I’ve found most business owners, especially new ones, treat accounting like the ugly stepchild. It’s something that must be dealt with, but the less attention they give it the better.
Most business owners usually start with pushing aside the numbers and focusing on bringing in sales. However, that is a self-limiting attitude. The ugly stepchild can help your business if you give it the attention it deserves. Having strong accounting is the secret to small business success.
Accounting tracks a lot more than just your money. It tracks your company’s worth, your company’s trends, and your company’s strengths and weaknesses. How can good accounting do all this, you ask?
Let’s look at it deeper.
How do you know how much your company is worth?
And, perhaps more importantly, why do you need to know this information?
Unfortunately, many small businesses fail. Watching the value of your company can help you prevent this fate. So, it’s very important to know its value. If you realize that your value is a negative number, it’s time to make some serious changes before the situation proves irreversible.
Additionally, if you need more money to run your company, potential lenders are going to want to know the value of the company before they’ll invest in it. Therefore, you should always know this number, too.
If you have accurate, up-to-date accounting, then your balance sheet will tell you what your company is worth. In fact, the definition that I use for a balance sheet is: it’s a snapshot of the value of your company at any given moment.
Do you know the direction your company is trending?
Trend lines tell you what’s happening and if they aren’t going in a good direction, it gives you a chance to change them. Watching whether sales are growing or shrinking is critical. If sales are growing, then the company sales line is trending up. However, if they are falling, it’s trending down.
Sales alone don’t tell the whole story. You also need to look at the cost of goods sold (COGS) and expenses. Usually, when sales are trending up, COGS are also trending up. It simply takes more COGS to produce more of your products or services.
Since expenses aren’t tied to sales like COGS are, they need to be controlled and watched carefully. If expenses are trending up and sales are trending down, you are headed in a bad direction and need to take immediate action.
Having accurate trendlines to watch is critical and can only be done if you have clean, up to date accounting.
How can you identify the company’s strengths and weaknesses and use that information to guide your business?
Having clear understandable financial reports starts with a well set up Chart of Accounts. Tracking revenue streams separately will make it clear where you are making the most money, your income strengths.
This information can help you decide where to focus your marketing, when to invest in new products or services, or when to bring on additional employees.
If you have a weaker revenue stream you can determine if you should discontinue selling the products or services in that category. Or it might indicate that you aren’t focusing enough energy on sales and marketing in that area.
With clean accounting you can easily know when you have enough net income to take owner’s draws, make additional investments in equipment, or add a new location. Making decisions without this critical information can quickly drive a company out of business.
Putting a priority on accurate and up-to-date accounting so that you can utilize the information in your financial reports will go a long way to helping your business succeed.
Accounting is a necessary evil for any small business. It’s not something you should take lightly or assume you can handle on your own if you have no experience. Running a successful business is not simply a matter of having a great product or service, it’s dependent on strong financial reporting that can be used to make important decisions. Smart business owners know to treat it with reverence and learn to understand how to utilize the information it provides to their advantage. Leaving the accounting shoved aside like an ugly stepchild is not smart business. Paying attention to the numbers is the key to success for any business.
Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (www.strongwomenthriving.com), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a book that both shares her personal story and addresses financial abuse. She can be reached at email@example.com.
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