What's the One Task Small Business Owners Dread?
Being a successful entrepreneur takes a unique mix of skills and practices. You need to generate exciting ideas, deliver desirable products or services, maintain a winning attitude, set goals, and develop marketing strategy, all while keeping an eye on the pulse of your business –its finances. To track your business’s performance and plan effectively for future growth and opportunities, you must have a thorough understanding of how money flows through your business. To do this, you’ll need to set up a good record-keeping system that document your daily operations. Some entrepreneurs choose to use accounting software, like QuickBooks or Peachtree, to maintain their records. Others rely on bookkeepers or accountants to monitor their monthly books. You might be the type of business owner that simply delivers a box stuffed with assorted documents to their accountant at the end of the year. Only at this point, after the fact, do you receive financial reports that reveal whether the business had a good year or is failing. Let’s work towards being pro-active rather than reactive to your business’s pulse.
It's important to choose an accounting method and stick with it – this makes your statements consistent and easy to follow. Moreover, the IRS requires it. So which method is best for your business, cash or accrual?
Cash accounting means you track all income and expenses when money comes in or goes out:
· You can accurately track your cash flow, because money collected and spent is recorded when those transactions happen.
· This approach does not accurately track long-term income and expenses: for example, if many of this year’s sales aren’t paid for until the New Year, your cash flow may appear to be negative even though you know the money will be paid.
· Less bookkeeping is involved, because transactions are straightforward and recorded when they happen. For this reason, small businesses often choose this accounting method.
Accrual accounting means you record income when you make a sale, even if the sale isn’t paid for immediately. Similarly, you record expenses when you receive goods or services, not when you pay for them:
· This approach does not accurately track your cash flow: for example, you may have made and recorded many sales this year, but if they haven’t been paid for yet, your cash flow will appear unrealistically high.
· You can accurately track long-term income and expenses. For the given period, you know your total sales and expenses.
· This approach requires more bookkeeping, because you must record both transaction dates and dates of payment. Businesses often switch to this method as they grow, in order to get a more accurate picture of their overall transactions.
Before you learn how to manage your records, you should be familiar with several terms:
· Accounts payable: Money you owe to your regular business creditors. Unpaid amounts are open accounts payable. After they have been paid, they are closed accounts payable.
· Accounts receivable: Money owed to you by your customers. Unpaid amounts are open accounts receivable. After they have been paid, they are closed accounts receivable..
· Cash Sales: Sales made to customers when no credit has been extended. Cash sales are paid for at the time the sale is made and are documented with a cash sale receipt.
· Cash receipts: Any receipt of money. A cash receipt occurs both when a customer pays your accounts receivable, (credit was extended) and when a customer pays a cash sale, (no credit was extended). The term can be misleading, because it can represent cash, checks, and credit card sales.
· Credit memo: a reduction or credit applied against a previously issued invoice. Credit memos can be a result of shipping errors, price reductions, damaged goods, returns, or canceled orders. Credit memos have unique identifying numbers.
· Debit memo: an Increase or debit applied against a previously issued invoice. Debit memos can be a result of original invoice errors, price adjustments, or order add-ons. Debit memos have unique identifying numbers.
· Invoice: A bill sent from a creditor to a customer. Invoices have payment terms consistent with the type of account the customer has with the creditor. Invoices have unique identifying numbers.
· Invoice terms: The payment agreement a creditor extends to a customer. Common invoice terms include these:
o COD: cash on delivery.
o Due upon receipt: Payment due upon receipt of invoice.
o Net 10, Net 15, or Net 30: The number of days (10, 15, 30, etc.) before payment in full is due.
o 2/10 Net/30: 2 percent discount can be taken if paid within 10 days, or full payment is due in 30 days.
· Purchase order: The form a business uses to place an order with a creditor. Purchase orders (POs) specify the buyer’s name, account number, billing address, shipping address, and order details. POs have unique identifying numbers.
When you create and maintain a simple record-keeping system, you will always have the information you need at your fingertips. And make no mistake; you do need this information to manage your business wisely. I hope you will join me for a basic accounting seminar at 6:00 p.m. on Wednesday, February 27th. We’ll look at the principle financial statements that you need to understand, the recording process, depreciation & amortization of your business’s hard assets, as well as how to determine the company’s break even analysis. Here’s a link for more info and to register: https://accountingbasics2019.eventbrite.com. Let’s roll up our sleeves and do this!