The importance of small business accounting
By Jamillah Lodge and Colina Outerbridge
Have you heard the saying, if it doesn’t make money it doesn’t make sense? I don’t know who said it, but when it comes to business, no statement could be truer. Most people who start businesses do so with the plan to make money.
How do you know if your business is profitable? The average person will say it’s because they have sales and focus on the amount of revenue that is being made from the sale of their products and services. But what are the costs associated with making the sales or costs of goods sold a.k.a. COGS?
The COGS is an accounting term that helps a business owner to determine their costs of delivering a product or service and consequently what they should be charging their customer for the product or service to ensure that they are making a profit.
When you talk about COGS, you are referring to small business accounting. For most entrepreneurs, the idea of accounting is a daunting task, and some entrepreneurs that we work with at the Bermuda Economic Development Corporation (BEDC) avoid it like the plague. But without proper accounting procedures how can you be sure that you are running a profitable business.
There are some fundamental accounting terms and statements that business owners need to understand.
Cost of Goods Sold are the direct cost attributable to the production of goods and services sold by the company, i.e. direct material, direct labour or purchase price of the merchandise.
Accounts Receivables is money which is owed to a company by a customer for products and services provided on credit. This is often treated as a current asset on a balance sheet.
An Income Statement is a report that shows the flow of revenues and expenses over a given period, typically a month, quarter or a year. It highlights management’s performance as reflected in the profitability of a business. It not only itemises the revenues and expenses of the past that led to the current profit or loss, but it also indicates what may be done to improve the results.
A Balance Sheet is a status report that shows information about the company’s resources at one given time. It is a financial statement that summarises a company’s assets, liabilities and shareholders’ equity. These three balance sheet segments give investors an idea as to what the company owns and owes as well as the amount invested by shareholders.
A Cash Flow Statement as the name suggests, is a flow statement that details the movement of cash through the company over a specified period. And a Cash Flow Forecast is a financial instrument used to plan how much money a company expects to receive and spend over a particular period.
Understanding these basic accounting principles can be the difference between success and failure. BEDC can assist entrepreneurs to learn the basics with our Financial Planning courses Part 1 and Part 2 which focuses on the utilisation of QuickBooks software to manage accounts. Once you understand the basics, we encourage business owners to hire an accountant or bookkeeper to assist with maintaining their accounts. While the cost of hiring certified accountants or Audit firms can be expensive, there are entrepreneurs who provide accounting services at better rates. BEDC has a list of Financial Service Providers that can help you to select the best fit for your business. You can log on to the small business toolbox on our website at www.bedc.bm to access the list and other helpful information.
Accountants can assist entrepreneurs with business planning and growth projections. Accountants use the numbers to forecast growth by analysing historical data and sales to help entrepreneurs manage revenue, spending and investment. Most financial institutions, investors and business partners will require financial statements to be able to access the health of a business. By having a grasp of the numbers early on in your business, you position yourself for the best chance at success. In the end, it will ensure that you make money because if it doesn’t make money, it doesn’t make sense.