Small Businesses usually are not able to use accounting and finance as a tool to understand and manage their business effectively and optimum profitability. In this article we are sharing some practical tips for using accounting and finance for small business.
Usual problems why small business are not able to use accounting and finance to its full potential includes
- Lack of understanding of basic accounting principles and a general mindset that accounting is cost center and only useful for filling tax returns.
- Poor setup of accounting process leading to no management information system.
- No Investment in the proper system and involvement of financial associates in business analysis and decisions.
Generally, a lack of resources, money, and talent is to be blamed, In this article, we are giving you some tips on how you can use accounting for your small business.
1. Keep business and personal accounts separate.
One of the messiest accounting blunders small business leaders can make is to mix their business and personal funds. Although plenty of entrepreneurs chip in their own startup money, business revenue and expenses must be kept separate from personal ones.
There may be a very thin line between personal and business expenses however as a thumb rule assume if expenses are going to help in growing business directly or indirectly and not owners personal enjoyment can be recorded as business expenses. It is important to identify such expenses to understand the real profitability of your business
2. Create profit and loss statements regularly.
A profit and loss statement is a staple accounting tool that summarizes your company’s income and expenses over a given period. All public companies are required to put them out once per quarter. Although small business owners aren’t required to create them by law, P&L statements are great ways to see whether you’re on track to meet your financial goals.
To generate a P&L statement …
Total up the revenue you generated in the quarter.
Itemize your company’s expenses. Break those expenses into two categories: operating expenses and cost of goods sold (COGS).
Subtract total expenses from your gross profit to get your operating profit.
Subtract interest and taxes from that operating profit, and you’ll know whether your business operated at a profit or a loss that quarter.
Although individual P&L statements are valuable, quarter-by-quarter comparisons are even more important. Are your operating expenses growing? Is your profit shrinking, despite the fact that your sales figures are up? Checking P&L statements against one another yields those sorts of insights. Learn more from this course Financial Analysis and Ratio Analysis
3. Keep a close eye on accounts receivable.
Although staying on top of accounts payable is important, it doesn’t dictate the company’s survival like accounts receivables do. If there isn’t money coming in the door, then the company can’t continue to operate.
Each month, review the percentage and total amount of outstanding revenue. Generally speaking, no more than 10 to 15% of your accounts receivable should be past due. Reach out weekly to those clients. Don’t send them to collections on a whim, especially if you want to work with them in the future. But you also can’t let them stiff you.
4. Make Forecasts for your business in the near future to make spending decisions especially capital and fixed in nature.
It’s always important to keep an eye on how the business looks like in the next three to six months. Revenue and forecast are usually made based on past business results however future plans and PESTEL situations will guide most of the budgeting.
Once the business has made a budget/business plan that would serve as a guideline to business decisions and BenchMark for performance measurement. Learn here how to make budger and forecasts by Mr Manish Gupta, a finance expert