Business owners have a lot on their plate; however, they should take time to utilize the information that is readily available in their accounting records. Accounting is essential in helping determine which direction a business is heading. Those who are proactive could avoid financial turmoil by reviewing their historical data and analyzing trends. However, there are steps required before a business owner can reap the benefits from their accounting practices.
Bookkeeping may not be a top priority for many small business owners, especially when they are trying to start and even grow their business. Part of the excitement of running your own business is having the privilege of making all the decisions and having no one to answer to; however, such privileges come at a cost. For many business owners there is a high probability that the workday won't end at 5 pm (it could end earlier some days and much later on other days), and a set paycheck is not always guaranteed.
When time is limited, you can only focus on the critical tasks. The following are 3 accounting tips essential for survival:
1. Always keep your books up to date:
If you have a bookkeeper or accountant on staff, encourage them to keep the company’s records up to date as much as possible. Companies with up to date accounting records have greater flexibility to make informed, educated decisions based on quality data.
For small business owners who do not have an accountant on staff, if possible, consider requesting the services of a professional bookkeeper that could work remotely or in the office. The cost savings from the overhead that is not needed would justify the cost of hiring outside help. However, if your company is too small to afford a bookkeeper then it is crucial to dedicate a set amount of time every week to complete all bookkeeping activities.
If a company were not able to keep their records up to date it would not be possible to create a solid, reliable budget adding every fixed expense that will need to be incorporated, as well it would be difficult to assess the cash position of the business without up to date records.
2. Maintain a budget vs. actual analysis monthly:
Not common with small business owners, but it is highly effective. Creating a monthly budget over a 12 month period is a great start; however, tracking the actuals as the months pass is worth the time and resources to coordinate the required figures. If a company’s records are up to date their accounting software could provide the actual figures in an organized report. A monthly budget should include the total anticipated sales versus the expected monthly expenditures (both cost of sales and overhead expenses).
The variance analysis that is conducted is a process of simply calculating the difference between the monthly budget totals and actual totals. If the sales budget exceeds the actual sales it would be considered an unfavorable variance; the reverse can be said if the expense budgets exceed actual expenses then it would be a favorable variance.
Failure to complete a variance analysis may prevent business owners to discover they may or may not be able to operate their business on budget. As well, managing cash flow would be more difficult without creating a solid 12-month budget that acknowledges one off expenditures (i.e. annual insurance premiums, corporate tax payable, capital acquisitions, etc.). This could be detrimental for the day-to-day operations when such costs materialize.
3. Understand the story behind your financials:
When periodic financial statements are posted, a business owner should know the story behind almost every figure. It isn’t necessary to recite every transaction to the exact cent, but there should not be any surprises for a business owner. An owner who could discuss their financial position without the assistance of their accountant is more likely to make better business decisions.
Proactive decisions are more efficient than reactive decisions. Financial statements tell the story of a company’s efforts to date. Income Statements show a business’s progress over a set period of time, whereas a Balance Sheet is a financial snap shot on a set day. Those who understand their own financials know how their business is doing in real time.
Without understanding the financials there is a significant risk that transactions that are harmful to a business may be overlooked. Worse if these issues cannot be remedied in time the business may be in jeopardy. Examples of potential issues overlooked are: money being embezzled, operating a top-heavy company (too much overhead), etc.
Business owners should make a note to follow these tips. It could save them thousands and give them peace of mind. Accounting serves a greater purpose than recording historical data, it can help shape a business’s future.