One of the most underrated skills in business is bookkeeping. People get into business for so many different reasons. Sometimes because of the passion they have for a cause or a unique skillet they hold. In many cases, they haven’t been trained on running the back end side of things. While there are many reasons 80% of business fail within 18 months, a major reason is that they don’t know how to track their money. The last thing you want is a booming sales business with no cash in the bank. This is the classic case of a wantrepreneur.
Wantenpreneur – Someone who admires entrepreneurs but either doesn’t take action or only does the “fun” part of being in business, while ignoring the necessary.
Every owner should at least have a working knowledge of bookkeeping, as it’s not the most difficult task. Unfortunately, as in other aspects of life, people are intimidated by the numbers. Follow these three bullet points to get yourself pointed in the right direction.
Follow Every Cent
If you learn anything from this post, REMEMBER TO NOT MIX BUSINESS AND PERSONAL FUNDS. This is a big no-no with the IRS, a road you don’t want to go down. Once you’ve established a separate bank account for your business, make sure you’re logging and categorizing every cent that comes in and out. Bought a pair of scissors for the office? Open your excel spreadsheet and log $4 in column 1, scissors in column 2, and supplies in column 3. Let’s say you went to a business related course or event: Log $300 in column 1, John Doe Seminar in column 2, and Seminars in column 3.
Column 1 – Dollar Amount
Column 2 – Exact Income/Expense
Column 3 – Income/Expense Category
For every item that you log, you should have a file containing every invoice or receipt on the spreadsheet. In that case, if an investor or tax authority comes knocking, you’ll easily be able to substantiate your financials.
At the end of the year, give this sheet to your tax guy and he’ll figure out your return from there. That’s a much better system that most who are scrambling for receipts in late February.
Understand Financial Statements
If you’re in business for yourself, get interested in financial statements (fast!). While Big Data has infiltrated every industry, your financial statements will be your source for any type of analysis you’ll conduct. In an upcoming post, I’ll talk about how to analyze the information they provide through a series of quick ratios you can calculate through their reported balances. Without them, you can’t spot trends or navigate your way as clearly as possible. Below are the three statements you NEED to know:
Income Statement: In the given period, this report will show all revenue and income producing activities subtracted by all expenses. Revenue – Expense = Profit
Beware, don’t fall into the trap of thinking your profit will equal cash in the bank.
Balance Sheet: The report showing the financial position of your company at the given moment, rather than period. The real value in this statement is that it shows what the entity owns, as well as it debts owed. You can get a great feel of the health of a company by analyzing its balances.
Cash Flow Statement: This statement will determine whether the company is in a positive or negative cash position. Sometimes, businesses have healthy sales but fail miserably. How can this be? Since a sale is recorded on your books when the service is provided, rather than the exchange of funds, it is quite possible. See my extremely oversimplified example:
Sales: $100,000 (only $40,000 collected through accounts receivable)
Profit = $50,000
Cash = Negative $10,000
If you don’t have the time to concentrate on your numbers, hire someone. That doesn’t mean you shouldn’t learn financials, it just means you don’t have to prepare them. I’ve seen bookkeepers for as low as $20 an hour, which really isn’t very expensive for the value they are providing. In this new age of information, there are some cloud based companies available as well. Bench.co is offering these services for a very reasonable fee. All you do is upload your information and they take care of the rest. Check out their free trail here!
Don’t let your company become a statistic, learn the language of money in order for your business to prosper. Ask me questions in our Facebook group here!
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