Does dealing with your business accounting make you nauseous? Do you avoid looking at your business numbers until you absolutely have to, like at tax time? If so, you could be undermining your company’s financial success. 

The solution: Take the stress out of dealing with your business numbers by getting more familiar with them. Knowing what’s going on with cash flow and profitability can be a stress reliever because at least you’ll always know what’s going on. 

And that gives you a chance to manage issues before they become quicksand canyons that feel impossible to escape.

Know What Your Business Numbers Mean

Having accurate, up-to-date business numbers is Step One for managing your business bookkeeping. 

Step Two is truly understanding those numbers and how each one affects the finances. That knowledge will be crucial to your business success. 

When you fully grasp all the numbers in your business accounts and reporting, you’ll be able to make better decisions for your company. You’ll be able to tell at a glance which products and services are the most profitable, which expenses could be cut back without hurting the business, and how much you can pay yourself without undermining the company cash flow.

Accounting results deliver vital information about your company’s financial health. They offer clear direction for future growth and increased profitability. 

But if your business numbers make you anxious or you’re not sure what you’re looking at, it will be harder to steer your business in the right direction. You could end up making decisions based on what you think and feel rather than based on the numbers, and that can lead to serious financial problems. 

At the end of the day, if you own a business it’s critical to learn how to read and analyze those numbers so you can make the best choices for your business. Even if you decide to have someone else manage the books for you. 

Know the Different Types of Accounts 

In accounting you have accounts (not surprising), which are really just categories to gather all the financial information about a particular item. 

There are six kinds of main accounts:

  1. Assets. These are permanent things the business owns such as chairs, machinery, and cash. Assets typically get separated into two groups based on time: 
    • Current assets are expected to convert into cash within a year. They include things like inventory, accounts receivable (what customers owe you), and cash. 
    • Long-term (or fixed) assets will be used by the company for a long time. These include office furniture, patents, computers, and vehicles.
  2. Liabilities. These are what the business owes, including credit cards and loans. Liabilities also get separated into two time-based groups:
    • Current liabilities are due within one year and include things like vendor invoices and credit card balances. 
    • Long-term liabilities won’t be paid off for at least a year and include bank loans and mortgages.
  3. Equity. This term describes the company ownership, which equals the difference between assets and liabilities. The type of equity depends on business structure. Sole proprietorships have owner’s equity, partnerships have partners’ equity, LLCs have member’s equity, and corporations have shareholders’ equity.
  4. Revenues. These are sales or money the company brings in by selling its products and services in the normal course of business. 
  5. Cost of goods sold (COGS). This describes what the company paid for the products it resells. For example ,if you have a bookstore, it would be the amount you paid the publishers for any books that your store sold. If you bought a book for $10 and then sold it for $20, your COGS would be $10.
  6. Expenses. These are the normal costs of doing business, such as insurance, payroll, rent, and office supplies. It includes things that get used up by the business during the year rather than things the business expects to have long-term.

Each of the main accounts gets broken down into more detailed subaccounts. For example, checking account, office furniture, and accounts receivable (what customers owe you) all fit under the asset umbrella. Things like software & apps, travel, and tax prep fees would all come under expenses. This structure helps organize transactions so you can more easily get a handle on the company finances.

Why Isn’t COGS an Expense?

Cost of goods sold is a type of expense. We just keep it separate from the others for accounting purposes because you can directly connect it to product sales. For example, if you buy books to resell to customers, those same books transform into COGS once they’ve been sold (it’s literally the cost of goods sold). But if you buy books to use internally, like for training employees, those books count as regular expenses because they aren’t being resold.

Know Your Financial Statements

In accounting, there are three key business reports every entrepreneur should be familiar with: a balance sheet, a profit and loss statement (P&L), and a statement of cash flows.

These reports work individually and together to provide important information about your company’s financial health. While many (maybe most) small business owners focus only on their P&L, the other two reports provide valuable data that you can use to improve profitability, cash flow, and sustainable business success.

Balance Sheet

A balance sheet gives you a snapshot of the company’s assets, liabilities, and equity at a specific point in time: the date of the report. It’s formatted in those three main sections, with each broken down into more detail to show you the status of every account. This report shows you what you as the business owner would have left if you liquidated all of the company assets and paid off all the liabilities. Sort of like the company’s net worth.

This report shows you in one glance how much debt the company has, how much cash is available right now, and how much will be coming soon by way of accounts receivable (the amount your customers owe you). 

For an even deeper dive into your company’s progress, you can look at comparative balance sheets from different time periods, like this year and last year.

Profit and Loss Statement

The P&L shows your revenues, COGS, expenses, and profit (or loss) over a period of time. For example, a P&L could cover a month, a quarter, or a year. This report starts with revenues at the top and then deducts COGS to come up with the gross profit (the amount that product sales exceeded the costs of those products to the company).

Next, it includes a detailed list of the company’s operating expenses such as marketing, payroll, office expenses, and insurance. These get totaled up into the “Total Operating Expenses” line (again, no surprise). That total gets subtracted from gross profit to give you the bottom line net profits, also called net income. If it’s negative, your business has a net loss.

Statement of Cash Flows

Also called a cash flow statement, this report breaks down the three different ways money moves into and out of the business:

  1. Operations: Through regular business transactions, revenues in and expenses out.
  2. Borrowing: Loan proceeds coming in and loan payments going out.
  3. Financing: Owners contributing money to the business and pulling money out of it.

With this report, you can follow the path of where the money that’s keeping your business afloat is coming from. In the beginning, you may rely heavily on borrowing and financing activities. But for your business to succeed, eventually most of the cash will need to come from operating activities.

When you have a good sense of the reports and how they work, it will take a lot of the stress out of your business management. You don’t have to become an accounting and reporting expert, but it will help ease a lot of anxiety if you gain a basic understanding of what’s going on with the finances.

What This All Means for Your Business

No one cares more about the success of your business than you do. And to get it where you want to go, you’ll need a grasp on what all of your business numbers and reports mean. That won’t happen overnight, but with a little time and practice you’ll be able to look at the P&L and see your company’s past performance and future possibilities.

But that doesn’t mean you have to do it all on your own. If tracking and processing transactions isn’t your thing, hire a bookkeeper to take care of that for you. If analyzing the reports gives you a headache, have that person walk you through them to help you figure out your best planning moves.

You don’t have to be in this alone. And that’s especially true for the things that make you feel queasy, anxious, or unhappy – because you’re less likely to keep up with them. 

Without the pressure of having to deal with all of your business numbers on your own, you’ll free up space to focus on the parts of your business that you really love. With the financial insights that can keep cash flowing in and profits growing for years to come.

That is what every business owner wants, after all.

Which is why hiring a bookkeeper is a sound financial decision. 

Speaking as a bookkeeper and accountant, I know how relieved my clients are that I take this responsibility off their shoulders and help them see their business numbers clearly every month.

I have helped many businesses grow and thrive over the years. I would love to help you make sense of your business numbers too.

Right now, I have available 2 spaces in my bookkeeping roster for the coming year. 

I expect these to go fast because we’ve been getting a lot of inquiries.  

If you’re interested in one of these spaces, please click on the button below to fill out my contact form. From there, we’ll schedule a free 30-minute consultation to see if we’re a good fit.