Accounting Basics for Small Businesses

Every business no matter how small has to maintain records to know how healthy their business is. If you don’t know where your money came from and how you are spending it, then you don’t have a good understanding of your business. You as a business owner need to maintain business records so you know if you’re making or losing money. These records can help you understand your business better so you can change and adapt your business processes to earn more profit. Conversely, these records may be telling you that it’s time to shut it down or sell it. Maintaining these records is called “Bookkeeping”. This is how most businesses here in the Philippines account for their money. Other methods of maintaining these books are software programs or online web-based programs. I discussed some of these programs in a previous post Online Basics – Free online tools for a small business.

Three fundamental reports help you decide how your business is doing. Where it’s doing well and how to improve the business in certain areas. These reports will be your guide and keep a trend history of your financial failures and successes. Banks will need this information if you are trying to get a small business loan so they can decide how much capability you have in paying them back. These reports will also be required when selling your business because it allows you to put a value on your company and you will be able to project future financial earnings. Now that you understand why we need to account and report everything, here are the basic reports or statements.

1. Income Statement: This is referred to as the P&L or Profit and Loss statement. This report shows all the companies revenues and expenses incurred over a specific period of time. It shows the companies net profit or loss within that specified time. This statement tells an investor or bank exactly where the revenues and expenses came from. This is the most analyzed statement. To show the actual profit or loss of a company, the expenses are subtracted from the revenues to show the Net Income -Profit or the “Bottom Line”. These are analyzed quarterly and yearly.

2. Balance Sheet: This report is a snapshot of a companies assets, liabilities and shareholder’s equity as of a single date.

3. Cash Flow Statement: This report is an analysis of all Cash activities for a specified time period. These statements don’t describe the financial strength of a company. It shows the detail of income and expenses, where it came from and where it went. This will include operations, financing and investment cash flow.

As a business owner, you owe it to yourself and your company to learn how to keep good records. It’s not a child’s game, a business, is not a teen with a pockit prepaid card, it’s much ore complex and evolving than that! You need to know where your business came from and where it’s headed so that you can plan ahead and stay two steps ahead of the game. If you’re not willing to learn, then you need to hire a good accountant to manage your books and advise you of your financial situations. If you’re interested in learning more, you can start here. It’s a free downloadable PDF of Accounting Basics.



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