So, you’ve started and registered a small business of your own. First of all, congrats. It takes a lot of dedication and energy to take an enterprise off the ground and keep it afloat during these turbulent times. Second, you must have realized by now that you’ll have to get at least minimal knowledge of the basics of budgeting, accounting, and bookkeeping if you want to keep your business booming.
Fear not. Here are the finance essentials that you need to know if you’re running a small business.
Infographic created by Donnelley Financial Solutions, a regulatory compliance software company
What is what
In short, bookkeeping is the skill of keeping and organizing a business’s financial transactions. It is the fundamental way for business owners to figure out if their venture is profitable.
By keeping an eye on your numbers, you’ll be able to quickly identify financial challenges and deal with them before they grow into an overwhelming crisis. On the other hand, it can also help you identify areas of profit expansion that would be harder to notice without clear financial reports.
Understanding business accounts
When it comes to bookkeeping, an account is a record of all financial transactions of a particular type, like sales or payroll. There are five basic types of accounts:
Bookkeeping starts with setting up each necessary account so you can record transactions in the appropriate categories.
Choose a bookkeeping method
If you plan to maintain your finances using a DIY method, the first important choice you need to make is whether to use single-entry bookkeeping or double-entry bookkeeping.
As its name suggests, with the single-entry bookkeeping, you’d enter every transaction only once. For instance, if a customer pays you a certain sum, you enter that amount into the asset column, and that’s it. It seems simple enough, but this way of keeping track of your finances has a limited scope.
If you work out of your home, don’t have any equipment or inventory, and don’t deal too much with cash transactions, you might consider single-entry bookkeeping.
With a double-entry bookkeeping system, you’ll record two entries for each transaction: a debit and a credit. Debits and credits are recorded as journal entries in the ledger. It ensures your books are always balanced, which means you’ll be tipped off immediately if profits start dipping.
Keep track of every financial transaction
Here is where the fun really starts. Each transaction must be recorded correctly and in the right account.
Say, for example, that you’ve bought a new computer for your business, and that you’ve paid $800 for it. The transaction will affect two accounts: cash (an asset account) and equipment (also an asset). Because you’re decreasing your money and increasing your equipment, you would record an $800 debit for the equipment account and an $800 credit for the cash account.
Balance your books
At the end of the quarter or year, it’s time to balance and close the books. When you tally up account debits and credits, the sums should match. This means that your books are “balanced.”
If over the month, your cash account has had $3,000 in debits (increases) and $5,000 in credits (decreases), you would adjust the cash account balance by a total of $2,000 (as a decrease).
If two sides of the equations don’t match, you’ll need to go back and find the errors. Redo the process again until the accounts are balanced. Then you’re ready to close the books and prepare financial reports.
Prepare financial reports
Financial reports create a picture of your company’s financial health. You can then use that info to make decisions about your business’s future. The three most common financial reports created in bookkeeping are:
Don’t do it alone
While this article covers the essentials of DIY accounting and finance, there are many more bookkeeping aspects than those mentioned here. It’s easy to get overwhelmed and feel like you’re in over your head.
Even if you are on top of this all the time, it would be wise to hire professional help from time to time, even if it’s just to help with your tax returns or some other business accounting aspect that causes you trouble.
Once again, congratulations, and don’t give up. Understanding the condition of your business’s finances means you can make better decisions and plan for the future.
Kevin has gone through an extensive home renovation with his son, which he has both thoroughly enjoyed, and dreaded every morning. He is now the proud owner of half his dream house (the other half has been waiting for spring). You can read more of Kevin’s work on PlainHelp.