As a small business grows, it should move from simple bookkeeping to more comprehensive accounting practices that help in the strategic growth of the company. Bookkeeping makes a record of what your numbers are, while accounting helps tell you what they mean. Accounting and finance practices can help you understand what’s happening at your company and give you ideas for how and where to move forward.
A business budget should be more than a list of projected income and expenses. A comprehensive master budget starts with income and expense projections, then creates different reports to help you operate. For example, cash flow statements show you when your income arrives rather than when it’s generated. This helps you avoid being caught short when you have bills to pay. A flexible budget ties your spending to income, rather than using projections. This helps you spend only what you have, rather than what you projected you’d have.
Effective accounting helps you understand what it costs to make and sell your product in ways that let you see how different sales volumes will affect your profit margins. The first step is to divide your expenses into overhead and production costs. Your production costs might remain fairly constant if you sell the same product over and over. Your overhead costs, which include expenses such as insurance, marketing, utilities and office rent, should decrease per unit as you sell more units, allowing you to lower your prices to increase your volume and market share.
If you simply look at your sales totals and see your revenue is increasing, you might not understand that you’re actually not maximizing your revenues. A finance department or manager will break down your sales by profit margin to help you determine if you should be dropping one or more products that aren’t contributing much profit, or if you can raise prices and increase your profits. If your accounting personnel see constant or growing sales but shrinking profit margins, they will look to see if overhead or production costs are the problem.
Your accountant should keep an eye on your debt to ensure that you don’t unnecessarily rack up increasing interest by paying only minimal payments when you have excess cash that could help you avoid this. Your finance department should also keep track of your credit reports and scores to ensure that you don’t damage your ability to get the best loans and credit interest rates possible.
When you sell to wholesalers, retailers or other intermediaries, you might need to offer credit terms to allow your partners to sell your products before they pay you. Offering 90-day credit terms when your suppliers are giving you 30-day terms can cost you more interest and cause cash flow problems that can stop your production. Your finance department will analyze what credit terms you can reasonably offer, age your receivables to help you avoid continually floating deadbeat customers, or determine that you’ll have to cut one or more slow-paying customers some slack because the profits they generate are more than their delayed payments cost you.
Your finance department is responsible for keeping accurate records and preparing your year-end financials for your tax preparer. In the event of an audit by the Internal Revenue Service, your finance team will help provide and verify your numbers, answering any questions the auditor has. Your finance team will also help you meet state and federal filing responsibilities for payroll, workers’ compensation and income tax reporting.