses fail is due to the tendency to over-project income and under-project expenses. So, comprehending the numbers is necessary to appropriately manage the health of your business — it’s the only way you’ll understand how you’re actually doing, and if you’re on target with your projections or need to make adjustments.
While accounting software like MYOB and Xero are incredible tools, it doesn’t let you off the hook. “You shouldn’t do anything with this software until you have an understanding of small business accounting,” said Pinson. “You need to understand what transactions go under what category or you won’t be able to set it up properly. Plus, you also need to understand what the accounting software is doing.”
While accounting is critical, it isn’t an aspect of your operation that needs to fall entirely into your lap. There may be someone on your staff who can manage the day-to-day bookkeeping, or you can outsource certain pieces to an accounting firm, especially end-of-the-year essentials. Regardless of how you approach specific tasks, though, the key is to take steps to build a broad awareness of the fundamentals. Whether you enroll in a class at a local college or online, get schooled by a friend or read one of many available books, don’t underestimate the importance of truly understanding the numbers and how they play a role in every aspect of your business.