This article discusses why financial accounting is so important and how to do it properly. After all, many entrepreneurs do not keep financial records. At most, they have a table where they enter their receipts and expenditures. Some even write everything down in a notebook. But this is of little use – there is not enough information, and the business becomes unprofitable over time.
Why in small business is not accepted to keep records
It so happens that in small companies, there is no culture of keeping financial records. The first thing entrepreneurs learn is marketing and sales. But without knowing the basics of financial accounting, business is unrealistic to grow to the medium or even large.
Statistically speaking, 45% of small businesses rarely live longer than five years. There is a feeling that it is just a matter of not knowing the basics of management and finance. Finance is not just a collection of numbers in a spreadsheet, but information that helps you make decisions, plan actions and achieve goals. Business becomes transparent and manageable, not just somehow moving somewhere.
What is financial accounting?
So, let’s get this straight. Financial accounting is a system of reports that keeps a business’s finances under control. It consists of a cash flow statement, a profit and loss statement, and a balance sheet. Taken together, these reports provide answers to important questions: whether the company is growing, why there are cash gaps, whether management is effective, how to increase profits, why there are profits but no money. Without this information, it is difficult for a manager to manage a business.
Statement of Cash Flows
What does it take into account?
How much money goes in and out of the accounts.
Why do you need it?
The report lets the manager see if the business has enough money to meet its obligations: paying rent and wages, buying merchandise. Without MSF, he won’t control the funds in the accounts and will eventually get into a cash flow gap – a situation where the business has no money to operate and pay its bills.
Along with a cash flow statement, you need to keep a payment calendar and ytd on your paystubs. This is where you should enter your future receipts and write-offs. This way, you can anticipate cash flow gaps and take action beforehand.
Profit and loss statement (P&L)
What does it take into account?
Revenues and expenses of the business by deeds or invoices closed. The best way to save time is to use tools like Liveflow’s marketing P&L template to monitor the business’ payments and costs by closed invoices.
Why it’s needed?
The report is used by a manager to calculate the net profit of the business.
Profit is not money in the cash register. A loss-making business may have a full cash register, and a profitable business may have an empty cash register. Let’s look at two examples.
A full cash register, a loss-making business. Before the New Year, Jackson decided to make extra money on Christmas decorations. Orders turned out to be many. Jackson bought raw materials for production, paid bonuses, and ran targeted ads. The New Year came, and the charges ran out. Jackson paid his taxes and rent, but there wasn’t enough money for all the salaries. It turned out that the business was unprofitable. Jackson had to raise the price of the toys. He had no idea – there was a lot of money in the cash register.
Empty till, profitable business. Nasty makes cosmetics. Everyone admires her, writes her reviews, she has many orders. But she has no money: she borrows from her relatives for the production. And the business was profitable. It was simply good in inventory in the warehouse and receivables – deferrals to wholesale customers.
The assets and liabilities of the business. Assets are everything the company owns: real estate, equipment, inventory. Liabilities are the money the industry bought assets with.
Why do you need it?
The manager knows if the business is growing and with whose money it is growing. He also sees from the balance sheet what the profitability of the company is.
Imagine this: an entrepreneur keeps three reports. He sees that there is no money on the balance sheet. He looks at the balance sheet – there is profit. And then, he checks the balance sheet and realizes that the gain is a full warehouse of goods and new equipment.
You need financial accounting to run your business based on numbers, not intuition. Start keeping it with an MSF report. This is the easiest way to do it. Enter the receipts and expenses for all wallets each day and compare them to the actual amount of money in the accounts.
Keep a payment calendar along with your TDS report: determine how much money you have at the beginning of the month, add planned receipts and expenditures. This way, you can see if you have enough money to pay everyone off.
When you’re just getting to grips with accounting, you don’t need complicated programs. An Excel spreadsheet will suffice. The important thing is to learn how to group receipts and expenditures into categories yourself and report regularly. Try it, do it, and you will succeed!