Businessman doing his small business accounting with a calculator sitting at desk.

The Basics Of Small Business Accounting

Do you know your business scorecard?

Can you imagine a professional athlete showing up to compete time and time again, but never knowing if they actually won a game or match? Or not even knowing if their efforts contributed to the outcome? As ridiculous as this might sound, many business owners are doing just that.

Your financial reports are your business’s scorecard. The managerial reports are like your player’s stats. But all too often, small business owners are more focused on their product or service than the numbers. There’s no score or player stats. What’s even happening right now?!

Lack of attention (including illegal manipulation) to the finances has proven to be the number one demise of companies both large and small. This particular area carries the most significant liabilities, while attention to the numbers yields competitive advantages!

DANGERS OF NOT KNOWING YOUR BUSINESS FINANCES

The old saying “ignorance is bliss” definitely does not apply to accounting. Understanding your small business financials is critical. Ignorance in this arena has been the downfall of some of the world’s mightiest competitors. On the other side of the coin, successful companies leverage this information to make educated, data-driven decisions!

Without doing the bare minimum by making sure the bookkeeping is accurate and understanding your financial statements, danger is lurking around the corner. By the time you realize there is an accounting problem, it’s usually too late and one of these little devils is knocking on your door.

  • IRS or stakeholder audits
  • Bounced checks and increased fees
  • Feeling-based decisions rather than data-driven decisions
  • Unhappy vendors, creditors and employees
  • Overpaying Uncle Sam
  • Difficulty obtaining business credit
  • Cash flow problems
  • Bad investments
  • Bankruptcy
  • Criminal charges of negligence
  • Increased interest rates from creditors
  • Lawsuits from vendors, creditors, customers or employees
  • Increased potential for fraud – both internal and external
  • Overspending during high cash flow periods
  • Underpaying Uncle Sam
  • Poor business credit
  • Missed investment opportunities

Just one of these ‘dreaded beasts’ can become time consuming and/or costly, if not crippling. Which begs the question – What can a small business owner do to mitigate these risks, and where do you even start?

COMMON SMALL BUSINESS ACCOUNTING QUESTIONS

I want to better understand my books to protect my company, but where do I start?

Bad news first – It takes 7+ years to earn the CPA designation. Who has time for that!? The good news is you don’t need to be a CPA to have a basic understanding of your books. Additionally, there are a number of free or inexpensive options to get you going. Here’s my shortlist of how and where to get started understanding your business finances:

1) Software: Until you have some basic accounting software, it will be much more difficult to wrap your head around bookkeeping. There are a ton of options these days, like Xero, Freshbooks, and even some free options. I recommend and use Quickbooks. It is the most widely used small business accounting software so it has the most free online tutorial information, and the most professionals who can help you if you are ever in a pinch. Quickbooks Desktop or Quickbooks Online? I won’t start that debate here, but contact us and we will be happy to offer our advice based on your needs at no charge. Then you can create a test database once you have it and start learning! 

2) Find a trusted mentor: While online tutorials are great, nothing beats having a trusted advisor. SCORE is a nationwide organization which offers free expert mentorship in all areas of business, including finance and accounting. 

3) American Institute of Professional Bookkeepers: For a small fee of less than $40 a year you get a ton of free information, hiring quizzes, training materials. On top of that, you even have access to AIPB certified bookkeepers who can provide answers to your bookkeeping questions. Click the button below for more info and poke around the site to uncover even more value.

*Note* – you should always consult with your CPA before doing anything in your books that you are not 100% sure on, regardless of where you obtained the information!

What financial reports should I understand and how often should I look at them?

At a bare minimum, a business owner should be reviewing these reports on a monthly basis. If you are a true DIY’er, here’s where some YouTube research can give you a great jumpstart. Just make sure the person posting the content is a CPA or it is from a trusted accounting organization.

  • Profit & Loss
  • Balance Sheet
  • Accounts Payable
  • Accounts Receivable
  • Statement of Cash Flows

Can't I just hire a CPA at the end of the year to "take care of everything" for me?

No. A CPA’s job is not to “clean up your mess”. Without asking them to conduct a full audit of your books or paying them monthly to enter every receipt, bill, PO, etc., it is unlikely they will dig too deep in your transactions at year end. It’s important to note that if you have your own in-house bookkeeping and use a CPA just for your tax returns, their job is to review the information you give them, ask questions about any grey areas, and file the information you provide them to the IRS once the numbers match up. Their job is not find every single transaction you entered that may be incorrect.

Don’t be the team captain who shows up when the game is over with a shoebox of receipts saying “sorry I’m late, tell me what happened?”. As the owner, you are the one legally responsible for the accuracy of your taxes. Whether you outsource your bookkeeping or do it in-house, you need to understand and know your numbers!

A BIT ABOUT QUICKBOOKS SETUP

Quickbooks is my recommended accounting software for the majority of small businesses, and there’s a reason for the underlined/bold text. Although it’s great accounting and payroll software – depending on your industry – there are better options for point of sale, inventory management and a host of other processes you may need.

With Quickbooks being the most used accounting platform out there for small businesses, software manufacturers of industry-specific POS, IM, etc. know they need to integrate with Quickbooks to be competitive. This is very important to keep in mind… don’t let the local “QB Expert” convince you otherwise. The goal is to get you operating as efficiently as possible.

The setup process:

A thorough setup service usually includes chart of accounts creation, customer and vendor setup, employee and payroll setup, inventory and service item setup, standard form customizations, payment processing and basic financial reporting.

Integrations:

There’s no shortage of great services that integrate with Quickbooks which can save you serious time and money. After initial setup, take a hard look at your business and internal processes to see where you can bridge gaps between POS, shipping, billing, your website, time tracking, CRM etc.

FINANCIAL ACCOUNTING

There’s no shortage of bookkeeping and accounting agencies out there these days and some are certainly better than others. It’s an extremely fast-growing industry because improper bookkeeping comes with some of the largest risks/penalties a small business can expose themselves to.

Getting your books in order is the critical first step. Then I recommend steering focus on a few frequently overlooked subsets of financial accounting which further minimize risks and yield valuable decision-making data.

ACCOUNTING AUDITS

Yikes! AN AUDIT?!?! Publicly traded companies are required to do quarterly audits. But many small businesses never do one until it’s too late and Uncle Sam is showing up to do it. Identify the data you should be auditing and establish a process and schedule accordingly.

FINANCIAL REPORTING & ANALYSIS

Are you winning or losing? What decisions were made along the way to produce the outcomes? How can you improve? Solid bookkeeping leads to powerful reporting opportunities that yield data-driven decisions to swiftly set you apart from the competition.

BUSINESS VALUATION SERVICES

The most subjective area of accounting! Public companies are valued on a daily basis yet small businesses usually only think of a valuation when selling it. But there’s a number of reasons for conducting periodic business valuations, and I have a trusted CPA, CVA to help!

RISK AND COMPLIANCE

Risk comes from anywhere you are not looking. Some basics are having proper insurance in place and paying your taxes on time. Every industry has it’s own set of risk and compliance challenges. The key is identifying them before they cause a problem.

INTERNAL CONTROLS

Protecting your assets and people against internal and external fraud is critical. What controls need to be put in place to minimize risk? What gaps in information handoffs need to be addressed? After clearly identifying roles and responsibilities, create a system of checks and balances!

MANAGERIAL ACCOUNTING

Why is it that managerial accounting is such a broad subject with loads of information online surrounding it, yet so many small business owners have never even heard the term? Here’s my take:

Small businesses are generally focused on their product or service more than the numbers. You need a true inside look at a business to collect and use data to your benefit, which you cannot get from an outsourced accountant or bookkeeping agency. So they are not marketing these important services. It’s a “secret weapon” of the most successful organizations.

I recommend focusing on the subsets of managerial accounting I find have the highest impact to your small business!

OPPORTUNITY COSTING

Quite simply – when you say “yes” to something, you are saying “no” to something else. What’s the ROI of your time and money? Where can reallocation of these resources yield better outcomes?

DATA-DRIVEN DECISION MAKING

Good performance measurement and tracking helps minimize “analysis paralysis”. You don’t need to track everything – only that which helps you make faster strategic decisions.

BALANCED SCORECARDS

In addition to finance there’s 3 other quadrants typically seen in a “balanced” business scorecard – customer KPI’s, employee (learning and growth) KPI’s and process KPI’s. These “non-financial” indicators help create better strategies and action plans to drive those financial outcomes.

COST ACCOUNTING

COST ACCOUNTING!? Where did this come from? Cost accounting is a commonly overlooked pillar of accounting. The term is more common in the construction arena since “Job Costing” is a subset. But cost accounting is critical to every business (in every industry) and is important to get right because it directly feeds the financial accounting outcomes and some of the managerial accounting decisions! 

Proper cost accounting can quickly uncover high-impact, decision-making data. Whether you’re a restaurant, an online store, or a manufacturer – this data can be leveraged to Accelerate Your Business!

PRODUCT COSTING

Product costing is calculated by adding up direct expenses, labor and allocated overhead that goes into making a product to establish cost per unit. The methodology can also be used to establish true cost of ownership for products you resell. Decision-making data will surface.

PROCESS COSTING

Process accounting is typically used in manufacturing to move those same direct, labor and overhead expenses from a particular production step to the next one. But I find process costing can be applied to every business – in every industry. Time is money. What’s your team spending their time on, and where?

JOB COSTING

Job costing follows the same principles as product and process costing. The key difference is it’s generally used for custom items or services. But no different from the aforementioned, you can use the same formulas to uncover important insights that yield competitive advantages.

FINAL THOUGHTS

I firmly believe every business owner needs a basic understanding of their financials. Not only for risk mitigation, but for the unseen competitive advantages. The power of knowing, monitoring, and leveraging the most important data in your company not only from a financial perspective, but from a managerial perspective is profound. Sure, you need to know the scorecard of financial accounting, but more importantly, you need the player stats of managerial accounting to transform into a scalable and sustainable business.

Take an inside look at your team and operations to identify the internal metrics which are actually driving your organization’s financial outcomes. What can you measure, monitor and improve upon? How do these numbers relate to each other? How does increased input in one area affect output of that area, or another? What internal controls should you put in place to protect everything you have worked so hard to build?

Plenty of companies will happily take on your bookkeeping needs. As with anything, some are definitely better than others. I hate seeing people get screwed so if you’re looking for a bookkeeping service, I would be honored to help you find a good fit based on your unique needs at no charge. Just schedule a call below or email me at the link in the footer. I got you. 🙂

~Brian

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