If you are someone who does not like math, don’t let that stop you from handling your business’s accounting. Most modern accounting programs, especially ones from online providers, will do all the calculations for you. All you need to do is enter the amount for the invoice and it will not only calculate that invoice, it will also update all of your critical financial reports.
All you need to do is understand the basic terminology of accounting so you know what everything means. It is important that you regularly review your financial report, both so you get accustom to interpreting them, and so you can identify trends or problems.
There are three major reports you will need to understand and monitor:
Cash Flow Statement
A cash flow statement is the financial report that demonstrates the sources of a company’s cash and how that cash was used over a period of time. This is useful for determining the short-term viability of a company, especially in regards to its ability to manage its expenses. Since the management of cash flow is absolutely necessary for small businesses and it is recommended that an entrepreneur studies their cash flow statement at least once per quarter.
The balance sheet is divided into two parts (liabilities and shareholder’s equity) that must equal each other, or balance each other out. The main formula behind a balance sheet is: Liabilities + Shareholder’s Equity = Assets.
This means the assets (means used to operate the company) are balanced by the company’s financial obligations, accompanied by the equity investment that is brought into the company plus its retained earnings. Essentially, the balance sheet is a quick overview of the company’s financial position at a single point in time.
An income statement (also known as a profit and loss statement) is a summary of a businesses’ profit or loss during any specified period of time. The income statement records all revenues for a business during this given period, as well as the operating expenses for the business to determine whether a profit or loss was achieved.
Regularly monitoring of these three financial reports will give you a clear picture of how your business is doing and whether or not there are opportunities for growth. The meaning behind the figures on these statements can be improved, by cutting back on expenses, and looking for affordable methods of attracting new business. In reality, that is the most basic accounting principle all business owners must understand. There are always ways to increase your income and reduce your costs, but you need to be actively searching for them.
One example of reducing your expenses would be handling your own bookkeeping. It will help you gain a better understanding of your finances, plus you will save money on paying someone else to do it. If you use online accounting software, it will be a matter of basic data entry. Definitely something you can easily squeeze into your day. The more involved you get in your accounting process, the more sense it will make and the better you will be able to use the information to benefit your business.