I’ve heard so many business owners talk about how they can’t stand accounting or that they “have an accountant for that”. If you’re one of those people, than this article is for you!
It’s easy to pass things off that you don’t understand – or don’t want to understand, but the challenge is, how do you know that it is being done correctly? Understanding your business financials isn’t simply about keeping the books in order, it’s about really knowing where your business stands and how well it is performing today as well as in the future. Yes, accounting can be daunting, but taking the time to understand it can help your business immensely.
Here are some signs that you need to understand your business financials a little better:
Do you have ups and downs? Some months you are doing extremely well and other months you are scrambling to pay bills. This may be a sign of poor cash-flow management for slow periods of your business, or perhaps your client payment terms are too generous. For example: In the events industry, you may pay all of your suppliers within 15 days of the event, but your client takes 45 days to pay you. That means that you are carrying the cost of the event for 30 days. Your accountant can help you look at this and determine if a new policy is required.
Are you wondering where your money is going? If you can’t figure out why you’re not making any money when your gross revenue and sales are doing great, than this may be a sign that you have poor control over your expenses and/or inventory. You may also have poor bookkeeping practices, which makes it nearly impossible to know where your money is actually going.
Not all debt is bad, but… Are you paying it off or is your debt just getting bigger? Maybe your sales are great, but your debt is increasing alongside of your revenue. This may be a sign of poor financial planning, a lack of a realistic budget, or little to no management of expenses. Yes, in many cases your business requires access to funds in order to grow or expand, but before making a decision to make that purchase or to hire more staff with a debt cash injection, you need to make sure that you can afford the debt and have means to pay it back. In other words – you need to have realistic projections and a debt repayment plan in place. Knowing how much your monthly payments are on a loan is not enough.
Do you keep saying that you “just need to increase your sales” and everything would be better? That may be true, but increasing your sales may not be the solution you need. In fact, it may bring a whole host of other problems if your business isn’t set up to handle the additional workload. Increasing your sales is not a magic bullet that will help your financial problems go away. Some businesses are much more profitable with lower gross revenues than larger companies with higher gross revenues. Maybe it’s your margins and profitability that you need to look at first.
Do you know your monthly break-even amount? If you don’t know how much you need to make in revenue each month in order to cover your expenses before making a profit, you’re really working in the dark. Knowing your numbers intimately and monitoring them on a frequent basis can help you understand where you stand and where you need to be at any given time.
Are you even paying yourself? Is all your money going back into the business, or is your personal salary extremely low? Many people love to volunteer for the love of their business, but if this is your only source of income, or you’re having to maintain other jobs on the side to survive, then you need to investigate why this is happening – unless you’re happy to continue working in this way.
Have you ever said “I have no idea what I’m looking at” when looking at your financial documents? If you feel “stupid” or “scared” when it comes to accounting, it’s because you haven’t taken the time to learn – not because you’re incapable. Businesses that know their numbers inside out tend to perform better over the long term. When you look at your financials frequently, it can help you make better strategic decisions. Especially if your business is struggling, one of the first places you should look is your books, as they can be quite revealing and give you a better idea of the financial health of your company.
Have you ever signed a tax return without actually looking at and reviewing the accuracy of the enclosed documents? Finding a great bookkeeper and accountant that you trust is crucial, but relying on them completely is a mistake. If they make errors on your tax returns or financial statements, the government will be coming after you and not your accountant. That’s why it’s important for you to learn some basic accounting, monitor your financials often, and actually READ the documents you’re asked to sign.
Do you avoid your accountant or would rather focus on other areas of your business? Avoidance or claiming that you’re too busy to worry about your accounting is the equivalent of hiding from your problems with your head in the sand. Even if you don’t have any specific problems, you might be missing out on an opportunity to save money or prepare for the growth of your business. If you don’t like or understand your books and financial statements, it’s time to learn or have your accountant explain them to you.
Don’t trust your accountant? Time to find a new one or work on your relationship. Accountants can help you identify opportunities for growth and increased profitability, investigate current or potential problems, as well as find possible efficiencies. They are there to help you do better. However, make sure to find an accountant that will help you figure out a way to make things happen rather than just saying “no” to everything. Develop a strong and trusting relationship with your accountant and treat them as an important member of your team. Involve them in strategic planning of your business or hire a CFO as they will have valuable input, harmonizing creativity with feasibility.
Bottom line, don’t just hire an accountant, LEARN and pay attention to your accounting. You might be surprised with what you find.
Tell us why you love or hate accounting in the comments below! How has knowledge of accounting helped your business?