Small businesses have many strengths but keeping good books and accurate records generally aren’t one of them.
The small business owner usually does not have accounting training and the business seems to run quite well without formalized records. As long as the owner keeps track of invoices, who has paid and who has to be paid, he thinks everything will be OK. He is usually right but he could do a lot better than just OK!
Here are three reasons why a business owner should know about basic accounting principles, even if he has a bookkeeper and an accountant to do the day-to-day work:
- He will have a better picture of how his business is operating and will have a basis for comparison with other businesses;
- He will be able to make informed decisions regarding accounting questions which may have a considerable effect on his taxes and the value of his business;
- He will have to present his books when dealing with bankers, investors or people wanting to buy his business.
The Netscape Business Center gives you accounting basics without a lot of dry, uninteresting text. It takes you through:
– journals, which are your daily records of all your transactions, from the French “jour” meaning “day”;
– general ledger, where your transactions are posted and organized by the type of transaction, say “sales” or “office expenses”;
– trial balance, where, if your debits and credits don’t match, you can track down errors;
– and your financial statements which give a picture of your company.
Along the way, the site explains why most small businesses start off operating on a “cash” basis, which means that they record income when they receive a cheque and expenses when they pay the bill.
As they grow, they often change to operating on an accrual basis, which means they record income when they make a sale regardless of when they get paid and they record an expense when the bill comes, no matter when the check is sent and cashed. This is the kind of decision that your accountant will make for you but which you, as an informed owner, should be making and which can have a tremendous effect on some kinds of business.
So, here’s another thing, among hundreds, that the small business owner needs to know and doesn’t have time to learn. Basically, it comes down to pay-back. Picking up a few accounting principles will give you good value for running your business. Use the time you’ll save by not having to worry about what your accountant is up to over the next year.