If you run your own business or have a decision-making role in any organization, it pays to have an understanding of a few fundamental concepts that underline the practice of balancing the books. This applies even if you think your job has little to do with finance itself because ultimately everything in the commercial sector comes down to the issue of money.
Of course, you do not need to become a certified public accountant to improve your comprehension of this topic, even if it may be useful to take a look at the courses available and consider if a CPA qualification is right for you. With that in mind, here are some basic accounting principles to get you started and hopefully ignite your interest to fuel further investigation.
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Getting To Know Cash Flow
Cash is the lifeblood of any business, as without it you will not be able to operate successfully, fund new innovations, pay employees and stimulate growth over time.
One mistake that newcomers to the world of business make is equating sales with cash flow, but there is a significant disconnect here. Your sales may be through the roof, but unless you’ve actually managed to take payment for the goods and services that you have provided to customers, you could face a cash flow crisis.
Managing your cash flow means making sure that payments are collected on schedule, while also managing things like your product inventory and making sure that any bills your organization has to foot are also dealt with in a way that never leaves you struggling to make ends meet.
It’s also vital to have an understanding of your burn-rate, particularly if you’re a startup and you have a specific amount of funds at hand. Here’s a simple burn rate calculation
Expenses Explained
To get a handle on your cash flow, you need to know where your business expenses lie. This is complicated by the fact that some costs will be fixed, while others will vary from month to month.
Expenses which are set in stone and easy to predict over time are those relating to things like the cost of renting the premises you occupy, the utilities payments needed to keep the lights on and the salaries drawn by employees.
There are a number of examples of variable expenses that you will need to factor in when managing your business, including the number of sales you make and any commission that is payable for these transactions, as well as the number of items in your inventory and the costs of storing and replacing these resources.
In general, it is better to keep your fixed expenses to a minimum, since while they are predictable, you will be in a better position to secure growth if you have more variable expenses available to manipulate to your advantage.
A Balanced Approach
There are many reasons to stay abreast of accounting issues and get to know your obligations as a business owner, not least because it can help you avoid IRS penalties for improper conduct and general negligence.
As a result, it is worth familiarizing yourself with the tenets of double-entry accounting. This is a practice that underpins most business book-balancing and basically means that for every debited transaction your business makes, an equal and opposite credited transaction will also be recorded to offset this.
Pursuing this type of financial equilibrium has been commonplace for centuries and is just as relevant as a tool today as it was when it was first invented. Consulting with a certified accountant or receiving training yourself will help you master this and many other principles.
