As a business owner, you need to wear several hats and we know that the accounting one can sometimes be complicated, confusing and overwhelming. But understanding business finance is understanding what your numbers mean and how much money your company brings in. That’s why one of the most important tasks for any entrepreneur is to educate themselves.
That’s one of our missions at Camino Financial: we commit to help business owners reach their goals, not only through our financial assistance but also through education and ideas. That’s how we put at your disposal the tools you need to grow your business and improve your financial performance.For example, do you know the difference between gross profit vs net profit?
It’s ok if you’re not an expert. In this article, you’ll learn the key accounting concepts that every business owner should know, how they can help you, and the pros of hiring a bookkeeper vs as opposed to doing it by yourself.
Key Accounting Concepts
These are some of the basic accounting concepts that every business owner should know. Knowing them will help you create a stable financial future and make better decisions.
There are many financial statements used by businesses but the three most common ones are Balance Sheets, Income Statements and Cash Flow. They are important because they contain significant information about a company’s financial health and business performance.
According to Investopedia: “The cash flow statement provides a view of a company’s overall liquidity by showing cash transaction activities. It reports all cash inflows and outflows over the course of an accounting period with a summation of the total cash available.” In other words, cash flow is literally the amount of money going in and out of your business each month.
The Balance Sheet
Is a financial statement that summarizes a company’s assets and liabilities at a specific point in time. The balance sheet illustrates your business’s net worth.
The Income Statement
Also known as a Profit and Loss (P&L) statement, it summarizes a company’s revenues and expenses over a period, either quarterly or annually.
According to ABEL Finance, “gross margin is a metric that measures your profits as a share of the revenue. A higher gross margin or gross margin rate means that you have a highly profitable business. A lower gross margin or gross margin rate means that you make less profit for each unit sold”.
Gross margin usually varies from business to business and from industry to industry so the comparison should only really be made with companies in the same industry.
Gross Profit and Net Profit
Gross profit is the amount that remains after you deduct the cost of goods sold from your revenue, and net profit is the amount your company gains after subtracting all operating, interest, and tax expenses, in addition to deducting your COGS.
This is one of the fundamental accounting principles and it means that for every business transaction, amounts must be recorded in a minimum of two accounts. According to American Express, this method can help business owners prepare accurate financial statements and detect errors in the company records.
Accounting Tips for Thriving Businesses
Now that you know some of the basic concepts, let’s go through some accounting tips to help your business thrive:
- Pay yourself a reasonable compensation.
- Invest in growth.
- Spread out tax payments.
- Monitor your books.
- If you don’t have financial skills or don’t have the time to do your own accounting, find someone who knows how to do it and get it done!
Should you hire a Professional Bookkeeper?
Actually, doing your own business accounting is ok as long as you have the right knowledge. But consider that most entrepreneurs who hire a professional bookkeeper usually discover they weren’t doing as well as they thought they were on their own.
Outsourcing your accounting services can be beneficial and less expensive than hiring an accountant to work in your business. Here are some of the top reasons for considering outsourcing your accounting function:
- Save money.
- Save time and improve operational efficiency.
- Understand your cash flow and your financial statements.
- Keep your finances up to date.
- Reduce audit headaches.
- Improve processes and reduce risk.
In confusing times, the more you understand your finances, the better. Are you able to read your financial statements and make decisions for your business? Do you understand the difference between gross profit vs net profit? Do you keep financial records? Visit Camino Financial’s website to get resources like this, plus financing options, for your small business.