In teaching entrepreneurship I often tell my students that they should at least understand the
accounting and bookkeeping practices involved in their businesses. They should be able to speak the language of
their accountant or bookkeeper and be able to ask for periodic reports to
enable them to review their business’ financial position at any point in
time. The several accounts to be mindful
of are the following:
Cash. All of the transactions your business has
pass through the cash account whether it is for the receipt of collections or
the payment of bills. Some bookkeepers
use two journals - cash receipts and cash disbursements – to track activity.
Accounts receivable. If you are a manufacturer or a service
provider and you don’t collect payment immediately, you will generate
“receivables”, and you must track them by having your bookkeeper generate an
aged receivables report indicating which customers owe you money and how long
the bill is outstanding. An effort to collect “old” bills is required to get
your money. Busy businesses generate an
accounts receivable report daily. But it
is up to you how often you would want to see this report. But you should review this report weekly for
any potential problem accounts.
Inventory. Products you have in stock to sell are your
“investment” sitting on the shelf and must be carefully accounted for and
tracked. Periodic audits of what you
have on the shelves and what you have in your books must be compared and
verified. It is important for you to
determine what level of inventory is needed in order to satisfy your customers’
demand to avoid any write-downs of obsolete or damaged inventory. An analysis of these accounts will help to
determine this level.
Accounts payable. No one likes to pay bills and send money out
of the business, but if you have good bookkeeping practices you will have a
clear picture of everything if you use your accounts payable feature on your
bookkeeping software. You will have
timely payments, and you will not pay anyone twice. Paying bills early may qualify you for
discounts with your vendors.
Purchases. The purchases account is where you track any
raw materials or finished goods you buy for your business. These work- in- process accounts are part of
your inventory account, and they can help you calculate your cost of goods
sold, which is subtracted from your sales to find your company’s gross profit.
Here you will be able to see if you are paying more for your raw materials and
take measures to reduce the costs of them and improve your profit margin.
Payroll expenses. One of the largest expenses for all companies
is the cost of paying employees. Keep
this account up to date for meeting tax and other government reporting
requirements.
It is important to note if
you cannot hire a bookkeeper that you purchase a good bookkeeping software
package, like QuickBooks, to help you organize and track your sales,
collections and inventory.
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