I am starting to get the feeling that a fair few of you would love a quick lesson in accounting, so here goes!
WHAT IS ACCOUNTING?
The best thing ever. I love it. It's like the language of money, and when you understand it, you become empowered to make better business decisions.
Basically, accounting is the balancing of money. It is the process (or as I like to consider it, the art) of making sure everything has its place and is, well, accounted for.
Without accounting, a lot of things would go missing, very important financial things. Without accounting, it's super easy to lose track of things; just think about what happens in your business each week - money goes into a bank, out of a bank, transferred to cash, spent, received, paid to a supplier, received from a customer, deposited back into the bank and so on.
Can you give me an example?
For sure, let’s look at your bank:
Last year it had a balance of $10,000 and now it has a balance of $50,000. That’s good right?
Well, it’s not bad, but what if you made $1,000,000 in sales… then maybe it doesn’t look as good as it should. Where did all that money go? Without accounting, we have little clarity or confidence.
It could have been paid to employees or suppliers, it could have been invested in shares or new equipment, or it could still be waiting on payment from customers.
WHY DO I CARE ABOUT THIS?
With well kept "books" (i.e. your financial accounts or records) we can quickly and easily make beautiful reports that summarise the position of the business and the business activities over a period of time. The profit or loss statement tells you about what the business has been doing between 2 dates (i.e. what has been sold and what expenses you incurred in that last 6 months). The balance sheet tells you, as at a certain date, what assets you have (cash and who owes you money etc), and what liabilities you have (bills too pay etc).
Sure, accountants love making spreadsheets and reports, but they are actually super useful... when you understand them. The numbers can tell a story. You just need to speak the language of accounting. They help us to understand areas of strength and of weakness, ways to add value and profits, improvement over time, trends in sales (i.e. good months and tough months), and growth opportunities.
DO I HAVE TO DO IT MYSELF?
Hell no! Absolutely not. While it is beneficial to you as the business owner to understand the basics for sure, sometimes this is best left in the hands of an expert, such as your accountant (i.e. me!).
If you ever need help with your financial accounts or want to know how to understand your numbers better I am here to help!