If you don’t have an accounting program, get one. That wasn’t my first tip, but it needed to be addressed. There a many different small business accounting programs out there, but I will be referencing QuickBooks, since it is the most widely used small business accounting system out there and the one I am most familiar with. Here’s a review of the best small business accounting systems by PC Magazine
Tip #1 – Organize Your Books
While I had taken business accounting courses during my academic career, looking at Profit & Loss’s, Balance Sheets, and Cash Flow statements for my own business was a new concept. It definitely took some trial and error to get it to an understandable format, but once I did, it was much easier to interpret.
I found that by properly assigning expenses into cost of goods sold or expense made all the difference. The accounting system organizes your P&L to start with revenues, subtract out cost of goods sold, and then subtract out all other expenses. Once I did this, I could much more easily understand what I was spending in overhead. This then allowed me come up with a more precise overhead figure that I could use when building proposals.
The other thing I did was separating sales categories. This helped me to understand what was selling. You could take it further and organize your COGS by service or product to help determine where you are making the most money.
Tip #2 – Utilize the tools that you accounting program provides
Your accounting program was built with sets of tools to help you manage your business in real time. If you aren’t taking advantage of these tools, then your ability to manage your business will be weakened significantly. This is where you start to run by feel instead of by concrete data. One such basic function is entering bills. Do you enter bills as they come in, or do you let them sit in a stack until they come due and then pay them and only record them in the check registry? If you enter them as they come in then, not only can you get bill reminders that will help you avoid late fees, but you can get a much better control over cash flow.
Tip #3 – Cash vs. Accrual
Gaining an understanding of cash vs. accrual and how they change the numbers of your P&L is key. I run a cash basis business for tax purposes, but I manage it with accrual and cash combined. Accrual tells me what I am going to have, where cash tells me what I have right now. If I did not enter bills as they come in, then I would not be able to see any future cash flow issues. Typically, we are slow to enter expenses, but quick to deposit checks. If you ran cash basis and looked at your receivables you would see what you would have if you collected everything within the next 30 days, but more than likely you are just taking a guess at the amount of the expenses you have to offset that by. Additionally, we typically underestimate this number, which can cause issues and a false sense of security.
I hope this helps you gain some more insight into your accounting practices. Look at what you can do today to help you better manage your business. “Stop Doing the Mundane, and Start Getting Weird!”