Know Your Numbers!
Business owners wear lots of hats. At minimum they must understand marketing, sales, hiring and firing staff, operations, accounting and strategic planning. It is very easy to get absorbed in the day-to-day activities and avoid studying the numbers that accurately reflect progress or decline in the business.
Owners do not need to be financial experts, but they should understand management accounting concepts and know how to use the data to make informed decisions. Also hiring a book keeper and tax accountant creates more time for the owner to concentrate on other areas of the business.
Have you ever asked: How should I set my prices? How much can I afford to pay an employee? What is my break-even point and profit margin?
Understanding accounting lingo and concepts and analysing financial statements to make decisions is not hard, but it requires a desire to learn. Taking a proactive approach to accounting helps steer the ship in the right direction and avoid collisions or major catastrophes.
Let’s review a few important accounting terms and definitions:
Accounts Payable: This is the liability created when purchasing goods or services on credit and/or the amount you owe a vendor.
Accounts Receivable: This is the money your customers owe you because you extended them credit or you have completed the work but you have not yet been paid.
Assets: Resources that will provide current and future benefits to the business, such as cash, accounts receivable, inventory, property, equipment and other investments.
Liabilities: Total liabilities are the current and long-term debts the business must pay.
Break-Even: The point at which a business’ total revenue and total expenses are equal.
Gross Profit: Sales minus Cost of Goods Sold (such as labor and materials)
Sales – Cost of Goods Sold = GROSS Profit
Net Profit: Sales minus Cost of Goods Sold minus Indirect Costs (such as administrative and operating expenses)
Sales - All Expenses = NET Profit
To get your Gross Profit Margin Ratio or Net Profit Margin Ratio, take your Gross Profit or Net Profit dollar amount and divide it by your Sales dollar amount. This will give you a percentage.
Business owners beware of the old adage, “failing to plan, is a plan for failure!” Creating a budget and comparing actual vs. budget on a monthly basis, helps gauge where the business is and where it is headed. A budget is the roadmap in business.
Whether this has been a reminder of some basic management accounting concepts or if this subject matter is new, ask your bookkeeper and accountant more questions; read more articles and books; attend a workshop, enroll in a training course or work with a business coach. Never stop learning! Understanding and implementing basic management accounting concepts will help you make creative, informed decisions and ensure the growth of a profitable business.
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