Keeping Your Eyes on the Books

In teaching Entrepreneurship I often tell my students that they should at least understand the accounting and bookkeeping practices involved in their businesses.  They should be able to speak the language of their accountant or bookkeeper and be able to ask for periodic reports to enable them to review their business’ financial position at any point in time.  The several accounts to be mindful of are the following: 

Cash.  All of the transactions your business has pass through the cash account whether it is for the receipt of collections or the payment of bills.  Some bookkeepers use two journals – cash receipts and cash disbursements – to track activity.

Accounts receivable.  If you are a manufacturer or a service provider and you don’t collect payment immediately, you will generate “receivables”, and you must track them by having your bookkeeper generate an aged receivables report indicating which customers owe you money and how long the bill is outstanding. An effort to collect “old” bills is required to get your money.  Busy businesses generate an accounts receivable report daily.  But it is up to you how often you would want to see this report.  But you should review this report weekly for any potential problem accounts.

Inventory.  Products you have in stock to sell are your “investment” sitting on the shelf and must be carefully accounted for and tracked.  Periodic audits of what you have on the shelves and what you have in your books must be compared and verified.  It is important for you to determine what level of inventory is needed in order to satisfy your customers’ demand to avoid any write-downs of obsolete or damaged inventory.  An analysis of these accounts will help to determine this level.

Accounts payable.  No one likes to pay bills and send money out of the business, but if you have good bookkeeping practices you will have a clear picture of everything if you use your accounts payable feature on your bookkeeping software.  You will have timely payments, and you will not pay anyone twice.  Paying bills early may qualify you for discounts with your vendors.

Purchases.  The purchases account is where you track any raw materials or finished goods you buy for your business.  These work- in- process accounts are part of your inventory account, and they can help you calculate your cost of goods sold, which is subtracted from your sales to find your company’s gross profit. Here you will be able to see if you are paying more for your raw materials and take measures to reduce the costs of them and improve your profit margin.

Payroll expenses.  One of the largest expenses for all companies is the cost of paying employees.  Keep this account up to date for meeting tax and other government reporting requirements.

It is important to note if you cannot hire a bookkeeper that you purchase a good bookkeeping software package, like QuickBooks, to help you organize and track your sales, collections and inventory.

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