Many business owners think of bookkeeping as a necessary evil, but in reality if you make effective use of the data collected, bookkeeping can be your best buddy for managing your cash. The key to taking advantage of what bookkeeping has to offer is understanding the value of basic bookkeeping principles and taking advantage of the information collected.
Charting Your Accounts
You may think that a list of accounts, called the Chart of Accounts, is not a big deal. Well that’s far from the truth. The Chart of Accounts dictates how your financial data will be collected and where your transactions will be put. It’s crucial to define each account carefully and determine exactly what types of transactions will go where in order to be able to use the information collected effectively.
Balancing Your Entries
Keeping your books balanced is the only way to know how your business is doing. You can never know whether your profit numbers are accurate, if your business’ books don’t balance. In bookkeeping, a process called double-entry bookkeeping is used to keep the books balanced.
Posting Your Transactions
In order to be able to use the information regarding your business transactions, they must be posted accurately to your accounts. If you forgot to post a transaction to your books, your reports will not reflect that financial activity. Or, if you post a transaction to your books that is not accurate, your reports using that information will be wrong.
Tracking Customer Collections
If your business sells to customers on store credit, you certainly want to be sure your customers pay for their purchases in the future. Customer account information is collected in the Accounts Receivable account, as well as in individual records for each customer. You should review reports based on customer payment history, called aging reports, on a monthly basis to be sure customers are paying on time. You may want to cut off customers from future purchases if their accounts are past due for 90 days or more. You set the rules for store credit.
Paying Bills Accurately and on Time
If you want to continue getting supplies, products, and services from your vendors and contractors, you must be sure you pay them accurately and on time. You also want to be sure that you don’t pay anyone twice. Payments are managed through the Accounts Payable account. You should review your payment history and be sure your are making timely and accurate payments.
Nothing is more important to a business owner than the profits he will ultimately make. Yet many business owners don’t take the time to plan their profit expectations at the beginning of each year, so they have nothing to use to gauge how well they are doing throughout the year. Take the time to develop profit expectations and a budget that will help you meet the expectations before the year starts. Then develop a series of internal financial reports using the numbers you collect in your bookkeeping system that will help you determine whether or not you are meeting your sales targets and maintaining control over your product costs and operating expenses.
Comparing Budget to Actual Expenses
Keeping a careful watch on how well your budget planning reflects what is actually going on in your business can help you meet your profit goals. Take the time to develop a budget that sets your expectations for the year and then develop internal reports that give you the ability to track how closely your actual expenses match that budget. If you see any major problems, correct them as soon as possible to be sure you’ll be able to meet your target profit at the end of the year.
Comparing Sales Goals to Actual Sales
In addition to watching your expenses, you also need to be sure your actual sales match the sales goals you set at the beginning of the year. Designing an internal report that allows you to track sales goals versus actual sales gives you the ability to monitor how well your business is doing. If you find your actual sales are below expectations, the earlier in the year you correct that problem the better chance you’ll have to meet those year-end goals.
Tracking Cost Trends
It’s important to know what is happening to the costs involved in purchasing the products you sell or the raw materials you use to manufacture your products. These costs trends can have a major impact on whether or not your company will earn the net income you expect. If you find the costs are trending upward, you may need to adjust the prices of the products you sell in order to meet your profit goals.
Making Pricing Decisions
Many factors must be considered when determining what price to charge your customers. You need to consider not only how much you pay to buy the product (or to manufacture the product) you sell, but you also must factor in what you pay your employees as well as other advertising and administrative expenses you incur in order to set a price. You can’t set that price too high though or you may not find any customers willing to buy the product. Properly pricing your product can be a critical factor in determining whether or not your product will sell. While the numbers in your books regarding product costs and operating expenses are not the only factor in making a pricing decision, the information is critical to help you make that decision. You’ll also need market research about what customers will pay for a product in addition to the product cost and operating expense data to set a price.