Small Business-Accounting Basics

It is said that money makes the world go round, and this is no truer than in the business sphere, where profits are the primary purpose. For this reason, it’s crucial to learn basic accounting as a small business owner—after all, you need to know how to keep stock of and manage your funds in order to captain a prosperous enterprise. Whether you’re founding a new venture or looking to accelerate your existing organization’s success, consider going back to the fundamentals to fortify your accounting knowledge and arm yourself to strengthen your business’s growth.

What, exactly, is accounting?

PayPal’s Business Resource Center states that “accounting is the process of calculating, documenting, and analyzing the financial transactions of a business.” In other words, it is the ongoing recording of how, when, and by what means your business makes and spends money and the use of such data to devise future tactics. You will need this information to perform many tasks, including “reporting income and expenses to tax collectors, drafting financial statements for investors, or providing stakeholders with balance sheets,” as PayPal adds. Understanding accounting is also vital for scoping out new investments, applying for financing, and conducting other business activities.

Though different industries and business types may require more specific processes, here are some general foundational steps to take that can help you dive into the world of accounting.

Build your budget

One of the most essential ways to help solidify your fiscal health as a small business is to establish a budget, which will better enable you to gauge your incoming funds and where to apportion them. If you don’t yet have a concrete budget, consider downloading a free small-business budget template you can fill in with your financial information. Continue to update it as you forecast, or predict future revenue and expenses based on historical data and anticipated trends. You can also perform what is known as a variance analysis to assess your monthly, quarterly, and annual budget adherence, allowing you to see where to make ongoing necessary adjustments.

Get organized

Accounting involves keeping track of a heap of information, much of which can easily get lost if you aren’t meticulous. As you manage your business daily, ensure that you save important financial forms, including bills, receipts, and invoices, by storing them in a separate and secure location. To further reap the rewards of recordkeeping, arrange them neatly by date, type, and whether they represent revenue or expenses, which will make them easy to find later as needed.

Understand revenue and expenses

Revenue and expenses are two pivotal figures to comprehend in detail. The former represents the money your business earns from selling products or services. Tracking your revenue streams separately by product or service type can offer insights into how certain goods are performing.

Conversely, your expenses encompass all costs incurred to operate your business. Categorize them distinctly as follows:

• Cost of goods: those associated with producing and promoting what your business sells
• Operating expenses: overhead costs such as rent and utilities

Documenting these expenses accordingly can assist you in better managing or reducing them so you can retain as much revenue as possible, which you can then invest or use to help fortify or grow your company.

Become familiar with financial statements

These core forms act as the backbone of accounting, each providing a clear snapshot of your business’s financial performance. Here are the three main financial statements you should become familiar with.

Balance sheet
Capturing what you own and owe, this statement tells you where you stand with your assets, liabilities, and equity at a given point in time. Assets refer to any financial value held in items such as cash and inventory, whereas liabilities refer to financial obligations, including loan repayments and payroll. Equity, meanwhile, is the difference between your liabilities and assets, representing the total value you hold in your organization.

Income statement (profit-and-loss statement)
This form summarizes your revenue, expenses, gains, losses, and net income during specific time frames. Its overall purpose is to gauge how profitable your business is. Naturally, you should analyze this statement regularly.

Cash flow statement
Often considered the most comprehensive financial statement, this sheet tracks the streams of cash in and out of your business during a certain period, including its operating, investing, and financing activities. Reviewing it can facilitate your understanding of how you make and lose money, guiding you toward more effective cash management.

Keep an eye on KPIs

Key performance indicators (KPIs) are additional metrics that evaluate your business’s success, indicating its current health and future growth potential. Common ones to monitor frequently include:

• Gross profit margin: Subtract your cost of goods from your net revenue, then divide that by your revenue times one hundred. The resulting percentage indicates how much you profit after expenses.
• Customer acquisition cost: This calculates the costs associated with finding and converting leads.
• Return on investment: To obtain this clear measure of success, divide your net income for a certain revenue stream by the amount you invested in that product or service.

Inspect these KPIs in your accounting software or request them from outsourced services regularly to assess your organization’s progress toward goals and make strategic adjustments when necessary.

Get your taxes in order

Dutiful accounting can aid in clarifying your tax obligations, including for sales, payroll, and certain industry-specific areas. Thoroughly recording your income, expenses, and deductions will also ease the general tax-preparation process, whether you decide to handle it yourself or enlist a professional.

Manage your accounts

Keeping and periodically reviewing accounting data can help you manage your organization with a keen eye and safeguard your financial health. You can certainly achieve this on your own, but for the best results, it may be worth purchasing business accounting software or requesting the assistance of a professional accountant, who can aid you in compiling necessary records.

If you prefer to stay in-house, there are numerous stellar DIY accounting tools to try, including FreshBooks and Zoho Books, each of which is accessible from any device with internet access. Enterprise systems such as NetSuite, meanwhile, are more appropriate for recordkeeping within larger organizations. Consider following online tutorials or seeking out other educational resources like manuals that can demonstrate how to take advantage of all these systems have to offer.

Utilizing such software or hiring a professional service can ease the heavy lifting of keeping accurate fiscal records manually while also offering you consistent, ongoing awareness of important data. Armed with these resources and a foundational knowledge of accounting, you can save yourself the headaches of financial confusion and help guide your organization toward overall success.

TAKE ACTION:
Familiarize yourself with accounting basics to organize your financial records and hone your strategies based on the gathered data.