I know small business owners that are great at selling their products and services and winning over customers but they would probably flunk a basic bookkeeping course.
If, as a small business owner, you do not understand your own company’s books, measuring the actual profitability of your company is difficult and there is potential for a cash flow crisis.
Here are the most common types of bookkeeping accounts that a small business owner should know and track:
Cash. I recommend reconciling your cash accounts on a daily or weekly basis depending on your account activity.
Accounts Receivable. This is money owed to you from customers. Reviewing it regularly and keeping it up to date is critical for cash flow. There is nothing worse for your cash flow than finding out 30 days later that a customer didn’t receive an invoice when you were relying on their payment to fund your payroll.
Inventory. Unsold inventory is just like money sitting on a shelf. It should be treated just like cash. Do a periodic testing of the book number compared to a physical count. Consider selling slow-moving or obsolete inventory at a discount or even a loss so you can turn it into cash.
Accounts Payable. This is the money you owe to vendors. You don’t like to see your money leave the business but it’s a little less painful if you can see exactly everything that you owe. Good bookkeeping helps you to make timely payments and, more importantly, not pay anyone twice. Just like with your personal finances, paying bills on time can help you create a good credit rating. Paying early can qualify your business for discounts.
Payroll Expenses. This is a big cost for a lot of businesses. Compare your headcount and payroll expense to prior months and to prior years to make sure it is in line. Payroll costs can balloon quickly if you aren’t monitoring overtime and raises. As I wrote in another post, you are responsible for making sure your payroll taxes are paid and you can get into serious trouble if they are not.
Owners’ Equity. This is an important account if your company has multiple owners. Basically, it tracks the amount of capital each owner has invested into the small business or has withdrawn from the small business.
Retained Earnings. Retained Earnings is a cumulative account of your company’s profits or losses that are reinvested in the business and are not paid out to the owners. It is an important account for investors and lenders who want to track the profitability of the company over time.
If you are a small business owner just starting out and don’t know anything about bookkeeping, I recommend that you hire an accountant to help you setup your books and train you on how to enter transactions. You can also have the accountant review your books monthly or quarterly to make sure you have entered everything correctly. If you understand and make effective use of your financial data, bookkeeping can help you operate your business more effectively.