As a business-owner, are you taking the time to go through the numbers thoroughly at least on a monthly basis? This is a very key function and there are many benefits in doing so. There is no doubt that running a business is a big responsibility and it requires commitment, tenacity and a great deal of your time. Keeping up with service delivery and customer demands is generally the focus. After all, happy customers tend to bring in other customers, or so we hope.
Bookkeeping
On a day-to-day basis, business activities occur, which generates the need to record these transactions. Whether your business is selling a product, or offering a professional service to your customers, some standard bookkeeping functions must be performed. Some business owners may choose to manage this function themselves depending on the size and nature of their operations, while others may hire someone to do it for them. Some larger companies are even outsourcing this responsibility altogether.
If you are one of the “do it yourself” entrepreneurs and decide to set-up your own accounting system, before doing so, there are a few basic principles you must know. There are two major basis of accounting methods used in business, which are cash and accrual. Some businesses do use a combination of the two and based on the threshold of annual revenue, the cash basis is a better option for them. It is highly recommended that you consult an accountant for guidance.
- Cash Basis– Items of revenue and expenses are recorded when received/paid.
2. Accrual Basis – Items of revenue and expenses are recorded when earned/incurred.
The method adopted will determine some of the accounts that have to be maintained in terms of journaling or recording as commonly called. Under the accrual method, sub-ledgers are created to record purchases made from vendors and also sales to customers on account (on credit).
The following two accounts are created for businesses that operate their accounting under the accrual method:
- Accounts Payable – Records transactions for products or services that you purchased for your business from vendors, that you intend to pay for at a later date. Usually, vendors may agree on terms for payment and allow for discounts as incentives for early payment.
- Accounts Receivable – Records the sales of products or services provided to your customers, where payment will be made to you at a later time. The income is considered earned once the sale has been completed and the transaction can then be recorded to your books.
Whichever method of accounting you choose for your business, it is important to capture all transactions, record them timely and accurately. In order to measure the performance of your business, the bookkeeping as well as accounting functions requires the utmost diligence.
Leveraging Technology
Many of the routine processes can be automated to minimize unnecessary labor hours. Take advantage of technology. A good example of that is to utilize software with apps that allows you to scan receipts for purchases made by you or your team while you are away from the office. This comes in handy particularly when you are on a business trip and have to submit receipts timely for reimbursement.
To bring it all together at the end of the period is the function of analysis and reconciliation. One of the key areas that should never be ignored is the banking activities. I cannot stress enough the importance of performing a bank statement reconciliation. This is where you review all of the transactions to ensure that they are not only recorded, but the amounts are recorded accurately. As electronic banking for day-to-day operations have increased, this is a must. Also, fees and other miscellaneous credits and charges have to be accounted for, thus the need for analysis.
Numbers Tell The Story
Again, if you are not the one handling the accounting for your business, one piece of advice I would like to give is that you carve out some time to review the financial reports. As a CEO or Entrepreneur, it is in your best interest to understand what the numbers mean. Numbers tell the story. It paints the picture of how the business is really performing. Cash flow is not profit; however, the bank balance after reconciliation is also a key indicator of how the business is operating. Ask questions and go beyond the surface of the reports. Look at ratios as well.
At SLS Accounting & Business Consulting Services, we will work with you to streamline your bookkeeping and accounting operations. We will implement cost-saving strategies to keep your business sustainable. From setting up your chart of accounts to developing metrics and key indicator reports that will allow you to make data-driven decisions. With our team handling your books, you can expect nothing less than optimal, reliable and professional services. You keep delivering amazing products and services to your customers and leave the numbers to us.