A basic accounting analysis will show you what kind of shape your small business is in.
There are a lot of ways to check the pulse of your business. Some business owners use their checking account balance as a guide. Others let the bottom line on their Income Statement do the talking. The truth is, you should monitor several accounting basics to keep your business on track.
Basic accounting principles tell us our Financial Statements have the purpose of monitoring the health of our business, but there are other things to watch, too.
1. Balance Sheet
Let's start our basic accounting analysis with the Balance Sheet. This financial statement gets ignored by a lot of small business owners, but it's a very important tool.
What is on a basic accounting Balance Sheet? Assets, Liabilities, Equity. Remember this equation:
Assets - Liabilities = Equity
Put simply, this means what you own minus what you owe is your business net worth. If you owe more than you own, you end up with a negative net worth. Not good.
But there's more to a simple accounting analysis then just looking at this equation.
The Balance Sheet also shows you more details, like how much cash you have, how much customers owe you (accounts receivable), how much in bills you owe (accounts payable), how much you owe in loans, and how much your business has earned up to now (equity or retained earnings).
For more on the Balance Sheet,
2. Cash Balance
How much is in your checking and savings accounts? Cash is vital to your small business health. You can't survive without it. This is an accounting basic.
Even if you buy on credit, you still have to pay the bills. If you have to keep borrowing, your debt will overtake your assets, and your net worth will disappear. And banks don't like negative cash flow. So monitor your cash balance.
Reconcile your bank statement every month. Know when your business cycles up and down, and plan ahead to make sure you have the cash you need to move ahead.
3. Income Statement
The next step in your basic accounting analysis is to take a look at your Income Statement each month. Your Profit is your bottom line. But it's so much more than that. Your basic accounting analysis should dig deeper than just your Profit or Loss number.
Look at your total revenue and total expenses. Are they increasing or decreasing? Ask your accountant for a comparative Income Statement. This shows the comparison of this month and this year to date with last year, this month, and last year, year to date.
That way you can see at a glance what expenses are increasing, for instance. If you're doing financial statements yourself, just keep copies of your Income Statements, and lay last years next to this years, and compare.
For more info on the Income Statement,
4. Statement of Cash Flow
This financial statement is another step in your basic accounting analysis. It takes the change in your cash balance for a time period, usually a year, and dissects that change into 3 areas - operations, financing, and investments.
From this statement you can see whether your business is holding its own, or needs influxes of cash from sources outside day to day operations to keep afloat.
For more info on preparing this statement,
Let's say you have a $50,000 increase in cash for the year. Great, right? Maybe. Maybe not.
Look deeper. If most of that increase came from operating activities (day to day operations), that is great. But if it came from financing activities (loans) or investing activities (liquidating investments) then it's not so great. Your operations should provide your cash flow.
So this statement should be prepared at least at the end of every year. Make it part of your accounting basics.
5 - Employee Turnover
Another part of your basic accounting analysis is taking a look at your employee turnover. Do employees stay a while or leave right away?
Certain employees are a very important part of your business. They may be the ones greeting customers, or helping customers on the phone, buying your materials, or selling your product. The longer they work for you the more wealth of knowledge they have, the more your customers count on them, and the harder they'll be to replace. Each new employee needs training. That takes time and money. In some businesses, your employees are your business.
6 - Supplier Relations
How well do you get along with your suppliers? When you need something in a pinch, are they willing to work with you or do they not return your phone calls?
No basic accounting analysis would be complete without looking into the strength of your supply chain. Make sure you pay on time, and take a little time to develop a personal relationship. I'm not talking buddies, here, but make some time for those sales reps. If they know you, they're more apt to go to bat for you in a pinch to get what you need.
7 - Customer Relations
Last on my list, but certainly not any less important, is customer relations. How are your customers? Do they come back for more? Do they send their friends to you? Are they angry or happy with you?
This is an important part of your basic accounting analysis because there is no business without customers. There is no sales income without customers.
Again, word of mouth is the greatest advertising. Make sure your customers are happy and giving you the thumbs up to their friends and business associates.
Keep in touch with them, and let them know how important they are to you.
These 7 tools are by no means inclusive of a basic accounting analysis, but they will give you a rounded, realistic view of how your business is doing.
If you have positive net worth, a decent amount of cash in your checkbook, a profit, great employees that stick with you, suppliers ready to back you up, and customers raving about you, how can you go wrong?
And if you don't have all these things? Find out why.
That's the great part of doing a simple accounting analysis on a regular basis. Nothing about business is static. It's always changing. Keep up. Spot problems when they're small and fixable.