It's so tempting for small business owners to just throw all the bills and receipts at their bookkeeper or CPA. While that system can work, we want you to remain in business for many years which requires you to understand what your business's numbers mean even though you can't and shouldn't track every penny.
Here are our 5 basic accounting concepts for every small business owner:
Here are our 5 basic accounting concepts for every small business owner:
1. Net Profit = Sales Revenue - Expenses
This seems so obvious, but you'd be amazed how many business owners, in the heat of the moment or day-to-day operations, forget this simple equation.
Sometimes they price their goods and services lower than what they cost. Sometimes you have to lose money on a transaction, such as when you refund a customer. Sometimes you may choose to run a sale to attract new customers. But make certain you're doing so strategically, to attract customers who will pay full price later.
When you're tempted to buy new equipment or hire more employees first make certain you can afford additional expenses.
2. Depreciation
Everything in life eventually wears out, including the machinery or equipment your business uses to operate, whether it's a meat grinder, a laptop or a pickup truck. Therefore, using your assets is an expense the government allows you to use to reduce your net income so you pay taxes on a lower amount of net profit. It's calculated by dividing the amount you paid by the number of years of its useful life.
Nobody really knows how long any given piece of equipment will last, so we use the number of years the Internal Revenue Service tells us for the asset class.
Remember, that although depreciation is an expense, it's not cash that is coming out of your pocket. Eventually, you will have to come up with the money to replace the item. The longer you can keep the machinery operating, the better.
3. Book Value Does Not Equal Market Value
When you buy some machinery, equipment or the business itself, the total price you pay goes down on the left (asset) side of your balance sheet as an asset with a book value. As the years go by, depreciation reduces the book value. However, that has no relation to market value. Used equipment will always be worth less than the same item bought new.
Keep your old equipment for as long as it's still performing well unless you'd be a lot more productive with something more up to date.
4. Net Equity = Assets - Debts
This is how to look at a balance sheet. Your business is worth -- on paper -- the difference between the total book value of your assets and what you owe.
Don't overestimate how much your assets are really worth if you sold them off. And keep your debts as low as possible. If your business debts exceed net assets you have an accounting problem we cannot solve for you.
5. Net Income is the Most Important Figure
A lot of accounting figures are important, but not vital. Your machinery is worth the money you can use it to bring in, and that's your net income.
As long as you're making a comfortable net income, the rest is details.
We can help you with the details of your business. Now that you understand the basics, get started today so we can simplify the bookkeeping for you.
This seems so obvious, but you'd be amazed how many business owners, in the heat of the moment or day-to-day operations, forget this simple equation.
Sometimes they price their goods and services lower than what they cost. Sometimes you have to lose money on a transaction, such as when you refund a customer. Sometimes you may choose to run a sale to attract new customers. But make certain you're doing so strategically, to attract customers who will pay full price later.
When you're tempted to buy new equipment or hire more employees first make certain you can afford additional expenses.
2. Depreciation
Everything in life eventually wears out, including the machinery or equipment your business uses to operate, whether it's a meat grinder, a laptop or a pickup truck. Therefore, using your assets is an expense the government allows you to use to reduce your net income so you pay taxes on a lower amount of net profit. It's calculated by dividing the amount you paid by the number of years of its useful life.
Nobody really knows how long any given piece of equipment will last, so we use the number of years the Internal Revenue Service tells us for the asset class.
Remember, that although depreciation is an expense, it's not cash that is coming out of your pocket. Eventually, you will have to come up with the money to replace the item. The longer you can keep the machinery operating, the better.
3. Book Value Does Not Equal Market Value
When you buy some machinery, equipment or the business itself, the total price you pay goes down on the left (asset) side of your balance sheet as an asset with a book value. As the years go by, depreciation reduces the book value. However, that has no relation to market value. Used equipment will always be worth less than the same item bought new.
Keep your old equipment for as long as it's still performing well unless you'd be a lot more productive with something more up to date.
4. Net Equity = Assets - Debts
This is how to look at a balance sheet. Your business is worth -- on paper -- the difference between the total book value of your assets and what you owe.
Don't overestimate how much your assets are really worth if you sold them off. And keep your debts as low as possible. If your business debts exceed net assets you have an accounting problem we cannot solve for you.
5. Net Income is the Most Important Figure
A lot of accounting figures are important, but not vital. Your machinery is worth the money you can use it to bring in, and that's your net income.
As long as you're making a comfortable net income, the rest is details.
We can help you with the details of your business. Now that you understand the basics, get started today so we can simplify the bookkeeping for you.
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