Small Business Accounting and Finance

One of the most vital aspects of any business whether it is large or small is making sure that really good financial accounting processes are in place. I have been an executive of both small and large companies and can say with out hesitation that having a very firm grip on the accounting and finances of the company is the number one factor in ensuring stability and controlling your destiny. I have seen many companies fail because of poor or sloppy accounting. It is vital that if keeping the books and controlling the finances is not your primary skill, that you get someone that you fully trust that can and will do this religiously.

Below are a 10 basic things that you need to monitor, track, and carefully remain conscious of as you control your finances and accounting in your small business:

1.- What are the company’s liabilities?
Again, on the face of it, this is easy — liabilities are what you owe. But what you owe isn't always as obvious as a bill from the company’s landlord. Payroll taxes are a liability that you might be able to put off on a monthly or quarterly basis, depending on the size of the company’s payroll. Loans are a clear liability, but in repaying them you'll want to be able to track how much of a payment is applied against principal and interest.

2.- What are the company’s assets?
Yes, yes, we all know that assets are the things that a business owns. Tracking the company’s equipment, furniture, real estate and other holdings should be easy.

But to have a true idea of the value of the company’s business, you also have to track changes in the value of those assets. More than one small business has found itself located on a piece of land that's worth more than the business itself. (Yeah, we should all have these problems.) Similarly, you also will want to track the declining value of assets such as computers and office furniture.

3.- What's it costing to make what the company sells?
If you're buying a finished item for resale, this is relatively easy. It's trickier if you have to calculate all the factors, such as labor, that go into manufacturing a product.

4.- What's it costing to market what is sold? Advertising, marketing, labor, storage and the catchall category of overhead — it's useful to know how much it costs you getting a product out the door as well as what it costs you in creating it.

5.- What's the company’s gross profit margin?
This is calculated by dividing the company’s total sales into the company’s gross profit. If the company’s gross profit margin is staying consistent or trending upward, you're probably on track in terms of adjusting the company’s prices appropriately to reflect changes in what you pay for what you sell or produce.

Being able to track a declining margin can give you a heads-up that you must adjust the company’s prices or the company’s costs. In the worst cases, of course, the company’s gross profit and the company’s profit margin disappear altogether. At that point, you'll be like the fellow who lost money on every sale but figured he could make it up in volume. Don't go there.

6.- What's the company’s debt-to-asset ratio?
This ratio can let you know how much of the stuff you have in the company’s company is actually owned by someone else — the company’s lender. Having this ratio climb can be a bad sign — it can happen as part of a major expansion, but it can also indicate that you're getting in over the company’s head.

7.- What's the value of the company’s accounts receivable?
This is the money that you are owed. Value of being able to track it: If accounts receivable are on the rise, you may be getting a warning that the folks you sell to are starting to stumble. That's especially true if the company’s accounts receivable, as a percentage of total sales, are increasing.

8.- What's the company’s average collection time on accounts receivable?
This is probably one of the most aggravating pieces of information for cash-strapped businesses, because it tells you how many days you're acting as "banker" for the people who owe you money. To calculate it, you'll need to know the company’s average daily sales and then divide that number into the company’s accounts receivable.

9.- What are the company’s accounts payable?
The flip side of accounts receivable. An increase in the company’s accounts payable may merely reflect a policy of taking a little longer to pay bills, or of a larger amount of purchases overall. But an increase that hasn't been planned or managed can be an internal warning that the company’s company's financial strength is waning.

10.- What's happening with the company’s inventory?
There are occasions, even in this just-in-time business world, when building up a significant inventory can be a good thing.

If prices for items you sell or use in production are relatively low, putting some of the company’s money into inventory may make sense. Personally, I wish I'd stockpiled an "inventory" of a full tank of home heating oil last spring, when the price was around $1 per gallon.

Being able to track the company’s inventory, and how long it takes to be sold or turn over, can tell you whether business is increasing or slowing down. It also tells you how much money that might be used for other payments or investments is tied up in this unproductive asset.

A special thanks to Joseph Anthony at MSN who provided much of this summary.