Tag Archives: Accounting

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Operational Accounting for Small Business

As small business owner we need to understand the importance of accurate and timely accounting reports where we will need precise financial information to make the very important decisions we make as owners and managers.

Very often I meet small business owners who have put themselves into a pickle by not managing or paying attention to the valuable information provided in many accounting software packages.

Accounting operations to any business, small or large is like the fuel in your car. If you don’t have the right fuel or enough fuel in your car, you will not go very far.

Over the years I am still amazed at how many small business owners fail to see the value in managing the accounting process of their business. I was always puzzled at how small business owners could get away with running their business without even using Quicken or QuickBooks.

I figured it out. Most small businesses grow so fast that some of us don’t have the time to learn if not worry about the accounting side of the business. Why should we worry about accounting when we’ve got orders to fill, customers to make happy and vendors to manage?

Well, the importance of accounting not only lies in the requirement to file and pay the appropriate amount of taxes at the end of the year, but accounting also affords us valuable information in various report formats that allow us to make smart decisions in our small business.

These reports tell us many things about our small business that we would never think of and these reports also allow us to plan the future of our business as it relates to sales and expenses.

Sure some of us have CPAs or accountants that we give information to on a monthly or even yearly basis, where we should be calculating our sources and uses of cash flow everyday if not every week.

Sources and uses of cash is exactly what it says it is. It defines where are money is coming from (sales) and how are we using it (expenses). The reporting document that helps us determine this process is our Statement of Cash Flow. This report actually tells us in a summary format where our money came from and where it went.

Another very important report is the Income Statement report which tells us how much we sold, how much it cost us to sell what we sold, how much we spent to operate the business and finally our profit from all that work.

There are four pieces or elements of an income statement and they are; sales, costs of goods sold (COGS), expenses (fixed and variable) and income. Some small businesses will classify cost of sales (COS) rather than COGS. Costs of sales are for those businesses that really don’t have to purchase items in the raw material form and re-produce it to make it sellable.

For example, as owner of a consulting firm, we identify ours as COS where if we are a plumbing contractor or a manufacturer of wooden chairs, we would identify ours as COGS because we would have to buy plumbing material as well as wood and reproduce both to get a final product to sell.

The next report that is just as valuable as the previous two is the Balance Sheet report. This report tells us what our business is worth via a particular window of time. For example, I want to know what my business is worth today for the last month. The balance sheet would tell me what I own and what I owe.
This report basically has three really important pieces; Assets, Liabilities and Owners Equity. Each of these sections identifies exactly what it says.

Assets are those things the business deems worth something or those things we can get cash for in a pinch if we needed. This section is also the section banks and other lenders measure a business’ worth.
Machinery, inventory and sometimes your accounts receivables are considered assets. Yes, accounts receivables can be converted to cash via a bank loan, but I absolutely do not recommend this for any business. Although many businesses do borrow against their accounts receivable, I would never do it for any of my clients.

Liabilities are those things the business owes such as short-term loans, long-term loans, wages, taxes, etc. Banks measure this as plain old debt and it’s not good to have allot of it.

Finally, Owner’s Equity is that which is owed to people or groups of investors that pretty much have a right to be paid regardless of the success or failure of the business. It’s just that. We have to identify that other individuals or groups have actually invested into our business outside of a typical bank loan.

Is it OK to have both a bank loan and a particular amount of owner’s equity as a liability? Yes it is, as most businesses do. It is estimated that most business in the U.S. is 80% financed via a mix of both.

So great, now we know about a bunch of reports. These reports are available to you through any accounting software package you use, but you must be using an accounting software package because these reports come from the accounting process that puts the information in the appropriate accounts or sections that will eventually produce these reports.

For every sale there is a corresponding affect within the accounting process that will eventually compile data in one of the reports mentioned above and give you the right information to make a decision. Accounting operations allows us to see our successes and failures day to day, week to week and month over month. We need to review these reports often in order to stay in business.

I have seen quite a few businesses go out of business where when you ask the owners what happened, they will all say the same, “we ran out of money”.
Had those businesses paid a little more attention to the accounting process they might still be in business. Remember, accounting in your small business is like the fuel in your car.

There are many programs out there that will help you understand the basics of accounting where all you have to remember is that accounting functions off of a cause and effect principle.

Every transaction in your business must be recorded where that transaction is managed by an accounting software process that basically works behind the scenes. All you have to do is understand what is occurring.

For example; if I purchase $ 25.00 worth of office supplies I need to let the accounting software package know what accounts I want that transaction to affect. Another example would be if I sold $ 200.00 worth of products, I want the accounting side of the business know what I sold via what I purchased to sell.

This last example is a bit complicated and I will save the detail for another article where you should take away the idea that you first recorded the purchase of the raw material, produced something from it, inventoried it and finally sold it for $ 200.00.
Bottom line is that accounting operations is of paramount importance to your small business.

Often we rely on hiring individuals that say they know accounting but how do we know if those individuals know accounting when we aren’t too sure about it ourselves?

There are many programs available to us as small business owners where we can learn the basics of accounting. Sign up for a seminar or take a class at a local college or university. Your small business is just too valuable to not understand it.

Luis Luarca is the Managing Partner of Allectus LLC, a management consulting company helping small to mid size businesses and is the author of Business Management for Business Owners; How to Manage Your Small or Mid Sized Business” . http://www.allectus.com

Small Businesses 3
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Image by Angela Radulescu
A look at how small businesses around the Morningside Heights area are dealing with the current economic hardship.

Flowers by Valli, a small flower shop on Broadway near 112th St.

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Vital Importance Of Small Business Accounting Software

Every business functions through a range of disciplines, sales and marketing, operational skills, purchasing and management. A small business accounting software is also an essential tool to bring financial discipline to the business. No matter how skilled and well trained the business every small business needs a full range of functions to reach the highest levels of success.

The first lesson in business is to ensure that business has sufficient cash to trade the next day. Failing to meet this target and the business is finished which is why accounting and in particular accounting software should be regarded by the small business management as an essential piece of kit.

Small business accounting software comes in many guises some of which will be more suitable for a particular business than others. Nevertheless the choice to adopt a solid form of financial control is vital to ensure sales are higher enough to generate profits, margins are sufficient, costs are controlled, net profits are generated, cash flow is under control and losses can be identified and reversed or halted. No large business would survive without a sophisticated system of financial control and small businesses have the same requirements albeit on a different scale.

Many entrepreneurs who run a small business regard the accounting function and the recording of financial transactions as an administrative burden. Small business accounting software should not be viewed in this way but instead as a tool to assist the generation of safer stringer profits and the early warning system of dealing with problems if the business does not perform.

Use the small business accounting software to update the financial records at least once each month. With sales recorded every month peaks and troughs in performance are obvious and can then be examined to replicate those actions that produced higher sales levels and cut out those actions which produced lesser results. The result hopefully being sustained sales growth.

Record all the costs each month and as with sales the trend to higher costs or more efficient cost control will be evident from the financial accounts. Also of importance will be the profit margin being achieved and this can be viewed against the level of sales and justified. Statistically small businesses run by born salesmen achieve high sales but at the cost of lower margins while businesses run by accountants tend to achieve higher profit margins but with lower sales.

This statistical fact is true as is also the fact that most small businesses are run by neither accountants nor salesmen but by the skilled worker applying their trade or area of expertise. By using a small business accounting software the entrepreneur can judge what he would like the figures to show against what they actually show and take the necessary action to change the future and produce the desired result. Without accounting software the entrepreneur works in the dark depending on hunches rather than financial facts.

No matter how good or bad a business is the cash flow or lack of it might well determine future growth or in the worst case scenario, survival. Many small businesses that do not use a small business accounting solution package and run into difficulties have often been in financial problems for many months before it is obvious as reductions in profitability are hidden by extended credit from suppliers or tightening credit lines with customers.

Small business accounting software can indicate which parts of the business are doing well, where action is needed if underperforming and may also indicate where action needs to be taken. Accurate control of money owed in and money owed out is extremely difficult without the information to know how significant these figures are. But they can be critical for some businesses and using a small business accounting software that provides this information is crucial.

A disadvantage of small business accounting software is that it may sound like a foreign language but it does not have to be so difficult. Accounting software using a database can require some bookkeeping skills to get the most out of the system but there are other alternatives. A small business accounting software solution written on excel spreadsheets that produces all the main requirements with all transactions visible can be an ideal solution for small businesses with little or no bookkeeping or accounting knowledge.

Terry Cartwright is a qualified accountant in the UK designs Accounting Software UK on excel spreadsheets providing complete Small Business Accounting Software solutions for small to medium sized business with

View of Some Virginia Avenue Commercial Buildings
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Image by Universal Pops (David)
[This Clarksville, Virginia commercial buildings set has 13 images.] This is a creative commons image, which you may freely use by linking to this page. Please respect the photographer and his work.

This is a view down a section of Virginia Avenue in Clarksville, Virginia. It shows most of the Clarksville buildings that have been posted separately [see the set]. From left to right: 324, Gino’s Pizza; 316-320, Planter’s Bank; 314, Colonial Revival; 308-312, Hotel Gilliland; 300-304, gray with awnings; 216, white with upper level side porch; 214, Blanks-Sizemore Pontiac. There is nothing architecturally spectacular about these buildings; however, they do show something of commerce in small town America in the first quarter of the 20th century. Clarksville Historc District was added June 6, 2002 to the National Register of Historic Places, reference ID #02000625

This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

The 15 Least Profitable Small-Business Industries

If you’re looking to start up a small business, first find out what the 15 least profitable small-business industries are.

Related Small Business Articles

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The Basics Of Small Business Accounting

Small business accounting is perhaps one of the most difficult challenges that business owners perceive. This is because accounting for a small business is not their forte. For most small business owners, they go into a start up because they are good at providing a particular service. Be this a catering business, contracting business or being a wedding planner.

Introduction to Small Business Accounting

To be successful at small business accounting one does not need to be a wizard at math. Being organized in keeping track of your cash flow is the key to good accounting for a small business.

Good accounting for a small business also means that you are handling the financing of your business well. Since capital for start up is either taken from loans or from leasing equipment and other assets, you can be sure to formulate a good plan to cover your expenses.

Small business accounting is also important because of the tax implications. As the business owner it is your duty to file taxes properly to avoid getting any penalties.

At the end of the day, small business accounting simply means keeping the records clean for your business. You take in all of what you have earned and then subtract your expenses, what you have left is your income.

For a start up business that relies on financing, accounting takes a crucial role because it tells you if you are earning or not. Your income is then projected so you can see if you are earning enough to cover any debts or seed money infused into the business. Seeing how your financial standing looks like will guide you in making wiser decisions in your business.

Image illustrating small business accounting

Below is a simple overview of some small business accounting terms:

Revenues or earnings:

1. Payment for services rendered – labor, consultation fees and the like

2. Payment for goods sold – products, materials, etc.

Expenses:

1. Leasing expenses – rental cost you pay for equipment, etc.

2. Cost of goods sold – what you paid for your inventory

3. Office supplies – necessary items for your office

4. Salaries – your payment to your staff

5. Representation costs – dining or entertainment expenses, these are usually for taking out prospective clients although only 50% is usually deductible

6. Depreciation costs – for assets you own that decrease in value over time, this can be an allowable expense

Small business accounting is then just taking the total of the two and then subtracting the expenses from the earnings. Your income of profit is the difference. These profits are then subjected to taxes to make your total profit for the year.

Small business accounting is simple and straightforward because of the scale of the numbers involved. It just seems more difficult because it is often up to owner to do this by himself. But through proper and disciplined book keeping, you can make Accounting for a small business a habit and it will get easier over time.

The important thing is to get the system in place right off the bat so you can track down all expenses and income properly.

How Financing Options Impact Small Business Accounting

Small business accounting is affected by the method of how have taken in financing. First, this impacts the period of the return of investment you put in. next it also impacts what you can claim as deductibles or expenses.

The amount of time a business is able to get returns on the initial investment is taken by dividing the investment amount by the monthly income. This is especially important when you have taken a loan because you do need to pay off debts in a certain amount of time.

Good Business and Marketing Practices

Use free marketing tools. The internet and social networking sites are great marketing tools. There are a lot of free sites and online coupon offers you can participate in. this makes for good and free marketing, at very low costs.
Save your receipts. Official receipts are a record of what you have bought and what you have sold. A well receipted accounting record can go a long way in helping you file taxes and not end up paying too much in terms of taxes.
Treat the business an entity in itself. In short, you are not the business and the business is not you. Don’t mix personal expenses with business ones, this will only confuse the records and you might end up losing more money.
Treat small business accounting as an integral part of operations and you’ll see your business do well.

Welcome to Financing of small business, We are setting your records straight by giving you the knowledge about small business leasing. There are lots of option of small business leasing.

Small Business Administration Awards Luncheon
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Image by MDGovpics
Small Business Administration Awards Luncheon. by Jay Baker at Baltimore, Maryland