Hundreds of thousands of businesses are started each year by creative entrepreneurs with an innovative product or service. Unfortunately, many of these businesses fail. One of the top reasons that startup businesses fail is poor accounting. There are many factors that can lead to poor bookkeeping. Small business owners are generally extremely busy and do not have the time required to complete proper accounting and bookkeeping. Also, many small businesses are understaffed and may not have the funds to hire a full-time accountant. In addition, many small business owners may not have the financial background to evaluate whether the books are being managed accurately. To ensure that the accounting and bookkeeping is being done correctly, there are many basic accounting terms that small business owners should be familiar with.
Sales – this figure tracks the incoming revenue from customers purchasing your product or service.
Cost of goods sold – this is the cost to the firm for developing the good that is being sold to the customer. This is a very important figure as it determines how much profit is being made from each product sold.
Gross Profit – this figure is calculated by subtracting the cost of goods sold from sales. It does not include any other operating expenses.
Fixed expenses – these are the expenses that do not change based on how much your firm’s sales are. These usually include rent, insurance, and non-commission salaries.
Variable expenses – these are the expenses that fluctuate based on the firm’s production. Variable expenses include the cost of goods sold and any other expenses that change as production changes.
Assets – this figure is usually found on a firm’s balance sheet and includes the company’s cash on hand, the value of owned equipment, inventory, and accounts receivables.
Liabilities – this category is found on the firm’s balance sheet and includes all active debt and loans that the company has.
Accounts receivable – this is money that is owed to the firm from customers that have purchased a good or service but have not paid off the entire balance. It is important for all firms that sell on credit to keep track of accounts receivables so they can prepare accurate bills for their customers.
Net profit – this is one of the most important figures for all companies. It is the actual profit for the firm after all expenses have been subtracted from the company’s revenue.
These are just the very basic terms that are found in accounting for businesses. As your business grows and becomes more complex, the firm will need a profit and loss statement, a balance sheet, a statement of cash flows, and a statement of retained earnings. All of these statements allow a company to better understand its financial position and plan for the future.
Small business accounting is critical for any startup business. Inaccurate accounting can lead to running out of cash and preventing company growth.
For many small business owners bookkeeping can become a time-consuming task that can take important time away from serving customers.