Accounting Basics For Small Business
You’re a small business owner. Great at creating innovative products or and delivering services that you know your customers want. But when it comes to the numbers and balancing the books- that’s not necessarily your strong suit.
The good news: you don’t have to be scared of accounting! Take control of your business and its financials by looking for help from a business accounting services company. In this article, I’ll cover the accounting basics for small business to help you on your way to better understanding and managing your business’ accounts.
Methods of accounting:
First of all, you must decide on the accounting method you wish to use. Accounting can be recorded either on a cash or accrual basis. Cash based accounting involves the recognition of transactions upon the exchange of money.
Accrual based accounting records business transactions at the time they occur, regardless of when money physically changes hands. Some very small businesses can get away with cash based accounting, however, you may find that the accrual method provides a more accurate, up–to-date representation of the company’s current financial position.
For example, if you were to purchase inventory from a supplier on credit, this owed amount is recorded under the accrual basis, however no record is made under the cash basis of accounting as no cash has been paid at this point. In this way the cash basis has effectively understated the company’s liabilities, resulting in an inaccurate representation of the business’ financials.
Next you must familiarise yourself with the three types of basic accounting reports, what they mean and how to use them. These reports are:
1. Balance Sheet
2. Income Statement
3. Cash flow statement
Put simply, the balance sheet shows the business’ assets (such as cash, receivables, inventory) against its liabilities (payables, bank loans etc.) and equity (retained profit, reserve accounts etc.). It provides a snapshot of the business, which can be used to assess the net worth and liquidity of the company, provide crucial information to investors, and to track your business accounts over time.
The income statement is as its name describes – a report that details the revenues and expenses of the business over a given time period. The necessity of this report is obvious, without knowing where your money is spent and how it is made, how can you know if your business is profitable? The income statement can help you to determine where you may be over-allocating resources and to pinpoint the key money makers of your business.
The cash flow statement monitors the ins and outs of a business’ funds. Cash, the lifeblood of any business, must be tracked and carefully managed to ensure a healthy business.
Keys to success:
Now that you have a grasp on accounting basics, here are a few tips to make the most of your accounting information.
Plan – As a business owner you must budget, forecast and constantly review your business goals
Monitor your cash flow – make sure you leave aside sufficient cash to pay bills, employees and suppliers when necessary – you never know when an unexpected bill may pop up
Compare actual VS predicted profit – use your income statement; what profit did you hope to make this year, and did you hit this target? If you made a loss, where could your business improve its operations or cut costs?
Compare financial reports – Across time periods within your business, consider how your business is growing or changing over time. Contrast your own financial reports with those of other businesses within the industry – how do you compare to your competitors?
Record accurately and in a timely manner – keep on top of your accounting. Record transactions properly the first time, and do it straight away. You want to avoid cash receipts, customer invoices, payments etc. from piling up
Track, track, track – keep an eye on your payables and receivables. Pay invoices on time to avoid late fees and to maintain strong relationships with your suppliers. Be aware of money that may be owed to you, and follow-through with reminders on overdue receivables
Do not be a one-man army!
Finally, as a small business owner you must recognise your own strengths and limitations. Whilst it is often hard to loosen your grip on the reigns, there will likely come a time when you need external help with your accounting, and that’s OK. You can’t do everything! Your time and energy is better spent on the core activities of your business.
Hiring an accountant can help with the more technical aspects of accounting, for example tax returns, and depreciation of fixed assets. Utilising accounting software can streamline the process of managing your business’ financials, saving you time and increasing the understandability of your accounts. If you are struggling, again ask an accountant to help you to get the most out of your software.
Now it’s your turn
You are ready, now that you’ve covered accounting basics for small business, get out there and embrace accounting! It should not be seen as a time consuming hassle, but as a source of vital information for you and your business.
Go use it, and good luck!