Here are five basic accounting skills and concepts every small business owner should have in their repertoire:
Understanding the difference between fixed and variable expenses is essential for planning the budget and maximizing profit. Fixed expenses are expenditures that remain consistent at all times, such as office rent and employee salaries.
On the other hand, variable expenses change based on factors such as sales. For example, the cost of replenishing your inventory may be higher after a month of solid sales, as you naturally need to order more product than usual. Also, you may have to pay more for sales commissions and bonuses.
Understanding how these expenses fluctuate helps you to determine which resources are being used effectively, and which could be used better. It also helps you to plan ahead, as you can use past performances to accurately forecast what similar months will require as far as expenditures.
Your company’s cash flow determines the amount of money moving in and out of your business. It’s easy to confuse your cash flow with your revenue, but the two are different. Your revenue is based on sales, but your cash flow is based on the acquisition of payments.
In order to help your company expand, you need to have enough cash on hand and ready to go. Understanding your company’s cash flow figures helps you to make important decisions and policies on inventory management, invoicing, collections, and making payments.
Although you don’t necessarily need to know the ins and outs of your books, you should at least be able to check and add to them. After all, you don’t want to waste time going through the accounting department when you need to do something like recording a basic company expense. Understanding how to operate your books also helps to prevent and detect an internal error and even fraud.
While it may be tempting to assume that your accountant is going to handle the taxation side of things, as the owner of the business, any tax blunders fall squarely on your shoulders. Not only are auditing incredibly stressful and time-consuming, but tax mistakes can result in steeps fines and even legal ramifications in some cases.
Do your due diligence, and make sure you’re aware of any small business tax regulations associated with your industry, where your business is located, and any other factors that affect how you file. You may even find out about some deductions that could save you money. It’s your livelihood and permanent record at stake, so don’t leave anything up to chance.
Your employees are the heart and soul of your business. They’re your most essential resource, so it simply stands to reason that you would have a hand in payroll. You should be aware of how much money each team member is making so you can make sure they’re being compensated fairly and that you're getting your money’s worth.
Staying in the loop on how many hours employees are working, bonuses they’re earning, raise they’re getting, and other payroll factors helps to keep morale and employee retention rates up. Being involved and informed shows that you care about their well-being and happiness, and it lets you make changes as needed based on long-term context.
Additionally, you never know when you may need to cut checks if the accountant quits or even calls out sick. When it comes to something as important as your team’s pay, you should never have to rely on one person.
As you can see, accounting isn’t just for accountants. Fortunately, learning these critical accounting concepts is easy these days. You can learn accounting basics online right from the comfort of your office or home. Once you have a firm grasp on the core concepts of accounting, you can run all aspects of your small business more efficiently, so don’t wait. Lay the groundwork for success by learning essential accounting principles today.