Think back to your youthful days and sitting on the edge of the pool contemplating jumping in the deep end for a minute. Now, replace the swimming pool with your taxes. Not as much fun, but recently we have taken a deep dive into accounting to prepare your small business finances.
There are three essentials to accounting fundamentals:
- Balance Sheet
- Income Statement
- Cash Flow Statement
There are a variety of resources available to find some small business accounting explainers, including Introduction to Accounting presented by the SBA. The 30 minute class hits on the main topics in a clear, concise manner that hits directly on the point of why any business owner needs to understand accounting fundamentals. As the “language of business” accounting enables owners to keep score and produce accurate records, which helps:
- Price Products Accurately
- Understand Cash Flow
- Raise Funds from Bankers and Investors (if applicable)
- Prepare Taxes
In fact, as the SBA presentation indicates:
51% of bankrupt companies have positive income statements, but are cash flow negative.
What does this mean?
Simply, the business is growing and has customers (they are selling goods/services), but the customers are not paying on time (if they offer credit). There accounts receivable (people who own them money) is out of whack and the company does not have enough cash to pay their bills.
As the saying goes: Cash is King.
Every small business is different, so there will never be a one size fits all approach to accounting. The main thing to learn and gain is some perspective. If you understand the basic concepts, then you can have an intelligent conversation with your personal accountant and make sound decisions. You can understand if you have enough cash to meet your obligations. If not, then you can understand what changes to make in order to sustain your business.
Even accountants hate accounting (sample size includes my 7 accountant friends), but it is important to understand your financial foundation in order to run a sustainable business.