Small Business Owners: Let’s make Accounting your BFF?

​Well, maybe this blog will not make you snuggle up with an Accounting book at night and call it your BFF but I will go for making you two close friends.  Close friends because you need this person in your life for your business to be successful. 
 
There are millions of small business owners and startup entrepreneurs who are masters at creating products and services and winning over customers.  However, many of them are weak in understanding the accounting area of the business.  To be effective in grasping the concept of accounting, I find it useful to understand some of the commonly used terminology.  Essentially, accounting is about managing debits and credits.  Those debits and credit are recorded and managed by the business owner, consultant or bookkeeper of the business, mainly to ensure money is coming into the bank and expenses are being paid timely.

​The American Accounting Association (AAA) defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgement and decision by users of the information.”
 
The basic formula to accounting is: Assets = Liabilities + Equity (Owner’s equity)

Knowing the basics equation, outlined above, will assist in the understanding of accounting account types.
 
There are different types of accounts in which debits and credits are kept track of in accounting, let’s define some them,

• Assets are financially measurable resources that a company owns.  Some examples of those are cash, supplies, property and equipment.  While reputation may be important to an entrepreneur and valuable when it comes to gaining new customers, it is not measurable thus not accounted for as an asset in the business.

• Liabilities are the financial obligations of the company, basically debt.  Every business will have it but the key here is keeping track of it accurately. 

• Equity is the dollar value of the company’s worth. 

• Revenues are the dollar amounts of income that are earned whenever the business provides a service or sells a product. 

• Expenses are the cost associated with running the business, including bills. 

 
When managing your business, these definitions will be used quite frequently especially if you have hired a consultant or bookkeeping to manage the accounting area of your business.  Let’s say your current business is a hair professional in a Salon and at the end of the day your analyzing how much you made for the day. 
 
Your recording book shows:

• 2 Clients, $60 each    
• 6 Products sold
  • 3 Hair spray, $10 each
  • 1 comb, $5
  • 2 Conditioners $ 10 each (owner ‘s product)

 
The owner of the salon may generally record total earned revenues of $175.  However, to an accountant or bookkeeper they are also concerned with how much it cost (expenses) the Salon owner to make the two conditioners she sold for $10 each and how much was it to purchase the comb and hair sprays.  Understanding this information gives the true net revenue amount of how much the salon owner made for her one day of work.
 
The take away here, is to remember it takes more than developing marketing techniques and creating new products and services to manage a business.  As a business owner, your accounting processes and methods used to analyze should be your BFF in the business because without it, you can never know where it stands or how healthy or unhealthy it is.
 
If you understand the importance of accounting to your business and are ready to protect your business from financial risk, visit our website to schedule your consultation.

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