Why review your business accounts?

The bookkeeping records are the mirror that you look into to know how your business is performing Click To Tweet

The ultimate goal of a business is to make money for the entrepreneur. On the way to attaining this goal, there are many things that you must do in your business which includes, producing the service or product, selling, managing your customers and keeping financial records.

Record keeping sometimes referred to as bookkeeping is an integral part of a business and these records are the mirror that you look into to know how your business is performing.
Once you have your records in place, the next important step is to use them to improve your business. This entails pouring through the numbers to understand the patterns and trends that the records reveal.

For you as an entrepreneur, there are two reasons why you want to go over your business accounts;

  1. To check that they are accurate; reviewing your accounts allows you to make sure they give a fair reflection of the state of your business, which will help to highlight any weaknesses and areas for improvement, for example, you will be able to note the missing records, vouch estimates used and even assess how stock is being managed.
  2. To compare performance; when accounts are compared with previous years or with your competitors, they can show unique trends and help you learn from other businesses in a similar position to yours.

Business accounts should be reviewed at least every quarter.

Reviewing your accounts allows you to make sure they give a fair reflection of the state of your business Click To Tweet

What to look out for

There are some important things to look out for when reviewing accounts.

On the income statement check whether the business has made a profit in the year and whether revenue or costs has gone up or down compared with the previous year?

The balance sheet will tell stories about how much money is in the bank. Remember, from the Cash is King article, we discussed why money should be available. The balance sheet will also gauge whether cash levels are moving in line with profit?

On the balance sheet, you will be able to note if the stock level is reasonable and also whether there are any big payments due soon in terms of loan repayment or large invoices. When analysing business accounts, ensure there is nothing that is obviously missing and use ratios to help you to compare and contrast the performances of businesses.

Comparisons can be made internally with past performance or budgeted results or externally with competitors or industry averages. It is good practice for the accounts to be independently reviewed and you can one or more of the following people to do this on your behalf:

  • Any person other than yourself
  • An accountant or
  • An auditor

In our ‘Reviewing Financial Accounts’ guide, you’ll find a section on key ratios for analysing business performance. It will provide you more information on how to go about reviewing your accounts. Download our guide on reviewing financial accounts here.

Bookkeeping for dummies

Bookkeeping is an important skill to have when you're starting your business Click To Tweet

One thing that you quickly learn when you start your business is that you’ll have to handle every aspect of it; from marketing your products, hiring your employees and most importantly getting a handle of your accounts.

It is therefore important that you get a good understanding of the basic set of accounts for any business, how they relate to each other and how the different actions you take are represented in your books. The more your business grows the more complex it becomes and at that point, you might want to consider getting yourself some professional help.

In this Forbes article, the writer talks about what you need to know about the 10% of start-ups that succeed.

One of the things he talks about is making sure you understand the ‘’boring’’ stuff about your business. It is so easy to get carried away by the more interesting aspects of your business and forget to handle the less interesting but many times the most important aspects of your business. One of these is the accounting.

What we are going to do here is to give you a basic introduction to the business accounting concepts that you need to understand as you run your business. Don’t be worried about whether or not you have an accounting degree, these are things you can do with your eyes closed.

Every business transaction is an exchange of one thing for another Click To Tweet

Double entry: All business transactions have a double effect on the accounts

Every business transaction is an exchange of one thing for another. This is the basis of accounting, the idea here is to get an all rounded picture of where your money is going and keep yourself from small mistakes.

As a boutique owner, you sell an outfit (inventory) in exchange for cash. This simple transaction has a double effect of increasing the amount of cash in your business while reducing the count of inventory. Very simply put that is double entry affecting your cash account and your inventory account.

The accounts are interrelated

At this point, we are basically building up on the double entry concept by creating an account for every element of your business. If for example, you did not sell the outfit for cash but for credit, then you’ll want to keep an account of the person to whom you sold the outfit to until you get the money in cash and then close off that account while increasing the amount of actual cash that you have.

Every time you use your cash for something new then create an account for whatever aspect of your business is affected by that transaction. If it is an account that you already opened then you just keep building on that account.

Balance the accounts

You’ve probably heard this phrase before, what it simply means is that after some time you’ll want to know how your accounts look. Say every month or every week when you want to know where your business stands you’ll make sure that for every account you opened both sides have an equal amount.

For example, your inventory account had a balance of $1000 when you started off, every time you sold something that balance reduced. Let us assume that at the end of the month your inventory reduced to $250, you’ll continue selling it off at the beginning of the next month so to balance your account the $250 will simply be considered as inventory carried forward.

Bookkeeping grows more technical as your business grows & there are many apps you can use to do this Click To Tweet

These are the basic accounting ideas that you need to understand. Bookkeeping, of course, grows more technical as your business grows and there are many applications that people employ these days to do this, however, the idea remains the same.

In the next article in this series, we’ll help you understand the important accounts when doing bookkeeping for your business. We’ll talk about differentiating between cash and profit, understanding the incoming statement as well as the balance sheet.