Unless you’re an accountant, maintaining your books may not be high on your priority list. However, making finance work for you and streamlining these tasks can make a big impact on the profitability and longevity of your business.
Whether you’re passionate about technology, consulting, sales or web design, get ready to crunch those numbers faster with these four simple tips.
1| Understand the financial basics.
Learning the basics of financial statements isn’t difficult, and knowing them will do your business a lot of good. Educate yourself about the important differences between your balance sheet, income statement and cash flow statement as well as the most common financial metrics. There’s no need to go get a degree in finance. Work with a professional who can teach you these important lessons or start with some quick but quality resources, such as:
- Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean by Karen German and Joe Knight
- HBR Guide to Finance Basics for Managers by Harvard Business Review
2| “Expensing it” doesn’t make it free.
It’s not uncommon to hear people exclaim, “Oh, let me get the check. I’m expensing it!” Don’t confuse expensing something with it being free. Nothing could be further from the truth! Business expenses are not free. In fact, every time you expense something for your business, you reduce the company’s profits. You need revenues so that your business can afford the current expenses, reinvest profits for future growth and pay that upcoming tax bill.
Keep in mind, qualified expenses do lower the company’s tax bill (or in some cases, your personal tax bill). However, the reason the tax bill is lowered is simple cause and affect: lower profits owe fewer taxes.
Tread carefully with some types of expenses and always confirm with an experienced accountant. For example, “Meals & Entertainment” cannot be deducted at the full amount like most other business expenses. Also, if you have a home office, confirm with an accountant what expenses are appropriate for your business.
Never mix your personal expenses with your professional expenses. Not only will the Internal Revenue Service (IRS) have a problem with it, it muddies the waters if you ever try to take out a business loan or sell your business. Separate with purpose, and keep your books clean and simple.
3| Select a quality accounting system and set it up properly.
Excel is often the go-to software program when it comes to numbers. However, you need a true accounting system to keep your books in good order. Make your life easy with an affordable, paperless, web-based accounting system, such as Xero.
Avoid manual data entry with a system that uses automated feeds to import your bank and credit/debit card transactions. Set up rules (like those in Outlook and Gmail) and see how the software quickly learns your preferences. With little effort, boring tasks are automated, and your accounting becomes fast and simple.
It’s worth enlisting a professional accountant to help you get set up properly right from the start. It’s much easier to keep up a good system rather than having to go back and redo lots of work afterwards. A professional accountant can quickly train you on the basics and advise you on critical items, including your Chart of Accounts, cash versus accrual accounting methods and more.
4| Avoid accounting data overload.
The “more is better” data trend doesn’t necessarily apply to your Chart of Accounts. Your categories within assets, revenues, expenses, etc. should be like Goldilocks – not too few but not too many. Just right.
With your bookkeeper, talk through your Chart of Account categories carefully. You want to be able to easily measure what is important to your business. They’ll also ensure that you break out categories for various tax-related and government reporting items.
Decide what’s truly important to measure and what’s overkill. Use this info to streamline your categories so that accounting chores (and budgeting) are easy and efficient. The last thing you want is confusion about whether the new stapler should be categorized as “Office Supplies” or “Office Equipment.” Keep it simple. Optimize your workflow by using clear labels and avoiding categories that don’t add value.
Also, if you see the need for any category revisions in the first couple of days or weeks, make the changes as quickly as possible so that you limit your amount of rework.
With these finance and accounting basics under your belt, you can use them to your advantage as you focus on the profitability, growth and longevity of your business!