Small business owners work long hours — often as much as sixty a week. Ah, but isn’t the moment when they get home and relax a little bit sweet? Light a few candles. Find a comfortable chair. Reach for an accounting book…
Learning more about accounting and finance isn’t appealing at the surface level. Not for someone who barely has time to blink. And yet the benefits are considerable. You don’t need to become a CPA to use this knowledge to your advantage. You, however, need to be able to tackle some things on your own.
In this article, we look at accounting basics every business owner needs to know.
Why Learn it Yourself?
Yeah, why? Isn’t that what accountants are for? Well, for one thing, in the early stages of your business, you may not be able to afford the services of an accountant. It can take several years for a business to become profitable, during which time you will most likely wear many hats. Accountant will probably be one of them.
The other thing: even when you can afford an accountant, they won’t be there to hold your hand through every decision. Certainly, you won’t be able to depend on them for constant help with everyday basic things like budgeting and payroll. Effective business owners need to know how to handle these things themselves.
GE investors circa 2015 were pretty happy. And why not? The multinational, billion-dollar company was reporting high earnings. As an investor, you can’t really ask for better than that. Or so one would think. It turns out, not all of GE’s transactions were above board — a reveal that would unfold dramatically in front of the public eye over the next two years.
The logistics of what happened are a little complicated, but here’s the rub: GE made a very large transaction — something to the tune of several billion dollars — with itself. GE Capital made a transaction with GE Power and passed the money off as new revenue to investors.
The fallout was immediate and punishing. GE reported $6 billion in losses in 2018. CEO Jeff Immelt was ousted, GE had to pay $200 million in fines, and their share prices plummeted by a staggering 75%.
GE is just one of many companies to get put through the public wringer for an accounting “mistake”. Hey, we all forget to properly round eight or nine zeroes from time to time, right?
Obviously, GE got caught making a deliberately shifty decision. However, even with good intentions, you can still find yourself in hot water following an accounting scandal.
GAAP (Generally Accepted Accounting Principles) is a set of guidelines that all publically traded companies are legally required to follow. While we’re willing to bet you aren’t the CEO of Disney, you can still benefit from learning more about GAAP.
These guidelines are ubiquitous for a reason. They add transparency to your business processes and provide consistency and quality to your accounting work.
Modern businesses with even the most basic tech stack will probably have some form of point-of-sale tracking — basically, a ledger that makes it really easy to manage inventory and keep track of income.
Tracking expenses can be a little bit harder because they can come from so many different directions. Order forms, payroll, repairs and maintenance, restocking fees, and so on. Actually, the more attention you pay to the list the more depressingly long it becomes. You’ve still got to do it.
Being able to accurately track expenses is an important part of setting and sticking to a budget. It will also just help you better understand what is going on in your business.
Income statements describe (you guessed it) the amount of money that your business has coming in. Being able to keep track of this information is a simple but also a fundamental part of being in business. Not only is this key for setting and sticking to a budget, but it’s also foundational for developing growth strategies, and setting yourself up right during tax time.
It’s easy to monitor income at a basic level. Your accounting software may have tools available that essentially automate it. However, to be effective you also need to understand how to pair this information with what we talked about in the last heading.
Incoming and outgoing cash exist in a constant push and pull. Understanding accounting basics allows you to take a more objective look at the situation, making it easier to strategize and think long-term.
Know What You Don’t Know
This sounds silly but it’s important. Understanding the basics of accounting not only allows you to tackle some things on your own but it also makes it much easier to understand what you need to pass over to the professionals.
Kind of like a seasoned do-it-yourselfer who knows the light fixture in their family room shouldn’t be flickering but is also sure that electric work plus them equals hospital time.
No matter how good you get with accounting work, chances are you will need to get professional intervention from time to time. The key is to understand what can be done in-house, and what needs to get bounced over to the pros.
Not only will you save money by handling most accounting situations on your own, but you will also get a more intimate understanding of your business. Rather than listening to someone else’s thoughts on your financial future, you can develop an informed understanding for yourself.
And when more complicated situations do arise, you can send it over to the pros. Let them worry about the nitty gritty while you focus on big-picture stuff.
Becoming a Controller
Controllers are business leaders that oversee the financial policies and decisions of a business. If you are running a business of just a few people, chances are that you’re already fulfilling the duties of a controller.
But if you are going to do that work, it’s important that you be qualified for it.
How to Learn More About Accounting
How far you want to go with accounting may determine your next steps. For some business owners, it may be enough to do a lot of high-quality Googling. Find reliable sources, and dedicate a significant time to study until you learn the ropes.
For people that want a more formal education, consider taking classes at your local community college, or enrolling in an online training program.
Knowledge is power, but it’s also important to be realistic. Small business owners are very busy. Take on what you can and leave the rest up to the pros.