Business owners often get absorbed in the service delivery aspect of their business and neglect the day to day financial management. While service delivery is paramount, an active understanding of the company’s books provides the best insight into the real success of a business; the bottom line.
Know the terms
Balance sheets, gross profit percentage, solvency ratios: what do all these mean? It can be daunting but it is essential for business owners to be familiar with financial terminology in order to decipher their own books.
Three of the most important terms to know are:
Understand the basics
We all know that cash is king so understanding cash flow is vital for any business owner.
It’s also important to get to grips with the financial statements. These consist of the income statement and balance sheet. The income statement is a yearly consolidation of day-to-day cash flow which includes all expenses and income and companies are required by law to produce these annually. The balance sheet records all assets and capital, which is used to measure your solvency.
It’s generally too time consuming for the owner to record all of this information in the books so it’s worth considering outsourcing these tasks to a professional book keeper. But even if the function is outsourced, business owners must have some understanding of what is going on in the finances of their business.
Your accountant is your friend
The ideal situation is to have an accountant who will take the time to explain these concepts and how they relate to the business. Hire an accountant who is willing to interpret the results and then train you to understand them.
It also helps to know enough so that you can monitor your book keeper and make sure that the job is being done correctly. There is a real danger of your books being defrauded and an owner who does not understand the books is an easy target for fraud. Test your book keeper's transparency by allowing someone else to take their place while they are on holiday or taking time off.
Create an accounting cycle
Accounting cycles are vital to ensure that you get timely and accurate information. Set aside a specific date of each month when you can go over the book keeping with your accountant. You also need to have an orderly way of organising what goes into the books. Presenting your accountant with a box full of invoice slips will only lengthen the process. Ideally the financial statements used in your monthly meeting with your accountant shouldn’t be more than a few weeks old.
Crucial data from stock-takes also need to be gathered in time and it is important to set aside a monthly date to send out all invoices and to contact debtors.
The rule of thumb is not to neglect your accounting processes until the year end crunch when you urgently need to file your tax or collect your debts. It’s worth spending a bit of time on your books every day, or at least once a week. Of course having the right business systems goes a long way in making these jobs easier. Because book keeping and accounting software automates most processes, your accounting cycles can be completed by simply pushing a button.
Evaluate your cost-effectiveness
As your business grows it may become necessary to hire your own in-house accountant when outsourcing these tasks becomes too expensive. A full time accountant is costly so it is recommended to have staff to capture the data and to only bring your accountant in to analyse the statements and check the accuracy of the books.
Invest in technology
Whether your data is captured internally or via an outsourced provider, an accounting package such as those developed by Pastel Accounting will make your entire accounting process a lot easier. Pastel’s programs are the most used in South Africa and they offer a comprehensive range of accounting software, from online do-it-yourself programs like My Business Online through to the fully fledged ERP solution, Pastel Evolution.
Your choice also depends on certain functions and modules, such as whether your business needs a stock-control system or if multiple users will work on it at the same time.
Don’t take the decision without the help of a good accountant.