Basic Accounting for Small Business
Accounting can be a daunting subject for a business owner, and if I’m being honest, more than a little boring.
When it comes to building a business, subjects like increasing revenue and marketing get good press because they are the fun parts—they answer the question, “how are you going to grow your sales?” But the back-end stuff like accounting can’t be overlooked.
Accounting is the part of your business that will tell you the bottom line—how profitable are you? If you think of it in those terms, it’s surprising that more people don’t LOVE accounting.
Love it or hate it—accounting is an important part of any small business. However, you don’t have to go get your degree in accounting in order to successfully grow your business (thank goodness). There are a few basics that you should understand though, to ensure that you’re making the best decisions for your small business accounting practice:
Understanding these questions is the key to starting your small business accounting system off on the right foot, so we’ll cover all three in this article.
Let’s dive in.
Simply put, accounting is the function of organizing the financial data in your business. You earn revenue, you incur costs, you pay employees—how do you account for that? Specifically, how do you record these transactions for your business? All accounting entries (called journal entries) must consist of the following data points:
· A date
· An account to be debited or credited (does the account go up or down)
· The amount to be debited or credited (does the account go up or down)
· A brief description
· A unique reference number
I realize I just tossed out accounting lingo, but since the goal of this is to understand the basics I’ll abstain from going into detail regarding debits and credits… let’s just suffice to say, you need to indicate whether money is flowing in or out of the account.
Accountants use accounts to keep business numbers organized. Think of them like buckets within your business—all of the money that flows through your business needs to be categorized somehow—that’s what accounts are used for.
For example, let’s say you invested money in your business, this would be tracked in the Owners’ Equity account.
Or if you earned revenue from sales, this would be tracked in your Salesaccount.
Does your business keep inventory on hand? If so, you would record this in your Inventory account.
These are just a few examples of the different types of accounts, but you get the picture. In essence, the flow of money in your business is recorded, tracked, and monitored by your Accounting.
If you find yourself wondering why this is all so important, it really comes down to having the ability to share your “books” with someone else in order for them to assist you with your business. You would need to share your books in cases like:
· Filing taxes
· Applying for a business loan
· Raising investment from angel investors or VCs
· Selling your business
· M & A
While these are the reasons you would want to share your books with someone, the most valid argument for proper accounting is that it provides guidance to you—the owner and executive team—for growing your business.
Through proper analysis, accounting shows you where you are crushing it as well as reveals your weaknesses. Are you running out of cash? Do you have more expenses than your competition? Is your profit margin lower than planned? Accounting provides the framework for this type of analysis—without it, these questions would remain entirely unanswerable.