Accounting Systems

Your accounting system should provide an accurate picture of your business and how it is doing. Setting up a good accounting system and understanding the numbers produced can make a major difference in how your business fares in the long run. The financial statements produced from your accounting system will help you with:

Pricing Your Product Accurately
Pricing your product is the first single most important thing you have to do in business. It's a simple equation, which says that you have to charge more than it costs you, right?? So tell me, what about paying back that loan that you opened last winter when you couldn't meet your workers compensation bill? What about the tools you put on your MasterCard for the last job? What about product liability insurance? There's a long list you're likely forgetting, or if not forgetting, discounting beyond reality. Nearly anyone can figure out the direct costs of their product or service - a good set of books will tell you just what ought to go into that equation for overhead, which is the difference between making a profit or loss.

Know If You Are Making Money
Are you making money? Well, even after you price your product, you have to know how your pricing compares with reality. If you are making some bad decisions with your pricing, and you wait until next April 14th to find out whether you've lost or made money, it may be too late to do anything about it. Running a business profitably is tough. It can take a long time for some of your decisions to prove right or wrong, even with good books. Give yourself a break and at least be paying attention so you see things happening soon enough to correct them.

Know Your Short Term and Long Term Cash Flow

Work With Bankers
As much as possible, have your numbers organized on a cash flow spreadsheet before you go to the bank. If you're already working with a bank, impress them with good numbers. I don't mean good in the sense of whitewashed, at all. I mean good in the sense of accurate. With good books, you will see problems coming before they happen. Go talk with your banker about them in advance, and you will have a better chance of getting and keeping that person on your side. A side note about relationships - never go in thinking that your relationship with your banker is adversarial by definition. The opposite is true - that relationship has to be one of teamwork and understanding. To look at your banker as an adversary from whom you should hide bad information is a huge mistake. Find a banker you can talk to and work with, and keep him/her posted, good or bad. Develop those relationships, and they'll stick by you as long as they can.

Taxes
Use books that you've prepared for your decision making, and maybe the results won't be a surprise. If your books are done and you know before the end of the year what taxes you have to pay, chances are you can save yourself money by paying ahead, or by buying tools that you know you will need. At any rate, your tax accountant can help you do whatever planning you need to do, but you cannot do that in the absence of good information.

Cash vs. Accrual Accounting
There are two ways handling your accounting records: cash or accrual. The cash method does not account for payments due or bills due. When you write the check, you enter the expense. When you receive money, you enter the sale. The accrual method keeps track of what expenses actually apply to the current period.

As an example of the differences, in the cash method if you receive a check for deposit on a house in December, and start the work in March, you are going to be taxed one year on the money you have taken in, and the next year show a loss because of your expenses of building the house. With the accrual method, on the other hand, you put the money in the accounting period where it actually is used. You pay the expenses the same month as you enter the sale, so it all makes sense.

Most small businesses will want to use the accrual method of accounting. Even if you aren't required to do so for tax purposes, you will have a better idea of where you stand month to month if you record your expenses as they are incurred.