Archive for Financial Statements

Two Basic Financial Mistakes Entrepreneurs Make

As an entrepreneur, learning the ins and outs of business accounting or finance is usually pretty low on the priority list. Especially when dealing with the myriad daily challenges of starting and running your own business.

But whether entrepreneurs do their own bookkeeping or hire a bookkeeper to handle tracking their financial records, having a basic understanding of both the Profit & Loss Statement and Balance Sheet is a “must learn” entrepreneurial skill.

To truly understand your business’ financial position, both financial statements need to be looked at together. Simply relying on your accountant or bookkeeper for interpretation is not a way to build your business.

Financial Mistake # 1: Profit and Loss Statement Tunnel Vision

All business owners want to make a profit, so they naturally obsess about their Profit & Loss Statement (P & L). Clearly, Revenue and Expenses are always top of mind with small business owners, but it’s only part of the financial picture.

You ignore your Balance Sheet at your peril.

OK, that sounds kind of dire. But the result of doing so can be serious.

Rarely have I met an entrepreneur who realizes that looking at only the P & L may lead them straight into a cash flow bind…until they are in one.

Business failures caused by serious cash flow problems are all too common. But understanding and properly managing Balance Sheet Assets and Liabilities can help prevent that.

Your Balance Sheet is where your “cash flow warning system” is located. And you can use simple financial ratios to keep an eye out for problems too.

Don’t get me wrong, you still need to focus on profitability, but Accounts Receivable, Accounts Payable, Loans, Inventory and Fixed Asset purchases all affect cash flow. And balances in those accounts show on the Balance Sheet, not on the P & L.

Knowing how to use that information and carefully managing those balances can help avoid some nasty financial surprises, so taking steps to learn how to read both statements is very important.

Financial Mistake #2: Not Understanding the Accounting Method in Use

Or worse yet, mixing them together, which I’ve seen multiple times. There is no way to manage cash flow or know your true bottom line unless you know how your business finances are being “booked” in accounting parlance.

There are two methods of accounting: the Accrual Method and the Cash Method.

They are very different from a financial reporting standpoint and depending on the type and size of your business, one may definitely be better than the other for you. This is something to discuss with your accountant when opening your business.

Generally, I prefer accrual under most circumstances but sometimes the cash method is preferred.


Should You Hire a Bookkeeper?

bookkeeping ledgerThe answer is probably yes – particularly if you don’t have any knowledge of accounting or how to deal with more challenging topics such as payroll taxes. Bookkeeping software can make it deceptively easy to think you are keeping good quality accounting records, but accuracy involves much more than the ability to enter checks and deposits. Cleaning up a badly organized or incorrectly set up file later can be both costly and time consuming; much better to get it off to the right start when you set it up.

Spending the money to hire or outsource quality bookkeeping services is some of the best money you can spend. Not properly accounting for your revenue, expenses and capital expenditures can cost you money in any number of ways, including:

  • missing expenses you can deduct for tax purposes, effectively raising your tax bill
  • not sending invoices and statements out on a timely basis means it will take longer to be paid and negatively impact your cash flow
  • falling behind on the bookkeeping will result in you not having an accurate snapshot of the financial state of your business
  • spending so much time on the details may blind you to the strategic issues for your business – the old “can’t see the forest for the trees” analogy definitely applies here
  • errors with mishandled payroll or sales taxes can result in significant fines and penalties
  • using your time to do bookkeeping probably isn’t the most productive use of your time from a business growth standpoint

Use a good quality bookkeeping software program such as QuickBooks and hire or outsource the task of using it to someone qualified to do so and who understands how to use the program to its best advantage for you. QuickBooks also offers you the opportunity to backup your data online so that you are protected in the event your business suffers a disaster. If you can’t find someone locally, consider the options available on a “virtual” basis from services like Elance. You don’t have to lose control of your data, just provide access to the file for the person providing the service.

And using a bookkeeper will also provide you with someone who can keep all your financial records in good order so that you don’t have to and make it easier to prepare for your taxes at the end of the year. If your books aren’t accurate, you can’t effectively manage your business, so don’t be penny-wise and pound-foolish about this.