Whether the business is a medium-sized one or a small tech startup, owners often find it tough to handle calculations, accounting strategies, and financial terms. No matter if the company has an in-house accounting team or outsources the work, having a basic understanding of accounting and finance is crucial for every entrepreneur. Stakeholders with financial insight and knowledge of relevant accounting processes can make smarter decisions. They can have meaningful conversations with finance professionals in the company. Let’s take a quick look at some of the most significant finance and accounting aspects for small businesses.
What’s small business accounting?
Accounting activities help track the in-flow and out-flow of money from the company, including sales, purchases, payments, and liabilities. It involves bookkeeping, creating financial reports, filing taxes, and activities that help track the organization’s health.
Financial management in a business
Financial management for small businesses involves controlling, organizing, and planning economic activities in the company.
Ensuring adequate working capital, controlling cash flow, identifying non-performing areas of business, creating various financial reports, etc. are some of the objectives behind financial management.
There is a thin line between accounting and financial management activities. Data retrieved from both assists managers in gauging the performance of the business.
Spotting problems in math at an early stage can help decision-makers in making informed decisions. The firm’s management can use cash flow statements, balance sheets, and income statements to get a clear picture of its finances.
Balance sheets include details concerning the firm’s assets (including inventory valuation), liabilities, and owner’s equity information. Trial balance statements can play a crucial role in detecting posted journal errors as it helps in analyzing debits and credits to ensure they are equal.
Taking a look at bank statements can help in solving the money management puzzle. Financial analysts working for small and large firms perform weekly bank reconciliations to track errors and make corrections before the problem becomes more extensive.
Analysts at most of the companies prefer looking at numbers for year-to-date or fiscal year numbers. Some also prefer analyzing reports for 12 months from the time the organization starts generating reports.
When it comes to financial reports, special year-end reports, including year-end profit and loss analysis, help plan appropriately for the next year.
Unfortunately, entrepreneurs with a non-accounting background often underestimate the significance of generating and analyzing statements, reports. They do not have a dedicated staff for managing accounting and finance activities. And, often indulge in the last-minute rush, just before filing taxes or approaching new investors. For such small businesses, working with firms that provide accounting outsourcing services can be the best option. A virtual accounting service provider like FinAccGlobal can help in taking care of all the finance and accounting tasks.
Tracking expenses and revenue
Small businesses often fail to reach the break-even point during the initial stages as their revenue remains far lesser than expenses. Implementing cost-cutting measures becomes vital for survival. Thus, entrepreneurs should keep an eye on costs and income every month.
Keeping track of arrears account balance can help understand how much the business owes in various bills and debts. The accounts payable stats give an idea regarding upcoming payments.
On the other hand, the operating cash flow shows the tally for funds generated by the business through various activities. Another crucial calculation that every business owner needs to focus on is the free cash flow. It is the amount that the firm generates after paying all the bills.
Tracking assets and debts
Assets consist of everything that has a value, including contra assets with zero value on the firm’s balance sheet or intangible assets that do not have a physical form. Business owners should be familiarized with these assets and calculations, like assets to sales conversion ratio and asset turnover.
If the business has debts, the owner needs to be familiar with a few other calculations. The first is the debt ratio that compares the overall debt with assets owned by the company. It helps in understanding how much the firm depends on debt to cover on-going costs.
The organization’s ability to repay debts reflects in Times Interest Earned (TIE) calculation. The TIE can be calculated with the help of EBITDA or EBIT. Companies that struggle with debt often end up with insolvency or bankruptcy.
At times, firms need to be ready to raise funds with a longer repayment term. Decisions like selling non-essential assets or finding new investors or business associates may also need to be considered. Thus, entrepreneurs should always have little-bit knowledge about debt and equity financing.
Equity financing involves selling a certain percentage of the company to the investor in exchange for money. The new stakeholder or silent partner gets the authority to have a say in day-to-day operations.
On the other hand, debt financing involves banks and financial institutions that lend money to the business in exchange for interest. Repayment needs to be paid in monthly installments.
Funds can be arranged only if finance and accounting math is in place. Thus, business owners should always keep updated documents like balance sheets, profit and loss statements, cash flow statements, and break-even analysis.