What is... Accounting?
ACCOUNTING… A topic easily viewed as intimidating, dull, and overwhelming. Many business owners and individuals avoid learning even the basic accounting processes in fear of what lies ahead. Our goal here is to show a softer side of accounting by breaking it into simpler terms with practical application to ease the apprehensions of learning and taking on accounting processes. Let’s take away the stigma of accounting by referring to this as an overarching concept of Financial Management.
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Accounting in its most basic form is tracking, recording, and analyzing financial data. This data is used to help facilitate the day-to-day operation and growth of the business. For example, accurate recording can help in decision making such as the capacity to hire new employees or expanding to a new work space. Recording keeping procedures will also prepare you and your business for acquiring additional funding such as loans or capital investments. Not the mention, the obvious IRS audits to guarantee safe and legal operation of a small business’s financials.
In order to create an effective financial management program, there are several items which need to be considered:
1. In-House/Out-Sourcing - Deciding whether to keep accounting operations within the company or use an external accountant to manage the business’s finances is a major decision in the structuring of a small business. Either choice does not relieve the business owner from maintaining a firm grasp on what is occurring financially within the company. There are pros and cons for both including the evaluation of cost, time, and accuracy.
2. Accounting Software - When choosing an accounting software, it is important to know the needs of your company with the potential for increasing capacity. For companies in multiple locations or anticipating growth, a cloud-based software may be the best fit compared to a computer based program. Is running payroll a function that will be required of the software? Be sure to ask your CPA what software they use or recommend to best suit your small business. Lastly, what is your budget? It is important to not compromise on features and services, so be sure to do your research and see what software will best benefit the business for the present and future.
3. Budget - The creation and implementation of a monthly budget will assist in tracking expenses, detect cash flow problems, plan for the future, and ultimately succeed. Budgets serve as a guide to maximizing operational efficiency. Monthly budgets should always be compared to the actual revenues and expenses. It is very important to stay realistic when creating a budget. Budgeting is a lot like dieting. In order to make progress and drive results you have to take small steps. Setting unrealistic guidelines can hinder your growth and detour you from focusing on the primary purpose of your business. Small steps transform into big leaps with patience and consistency.
4. Accurate/Time conscience bookkeeping - Maintaining a timely schedule for the entry and recording of the small business’ financial data will keep you informed with an accurate picture of the overall financial state. Timely and accurate bookkeeping plays major role in making informed decisions for the business. Normally all accounts are reconciled at months end to ensure all data is updated in a timely manner. This method will prohibit any discrepancies when looking forward and it allows room to adjust on the go. The overall purpose for timely bookkeeping is to implement guidelines to stay within and guidance for accomplishing various objectives.
5. Review and Analysis of Financial Statements - The review and analysis of financial statements such as the Profit/Loss or Income Statement, Balance Sheet, and Cash-Flow Projections provides for a well-rounded financial description of the small business. The assurance and accuracy of these three reports goes a long way in the overall health of the business. Staying informed is vital when it comes to driving results. If you don’t know the monthly marks you are hitting this will inhibit you to adjust your process. Review and analysis of the financial statements is vital to catching bad and good trends within your company. In order to be knowledgeable about the next steps that should be implemented you have to asses the current trend and adjust if necessary.
Think of accounting and its application to providing accurate financial information as a blueprint for growing, staying steady, or reducing capacity. It will provide the direction and guidance to make these decisions and adjust the sails accordingly.
“Adjust the sails”