An accounting system can be an extremely powerful tool for business owners. When structured with the specific needs of the business in mind, it has the power (through the magic of debits and credits) to convert data into a format that actually tells an interactive, completely personalized story about your business. The balance sheet is a snapshot at a specific date, while the profit and loss is more akin to a narrative. By providing feedback on how your business is doing it allows you to control the course of your story (where hopefully everybody lives happily ever after) . Some of the feedback that can be gleaned from your accounting system is discussed below:
1. How much money do you have in your bank account?
Of course you can just look at your bank balance but this does not reflect transactions that have not yet been processed including outstanding cheques, deposits, pre authorized payments etc. This can result in unnecessary overdraft charges and payments being returned NSF, which can be detrimental to your credit rating, not to mention the headaches of calling the customer, bank etc. (God forbid you bounce a cheque to the government. It can take years to work out the bureaucratic mess it creates.) Additionally recording all the transactions in your bank account allows for a thorough review, which helps to prevent against unauthorized and erroneous transactions. Accounting software greatly facilitates the bank reconciliation process i.e. matching your bank transactions to your books. Ideally all cheques and deposits are entered at the time of origination and receipt, further simplifying the bank reconciliation.
2. How much do your customers owe you?
Even if you only have a handful of customers who pay on credit, it is important to know both total and individual accounts receivable . You may have fantastic sales, but if you have not yet received the cash for them, it can have an adverse, unexpected effect on cash flow. (higher sales require higher expenditures) Also, following up on delinquent customer receivables is far more effective when done earlier, rather than months after the goods or services have been provided. Finally, businesses seem more credible when they can generate customer statements upon demand.
3. How much do you owe your Suppliers?
Tracking your bills and when they are due can you help you optimize your cash flow by paying them only when necessary or save money by taking advantage of discounts. By reviewing and recording your bills when you receive them, you can also ensure that they don’t (magically) change.
4. How much did you sell?
An understanding of your sales is a key figure to know on an absolute basis and when comparing to a benchmark like your breakeven point and sales forecasts. Your accounting software will allow you to structure your accounts so that you can track sales by different groupings including sales by type or geographic region. This in turn can help you focus your sales efforts on products or regions that are more profitable.
5. What were your total expenses
You can track your individual expenses to quickly identify how much you are spending, by different categories, and where changes can be made. It is up to you decide how detailed you want this listing to be. You may want to track every paperclip (not usually recommended) or it may be enough to know how much you spent on office supplies as a whole.
6. What were your gross margins
This is a key metric for businesses who incur direct costs relating to their sales. As a percentage this can communicate whether you conform to industry standards, how to implement greater economies of scale, and how much you have left over to spend on overhead.
7. How profitable was your business?
Your profitability contributes to many of your business decisions. Although it might be negative in the beginning, it can be very satisfying to see this number grow over time. This is an important number on its own and as a percentage of your investment, equity etc.
8. How much did you contribute to the business
Your accounting system will help you keep track of how much you have contributed to the business in the form of loans and equity. Many small business owners are interested in calculating their return on equity which is simply your net profit divided by your equity. If you are not charging the business interest on your loan payable it should be included in the equity amount.
9. How much cash flow did you generate?
Knowing how much cash flow you are generating is essential for any small business owner. For several reasons, a profitable business may not have enough cash flow to cover its costs eg. High accounts receivable, investments in equipment that do not affect profit etc.. Keeping on top of this number is essential to better cash flow decisions. Most accounting software will generate this report automatically
10. How much inventory do you have on hand?
Setting up an inventory system, as part of your accounting infrastructure, can have a huge impact on how your service your customers’ needs, provide you details on what and when to place orders and eventually save you money.
11. How much debt do you have and what are the related interest costs?
The total amount of debt owing should be tracked regularly to ensure that payments are made on time, interest expense is accurately calculated and debt to equity and other ratios are monitored to ensure compliance with debt covenants.
12. How much do you owe in sales and income taxes?
It is always a good idea to ensure that your government debts are paid on a timely basis or if this is not possible, to work something out. A good accounting system will allow you to calculate sales taxes as they arise. Income taxes should be estimated periodically so that the final number is anticipated.
13. How can you save money?
A well structured accounting system will provide you with enough info to identify areas where you can save money whether you simply spend less on certain items, renegotiate terms with a supplier, reduce bank charges or buy greater quantities, there are numerous opportunities to reduce costs. It is also important to select the appropriate accounting software for your business.
While your accounting reports may not necessarily be a Nobel prize winning novel, it does have the benefit of being all about your business. It is descriptive as well as prescriptive and if interpreted correctly can be the difference between a bestseller and a dud.