Here’s why…

Accounting can be seen from 2 different views. The first is from the eyes of the non-accountant. Words that enter their minds are boring, mundane, an expense, required, structured, records, paperwork, confusing, taxes, CPA’s, nerds (I can say that, I’m an accountant), etc. For the average free-spirited and creative entrepreneur, accounting rubs the wrong way.

The second set of eyes is from the accountant’s point of view. Again, words that enter OUR minds are important, decision making tool, structure, decision making tool, analyze, decision making tool, accountability, decision making tool, etc. We are nerds. I will be the first to admit it. I’ll also be the first to admit that all of us, in some form or fashion, have at one time, wanted to cross over to the dark side of entrepreneurship but our structured and nerdy ways of thinking won’t let us. It’s best if we leave that side of the biz to the creative type.

The non-accountants, however don’t have that luxury. You have to cross over and see our world at some point. It’s just the way it has to be. If you take some time to learn how to account for your transaction, you can literally turn your financial statements (the reports created from record keeping) into powerful… I really mean powerful decision making tools.

Here’s how this blog is going to go from here on. In the next post, I’m going to share some examples of poor business decisions that could have been avoided if proper analysis had been done on the Finance statements. After that, I’m going to teach about some bookkeeping essentials that will be easy to understand and apply. Believe me, you don’t have to have a degree in this crap or be a genius to understand this. I’m going to make it easy. I’m going to make bookkeeping exciting and fun…okay maybe I’ve gone to far. I’m going to make it easy.

Stay tuned!

In order to increase cash flow, opportunity costs need to be managed. For instance, if you own and operate a small lawn care service, you most likely don’t have the volume for a full time accountant (yet!). Many small businesses can keep records and make the necessary entries in their accounting software in about 5 hours a week. Unless you are running a bookkeeping firm, accounting probably isn’t your core competency. If you were to outsource this task to a professional bookkeeper, he/she would be able to complete this same task in about 1 hour a week. Even if you pay this ‘outsourced employee’ $50 per hour, the chances are good that your cash flow will still increase. Why? Remember, by outsourcing your bookkeeping you are freeing up about 5 hours a week, which could mean an additional 2-3 new clients. In the long run, those clients, with referrals, can amount to an increase in paying customers, all because you decided to focus on what only you can do (get customers) and let someone else do the busy stuff.

Outsourcing is one of the greatest resources for small to medium sized businesses, because it offers a cost effective solution to taking a business to the next level. The advantages to outsourcing are that it allows a business owner to focus on core activities and gives him/her access to professionals for everything else. As mentioned above, it also increases cash flow and in business, CASH IS KING.

In summary, outsourcing allows small and medium sized businesses access to large business resources at a small business budget.

Every transaction that happens in a business should have a supporting document(s). These documents are used as evidence that a particular business transaction actually happened. Supporting documents are used to make accounting entries. They also serve as support during an audit.

These documents should include the date, the amount, and a description of the transaction. These papers are known as source documents, supporting documents or are sometimes referred to as a paper trail.

Examples of supporting documents include but are not limited to:

Credit card receipts
Checks
Invoices
Purchase orders
Time cards
Deposit slips
Receipts

After a transaction has been entered, these documents should be kept for future reference. If a paper trail is not available, one should be created using a bank statement or another existing source.

When your business or an auditing firm needs clarification on a transaction, make sure that you have marked a visible trail that will justify your companies’ position on the matter. This will also give you more information when making crucial financial decisions. Information gives you a solid understanding of where you are, which in turn helps you know where you want to go.

LEAVE A TRAIL!

Assets are things, that a company owns, that have value. An asset is also that which is owed to a company such as accounts receivables. Assets include tangible items such as buildings, vehicles, equipment, tools and inventory. However, tangible property is not the only thing that can be classified as an asset; intangibles such as trademarks, patents, research and development, and goodwill are also included in the category of asset. Remember that cash is an asset. So, anything of value that is owned or due to the business should be included as an asset on the Balance Sheet.

A liability is everything that a company owes others. This includes money that a company might owe a supplier, payroll that is owed to employees, taxes owed to local, state and federal tax agencies, and money owed to banks or other lending institutions for loans or credit card balances. This list is not all-inclusive as there are many financial obligations that fall in the liability category on the balance sheet. I have just included a few of the most common ones found on balance sheets of small businesses.

In a nutshell, Owner’s Equity represents the money that would available to all the owners if the company sold all of its assets and paid off all of its liabilities. Equity increases when owners invest money into the company and/or when the company shows a profit and retains those earnings in the company instead of paying those earnings out in a dividend. Equity is often called owner’s equity, shareholder’s equity, capital or net worth.

The following formula represents the balance sheet:

Assets = liabilities + Owner’s Equity

Understanding the balance sheet and monitoring its changes will help a business owner understand important trends in the business and help he/her make better decisions.

One of the most common mistakes young entrepreneurs make is thinking that their Net Income (income minus expenses) represents the amount of cash that should be in their bank. This is wrong. Net Income and actual cash in the bank are not always the same. The sure way to determine the actual cash available in your bank is to properly prepare and analyze the statement of cash flow.

As the chief accountant for your small business you can use this financial statement to determine your ability to service your short-term obligations – BILLS. (Most of you entrepreneurs are accountants whether you like that title or not.)

Another person that would enjoy seeing your statement of cash flow is your lender. If a loan or line of credit is issued to you, the monthly repayment will fall into the category of “short-term obligations”. If the lender or investor knows that you have a strong cash flow, and will be able to service the debt, he/she will more likely agree to grant financing to your company.

A simple way to prepare this statement is using the Direct Method. This is done by listing the major categories of cash income and cash expenses. Add the column and there you have it!

Example:
Cash sales from X product: $50,000
Cash sales from Y product: $15,000
Labor Expenses: ($10,000)
Loan Repayment: ($5,000)
Materials Purchased: ($20,000)
Total Cash Flow: $30,000

By preparing a simple statement like the example above shows us that we have 30K available cash for growth or additional future short-term obligations. This is exactly what lenders want to see.

Basic financial reporting is not as well known as it should be. In my experience a lot of entrepreneurs only want to know that there is money in the bank. This is as detailed as they get or want to get with their financials – this in understandable. Accounting can be intimidating to some but just because it’s confusing or intimidating, doesn’t mean it’s not important. Businesses need to be accountable.

Poorly-prepared financial statements can’t be used to make decisions. They can’t be used for tax preparation. They can’t be used for budgeting and if they get into the hands of a banker, they won’t help your case when applying for a 50K line of credit.

Having properly prepared financial statements (basic statements – Income Statement & Balance Sheet) will strengthen your access to capital but arguably more importantly than accessing additional capital would be managing your current capital. Accurate financial statements will accomplish both of these goals.