The importance of keeping accounting records- The basics!!
When it comes to small business accounting, most people know that it is important to keep your records updated for taxes. However, there are many more benefits from small business accounting that you can use to grow, improve, and expand your business. Here are some of the most important accounting reports for your small business that you should know about.
Profit and loss statement/income statement
The most important report for any business is the profit and loss statement, also called a P&L or income statement. This report tells you how much money a business makes, and a lot more. A well-run bookkeeping operation includes details for where you spend and where your money comes from. For example, I can look at the Bow Bells Accounting Services for a quick summary of how much we make from the accounting services we offer, how much we spend on advertising, how much we spend on business travel, and how much we pay for computer and internet costs. Each business would have different accounts for its own income and spending categories.
Small business owners should look at this report at least monthly. This should tell you what is working well, what isn’t, and help you focus on the most profitable parts of the business.
Balance sheet (Statement of financial position)
A balance sheet gives you a snapshot of what a business has(assets) and what it owes (liabilities)at any given point time. For small businesses, assets typically include things like bank accounts, accounts receivables, and possibly an investment account. A balance sheet may also include assets like property, computers, equipment, and other saleable physical and intangible property. Liabilities generally include things like credit cards, business loans, and anything else your business owes.
The accounting equation is based on the balance sheet. It tells us that Assets + Liabilities = Equity. The difference in what you have and what you owe should ideally be a positive number and one that grows over time, this simply means that your business is profitable
When examining the balance sheet, also look at the short-term assets versus short-term liabilities. If you have payments owed soon, you don’t want to run out of cash without noticing that your assets are illiquid.
Accounts receivable aging
You do not work for free, and your business is not a charity. Doing the work and sending the invoice is just part of the process. You must make sure those invoices get paid. Your accounts receivable (A/R) aging report tells you how well you are doing on the collections side. Look out for customers who always pay late, customers who usually pay on time and those who recently started paying late. At Bow Bells Accounting Services, we have been very fortunate when it comes to collections, but part of that is having a payment policy. We have a policy to have 50% paid before we provide the service and the remaining 50% to be paid prior to delivery of work.
Revenue by customer
Just as you should be looking at who owes you money, you should be looking at who gives you the most of it. Your revenue by customer report tells you how much you made from each customer over a period time. Professional service businesses like ourselves rely heavily on repeat business. Building good relationships with quality clients can turn in to a lucrative, reliable, and healthy income stream.
However, beware of putting too much faith in one income source. If too much revenue comes from one source, that is called “revenue concentration risk.” If the exit of one client leads to financial instability of your business, you need to get more diverse in who your business serves. Putting too many eggs in one basket might bankrupt your company.
Accounts payable aging
You probably would not like it if a company took too long to pay you. Pay your suppliers on time as well. A Simple principle “do unto others as you would like them to do unto you”. This will also strengthen your relationship with them. Your A/P (accounts Payable) aging report tells you who you owe and how much. If your books are updated, you can easily look and find who you need to pay so you do not miss the due dates.
Paying late can sour relationships and may lead to late fees and other costs. Just pay on time. You might even get an early payment discount from some vendors. That is a big win!
If you need any accounting or tax related services, kindly contact us:
Bow Bells Accounting Services
rodger@bowbellsaccounting.co.za
083 251 0513