Start Smart Series – Part 2

Starting a business can be daunting but running the business successfully is the real deal. Running a successful small business starts with the planning stage of deciding what you will sell and where you will locate your business. However, it doesn’t stop there, as everything from your choice of employees to your accounting practices may influence your potential success. If you are smart, you will start right and start smart.

Starting smart begins with understanding “business essentials”, and a major aspect is accounting.

It is said that accounting is the language of business. It simply means that without accounting, no one truly knows what you are doing – even you too. The financial viability of your business is in doubt, business growth cannot be measured, and bankers don’t know if they can take the risk of providing credit to your business. This is aside from the fact that you will lack any probable basis for planning or making major decisions.

Accounting is the process of analyzing and reporting on the financial transactions of a person or an organization. It is therefore an important function of your business.

With a proper accounting system you are able to:

  • understand the financial health of your business

  • save money and reduce wastage

  • secure additional funding/bank loan in the future

  • make plans and achieve long-term goals

  • determine accurately how much tax to pay (without being ripped off by the man)

Small business accounting requires an entrepreneur to learn common accounting terminologies. Let’s take a look at the basic accounting reports that every business owner should prepare and review on a regular basis:

  1. Income Statement

This is also known as the Profit or Loss (P/L) statement. It shows how much you made in revenue, how much you spent, and what your profit or loss is over a specific period of time. Are you making or losing money? Are you spending too much on an expense? The P/L statement will tell you.

  1. Balance sheet

This provides overview of your business financial health. It shows the worth of your business. That is, a summary of your business assets and liabilities. In simple English, it tells you what you own, what you owe and what is left over.

  1. Cash flow statement

This captures how cash flows in and out of your business over a specific period of time. It captures cash flows in three categories: operations, financing and investing. Operations cash flow refers to money flows from normal business operations. Financing cash flows captures cash inflow and outflows from buying or paying off assets and liabilities the business uses for more than a year. While Investing cash flows captures capital inflows and outflows from investors (that is, from the entrepreneur, bankers, other funding parties)

If you desire to run a successful business, it would be beneficial to have an accounting system in place. This would ensure that you are accountable for the success of your business. It will also demonstrate that you are genuinely interested in growing your business. This will show that you are clearly ready for business!