By Finance New Mexico
Entrepreneurs don’t need to be certified public accountants to start or operate a business, but a basic grasp of bookkeeping principles can help them accurately gauge performance and profitability, keep track of cash flow and make smart decisions about assuming debt or prioritizing payments to creditors based on what the financial reports say.
Though “bean counting” is perceived by some business owners as a time-consuming nuisance, a good accounting system is actually a tool that allows the owner to trace every dollar the business receives from a customer and to monitor dollars owed.When someone pays for a product at the point of sale, the transaction is applied to the appropriate account, where related expenses can be applied to indicate gross profit. When a client is billed on a monthly or quarterly basis, the accounting system can oversee payments to a different account and alert the business when payments are missed so steps can be taken to collect on aging invoices.
The basic setup generates two essential financial statements that document a business’s income and cash flow and allow the company to accurately analyze its progress in the moment. The income statement, also known as the profit and loss statement, reflects revenue and expenses. The cash flow statement follows money as it moves into and out of the business during a specific period.
A third statement, called the balance sheet, indicates the company’s progress over time. It reveals the amount of capital needed to support the business and is used in concert with the income statement.
Accounting systems monitor the overall health of a business so the owner can maintain an objective overview rather than focusing exclusively on one of many moving parts. For example, a business might rejoice when sales pick up but fail to appreciate that those profits are being gobbled by increased manufacturing or import costs.
These systems, and the metrics they generate, also help a business take a long-term view and make projections that support growth. They tell creditors, suppliers and potential investors how creditworthy and stable the business is and prove to taxing authorities that the business is operating above board.
Small businesses that don’t have in-house accountants often manage their finances internally using software such as QuickBooks and then provide financial reports to an external accountant or enrolled agent to prepare tax statements. The savviest of them take that relationship a step further and seek advice to identify areas of financial strength and weakness.
As part of its mission to build strong and sustainable businesses throughout New Mexico, the economic development nonprofit WESST offers classes on a number of business-related subjects, including bookkeeping. On August 24, WESST’s Las Cruces regional office is conducting a Quarterly QuickBooks Crash Course to show businesses the benefits of using this popular bookkeeping system.
WESST also offers workshops on how to read and use financial reports. Two sessions — one conducted in English, the other in Spanish — of Learn the Language of Business Finances are offered in Albuquerque in October. Visit the training calendar on the WESST website at https://www.wesst.org/training/ to find other workshops offered at the organization’s six regional offices in the state.
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