TAXES & ACCOUNTING • March 31, 2015
2 minutes Read
Understanding the fundamentals of accounting can help you make better choices for your business.
If you dislike accounting, you’re not alone. When TD Bank surveyed small business owners about their least favorite tasks as entrepreneurs, almost half (46 percent) said bookkeeping was their most dreaded chore. Those who work more than 60 hours per week found financial management tasks to be particularly draining; 58 percent hated bookkeeping and 34 percent hated banking.
Unfortunately, as a business owner, no matter how much you hate bookkeeping, you’ve got to do it. Every business has to keep a detailed record of its financial activities in order to comply with tax laws. Even if you hire a bookkeeper or accountant to keep the numbers in order, understanding the fundamentals of accounting can help you make better choices for your business.
To build or maintain a successful business, every owner should understand these three basic accounting concepts.
1. Manage your receivables. In accounting terms, “receivables” are monies owed to you. When you have slow-paying customers, you may have plenty of business but little cash on hand. That can quickly turn into a problem as you’re trying to pay bills, make payroll and control your business expenses. Business owners must look beyond the orders coming in and keep up with unpaid receivables as well. By staying on top of amounts owed and taking action to ensure that customers pay in a timely manner, you’ll keep your books—and your business—in better working order.
If you have trouble with customers paying in a timely manner, implement some tactics to help, such as offering discounts to those who pay quickly, assessing fees to those who pay late and refusing to fulfill orders for customers who have outstanding balances.
2. Understand your expenses. While it’s often true that you must spend money to make money, many business owners don’t have a handle on exactly how much they’re spending—or whether those expenses are even necessary. To build a strong income statement (and a strong company), you must understand how much you’re spending each month, on what and why.
For instance, if you’re spending money on advertising or events, you should be asking every customer how he or she found you. Keep track of how many customers are finding you as a result of each ad or event, and make sure the return justifies your investment. If you’re spending money on social media or other Internet campaigns, tools like Google Analytics can help you determine whether your money is being spent wisely.
3. Track your break-even point. If your business has $10,000 in expenses each month, it must make $10,000 in revenue each month to break even and more than that to achieve profit. It’s simple math, but it’s often overlooked by business owners.
To build or maintain a successful business, figure out your company’s break-even point and keep track of it. For instance, if you haven’t reached your break-even point this month, you can focus on increasing marketing and sales or decreasing expenses. When you know what that magic number is and can stay focused on it, you’ll be better equipped to make wise choices about your bottom line.
Photo credit: sergign/shutterstock.com
Stay up to date with the latest financial news.