As a business owner, we sometimes don’t know what we should be paying attention to in our financials. It becomes even more frustrating when our accounting is not tracked properly and we’re not sure whether the decisions we’re making are helping or hurting.
One of the biggest weaknesses in a growing business is accounting. Accounting is under-appreciated and therefore, often underfunded. Many business owners would rather invest in sales and marketing, not accounting. To address this weakness, business owners hire an accountant to be sure entries are made accurately and in a timely manner. Then when viewing reports, owners will look for help from a controller or business coach to interpret the financials for guidance on decision making.
I was recently interviewing a client on our podcast that I have worked with for several years. When asked what a big part of his success was, he said, “It’s all about the numbers.” We would meet every month and look at his financial reports. In the beginning, they were just numbers on a page to him. But with a regular monthly meeting, we interpreted his financials together and created a plan to take him from financial confusion to clarity and focused on areas to accelerate financial growth.
A few foundational accounting principles that can be helpful if you’re like this client:
- Select a chart of accounts for your accounting system based on the type of business you’re in (wholesale, retail, service, manufacturer).
- When you make your accounting entries, they should be consistent over time, match your revenues and expenses in the same accounting period, and be conservative if you’re required to make estimates.
- Most businesses will manage their business based on the accrual accounting method (revenue is recognized when it’s billed). However, many businesses will pay taxes on the cash basis method (revenue is recognized when it’s collected). So, when you’re preparing your financial statements for your CPA, make sure you choose cash basis.
- Keep your business expenses separate from your personal expenses so you have an accurate picture of how profitable your business is on its own.
In practice, accounting is done on a double entry method. For example, when you invoice a client, make an entry in both revenue and accounts receivable. When you collect that receivable, you make an entry in both cash and in accounts receivable.
Posting errors can easily arise if the wrong client is billed or we post a payment to the wrong job. Improper posting can cause profit margins to be skewed and receivables and payables can easily be overstated or understated.
With timely and accurate accounting information, you can break through barriers of growth, increase your cash flow and profitability, and successfully secure any financing needed for your business. With this financial information in hand, you can feel empowered to move forward with a strong financial position.
Many of us didn’t take accounting in school and there’s no on-the-job training when you’re the business owner. If accounting and understanding your financials is a weakness in your business, let’s talk.
In case you missed it, marketing is the other major weakness of growing companies. Check out why it’s so important and how to solidify your strategy.