Many small businesses are sole proprietorship, not incorporated, and have few employees; perhaps this is the reason why many do not pay attention to accounting.
What Accounting does for your small business
1. Accounting can take any small business from confusion to a clear path to profitability.
2. Accounting identifies and curbs financial holes through which your business is losing money.
3. Accounting gives you a clear picture of what your expenses are and what your profit is.
4. Accounting allows you to know if your business is worth the stress, how much you can retain, and at what points you could expand.
5. Accounting also informs your budgeting and marketing strategy.
Starting accounting for your small business
The first thing you want to do is separate your business account from your personal account; that way you don’t spend your capital or running cash on personal expenses.
The second very important thing you want to do is place yourself on a salary. Many times business owners fail to separate themselves from their business.
Although you might be a sole proprietorship, it’s best to separate yourself from your business financially.
To get to accounting; there are 7 basic things to always know in your business when it comes to money; revenue, inventory, profit or loss, assets and liabilities, cash flow, break-even, and credits receivable and payable.
Revenue
Revenue is the sum total of how much is coming into your account. This is one of the ways to measure how your business is doing. Now, depending on your business model, not every money paid into your account is revenue. Money that is paid to you to move to someone else as soon as possible isn’t revenue; if you are any sorts of a middle man this would likely apply to you. In that case, your revenue is the amount or percentage you charge for your services. To know your revenue, you need a sales account.
A sales account is a tabulated document that contains your products, unit price, quantity sold, and totals. It is also good to create a projected sales account before every business year. It’s wise to be ambitious but modest in creating the projected sales account.
A projected sales account can serve as a metric for how well you are doing or milestones you need to overcome in sales during the year projected. It’s very simple to create and use a sales account and you can find templates online if you have difficulties with excel.
Inventory
Inventory or stock simply means the products a business holds for the purpose of resale. An inventory account informs you of your estimated revenue. If items are missing or damaged, you would find out via your inventory account. In an FCMG or distribution business, it is best to take stock after every supply (restock) and every week.
Taking stock of what inventory you have identifies missing or damaged goods early. Change in price is also reflected in your stock account. For production businesses, it’s best to take stock after every production round and weekly. Having a stock account also informs the manager to know when to restock and when to slow down on restocking. Inventory accounts are also very easy to handle. Just like sales accounts, you can find a lot of templates online or customize one on excel.
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Profit or Loss
This is a more complicated but still, quite easy book of account. Just as the name implies; it helps you identify your gross and net profit or loss. If your business is being taxed, this is a very important book of account. It is also a common mistake for small business owners to think of profit as a weekly or monthly concept rather than an annual one.
While you might make a profit during a certain week or month, it’s best not to declare it for the purpose of cash flow. A profit and loss account contains your sales and cost of selling goods.
A simple arithmetic operation of subtracting the cost of selling your goods from your sales gives you your gross profit. The cost of selling your goods are expenses that directly relate to the acquisition and sales of the goods.
To get your net profit, you have to total your expenses; which are other things not listed in your COGS (cost of goods sold); this would likely include rent, insurance, bills, salaries, etc. By subtracting your expenses from your gross profit you get your net profit. If this is done on a weekly, monthly, or quarterly basis, the net profit should be balance brought down (bb/d) for the next interval. If it is done annually it can be declared as your profit and taxation can now be done.
Cash Flow
Think of cash flow as the lifeblood of your business. Cash is actually the king and even in this regard. Without cash your business is dead and this is majorly why you should be slow to spending excessively. A cash flow account helps you monitor how money comes in and leaves your business.
There are many benefits of a cash flow account including how to budget, cut back, and when exactly to infuse external investments into your business. It is also very helpful to have a projected cash flow account as a guide to your spendings. One of the things you’ll never see in a cash flow account is miscellaneous because what a cash flow is exactly; is a money tracker.
There are many templates for creating a cash flow account but if you can ask an accountant to draw up one that suits your business, that would save you a lot of stress at a small price.
Assets and Liabilities
The assets of a business are the valuable things that belong to the business. Liabilities are also valuable things that contribute to production but are not owned by the business. For context, if you a business owns its building of operation, that is an asset; if the business rents its space of operation, then the rent is a liability. Assets and liabilities can be used to value businesses and serve as collateral if need be. Knowing the value of one’s business is very important. A balance sheet is a document that identifies a business’s assets and liabilities and losses them against expenses.
This helps you understand if your business is valuable enough. You can also decide to invest in more assets, cut down on expenses or maintain your assets. Although you can figure out how to use a balance sheet, it would most likely be more productive to let an accountant do it for you.
Debits and Credits
Virtually all SMEs have to sell or purchase on credits sparsely or often and it is very healthy to keep a book of account to record all your debts and debtors. This is also a very simple accounting document and there are templates all over the web on how you could tabulate this. Having a lot of debts can ruin your reputation if you are not forthcoming with the payment.
With a credits payable account, you can know who to pay first and who to send out an appeal to. If a business has a lot of debtors, the business might be heading to closure. Like we identified earlier, the lifeblood of a business is cash. Paying attention to your debtors lets you know who to send a reminder to, who is a bad debtor, and how much exactly you have outside.
Break-Even
Break-even is simply the point your business becomes profitable. A break-even analysis divides your fixed cost by your contribution margin. Fixed costs are costs that do not change with the volume of production. The fixed cost could be rent, internet data, etc. A contribution margin is your variable cost per unit subtracted from your revenue per unit. Variable cost is the opposite of your fixed cost and covers expenses that vary with the volume of production for instance wage, supply, etc. By doing this simple arithmetic you can know at what unit your business becomes profitable. If you did not or will not make that amount of sales that year you know you can either work on your pricing or expenses. Doing a break-even analysis is very helpful, important, and informative.
We hope this helps with accounting for your small business. If you have any questions leave them below, we are happy to answer.