Small Business Owners: Accounting Is for Profit Planning, Not Just Tax Preparation

One might be led to believe that profit is the main objective in a business but in reality it is the cash flowing in and out of a business which keeps the doors open. The concept of profit is somewhat narrow and only looks at expenses and income at a certain point ZenBusiness  in time. Cash flow, on the other hand, is more dynamic in the sense that it is concerned with the movement of money in and out of a business. It is concerned with the time at which the movement of the money takes place. Profits do not necessarily coincide with their associated cash inflows and outflows. The net result is that cash receipts often lag cash payments and while profits may be reported, the business may experience a short-term cash shortage. For this reason, it is essential to forecast cash flows as well as project likely profits. In these terms, it is important to know how to convert your accrual profit to your cash flow profit. You need to be able to maintain enough cash on hand to run the business, but not so much as to forfeit possible earnings from other uses.

Why accounting is needed

Help you to operate better as a business owner

  1. Make timely decisions
    • Know when to hire a team of employees
    • Know how to price your products
    • Know how to label your expense items
    • Helps you to determine whether to expand or not
    • Helps with operations projected costs
  2. Stop Fraud and Theft
    • Control the biggest problem is internal theft
    • Reconcile your books and inventory control of equipment
  3. Raising Capital (help you to explain financials to stakeholders)
    • Loans
    • Investors

What are the Best Practices in Accounting for Small Businesses to address your common ‘pain points’?

    1. Hire or consult with CPA or accountant
      1. What is the best way and how often to contact
      2. What experience do you have in my industry?
      3. Identify what is my break-even point?
      4. Can the accountant assess the overall value of my business
      5. Can you help me grow my business with profit planning techniques
      6. How can you help me to prepare for tax season
      7. What are some special considerations for my particular industry?

 

To succeed, your company must be profitable. All your business objectives boil down to this one simple fact. But turning a profit is easier said than done. In order to boost your bottom line, you need to know what’s going on financially at all times. You also need to be committed to tracking and understanding your KPIs.

What are the common Profitability Metrics to Track in Business — key performance indicators (KPI)

Whether you decide to hire an expert or do it yourself, there are some metrics that you should absolutely need to keep tabs on at all times:

  • Outstanding Accounts Payable: Outstanding accounts payable (A/P) shows the balance of cash you currently owe to your suppliers.
  • Average Cash Burn: Average cash burn is the rate at which your business’ cash balance is going down on average each month over a specified time period. A negative burn is a good sign because it indicates your business is generating cash and growing its cash reserves.
  • Cash Runaway: If your business is operating at a loss, cash runway helps you estimate how many months you can continue before your business exhausts its cash reserves. Similar to your cash burn, a negative runway is a good sign that your business is growing its cash reserves.
  • Gross Margin: Gross margin is a percentage that demonstrates the total revenue of your business after subtracting the costs associated with creating and selling your business’ products. It is a helpful metric to identify how your revenue compares to your costs, allowing you to make changes accordingly.
  • Customer Acquisition Cost: By knowing how much you spend on average to acquire a new customer, you can tell exactly how many customers you need to generate a profit.
  • Customer Lifetime Value: You need to know your LTV so that you can predict your future revenues and estimate the total number of customers you need to grow your profits.
  • Break-Even Point:How much do I need to generate in sales for my company to make a profit?Knowing this number will show you what you need to do to turn a profit (e.g., acquire more customers, increase prices, or lower operating expenses).
  • Net Profit: This is the single most important number you need to know for your business to be a financial success. If you aren’t making a profit, your company isn’t going to survive for long.
  • Total revenues comparison with last year/last month. By tracking and comparing your total revenues over time, you’ll be able to make sound business decisions and set better financial goals.
  • Average revenue per employee. It’s important to know this number so that you can set realistic productivity goals and recognize ways to streamline your business operations.

The following checklist lays out a recommended timeline to take care of the accounting functions that will keep you attuned to the operations of your business and streamline your tax preparation. The accuracy and timeliness of the numbers entered will affect the key performance indicators that drive business decisions that need to be made, on a daily, monthly and annual basis towards profits.