As a business owner you have many skill sets, for some you rely on someone else. But, in order to rely on others, you must have basic information in order to understand whether the reliability on others is serving the purpose or not, whether they are giving you proper service or product.
Similarly, accounting is one such field where most of business owners rely on others completely.
But have you ever wondered the very core of your business, money which drives the business, which is also the result you expect and not understanding it can also cause disaster.
This issue is just not with the profit and loss account as in sales purchase and expenses, but this also has a concern when it comes to Balance sheet items too, like your asset is depreciated as per applicable laws, but when you liquidate it has different outcome same with investments. Also, your receivables and payables we have standard mechanism to maintain the due dates, but these due dates get stretched do to market conditions and habits.
So, what are the basic things a business owner must know about their accounting.
1. Method of Accounting used by your accountant
Cash System or accrual system, what are the entries and timings of it, your actual outcome is very much dependant on what goes in the system.
As it is commonly said “garbage in garbage out”.
You need to understand that if your data entry and methods are incorrect, then the reports or financial statements can show incorrect results.
2. Laws Applicable to you related to taxes and compliances
Laws have quite a lot of impact on the accounting as most of the time the entries and the effects are dependant on the Laws applicable, which can cause lot of changes in fund flow too, also provisional entries have book effects but don’t impact funds in real time but may impact in future, such confusion can lead to misreading of reports.
3. Software’s used and its limitations
The software used by your accountant needs to be paid attention from time to time as though there are many good software but they fail to upgrade causing inconvenience or limitation to the accounting process, most of you avoiding spending on this but it more important portion not to overlooked.
4. Understanding the Financial Reports Structure
As per your organisation structure the financial reports are prepared you must be able to read this report, so it is better you learn at least basics of what these reports cover and what is not disclosed, this will help you work out your financial position in better manner and also future plans.
5.Cash Flow study
We main our books on accrual system, it is a good system to understand your financial position, however for day-to-day operations and planning your funds you need to study your cash flow report, keeping eye on it will always keep you safe from sudden surprises in cash shortfall.
6. Budgeting and Forecasting
Short term budgeting and long-term forecasting is very much necessary to be made and updated constantly as this helps you to stay aligned to your financial goals and warns you well in advance if you are losing your track or things going out of control.
7.KPI’s
Key performance Indicators once you understand the above things you need to find out the ratios and percentages which you have to keep your eye on continuously, these are very fast way of knowing your financials, it is just like a “seismograph” warns you of earthquake coming. KPIs are dependant on your business scale, industry and type of business you are into. KPIs can be your, Margin ratio, Days sale outstanding, Accounts receivable/payable turnover, ROI, Net Profit Margin, etc.
These are the least you can start with to understand your financials, even though you have dependency on outsider, understanding it will only make you stronger.