Just the word – accounting – sends shivers down many spins. But if you run a business, this is the part that will show you, sometimes mercilessly, the state of your affairs.
You are not expected to be an accountant. Really. But you are expected to have one that knows what he/she does. You have to know some basic accounting words, and what to ask of the accountant you’re thinking of hiring to make an order in your affairs.
“One of the biggest mistakes small business owners make just out of the gate is not managing the back office correctly,” Charles Capers, a business adviser with the University of Houston Small Business Development Center is quoted saying. “Doing their books, income statement, balance sheets, cash flow statement … Who’s going to make sure that’s being done quickly and correctly?”
Here are some small business accounting basic terms:
Profit and Loss Statement – This one shows how much came in, in the statement’s period, and how much was spent on costs and expenses. This statement provides information about a business’s ability – or lack of – to generate income. It also provides a snapshot of the possible actions; increasing revenue, reducing costs or both.
Balance Sheet – This statement shows your assets, liabilities and capital. A company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (capital).
Cash flow Statement (CFS) – Where is the money coming from and where it is going to. It’s different from the previous two by not including future incoming and outgoing amounts like credits. Cash flow is not the same as net income on the income statement and balance sheet.
Cash Method – expenses are recorded when you actually receive them and expenses are recorded when you actually pay them. For example, if you make the sale in December and don’t receive the money until January the following year, you will not record it in the cash method.
Accrual Method – That is a method where expenses and revenues are recorded at the time if the actual transaction.
Questions to ask an accountant
Has the accountant dealt with companies similar in size? Does he/she understand the industry you’re in?
Who will you be working with? Will you be delegated to someone you haven’t met? The fact the top dog knows his stuff doesn’t mean he runs a tight ship.
How often and in what way should you stay in touch?
What should you be concerned about?
What can you do to make tax season go smoothly?
What things should you consult with the accountant on an ongoing basis? Purchases? Hiring?
What are common mistakes business owners do when working with you?
A good accountant can track your numbers, but a great accountant will provide advice about the tax implications of the way you’ve constructed your business and be able to advise on the different types of tax strategies and tax liabilities. “Your accountant should be able to help you develop an organized, effective cash flow model that allows you to adjust your operations in ways that help you survive shortfalls, as well as improve receivables and manage payables.” Write Entrepreneur magazine.