Accounting is one of the fundamental and most critical parts of your organization. Your financial data tells a story of where your business has been, where your business is currently and where you can go in the future. It’s important to get it right from the beginning.
The impact of accounting on your organization is critical, especially during times of uncertainty.
Accounting is often not a subject in which many business owners, organizational leaders and boards of directors are well versed. Yet it’s a vital pillar of an organization. Having a basic understanding of accounting and its function will help you and your organization long-term.
Understanding Key Metrics
Accounting starts with an understanding of your business and industry. A crucial component of that is understanding key metrics that will allow you to make solid business decisions. These fundamental accounting metrics provide detail into your organization’s financial well-being.
Determining What Information to Track
Tracking the right information is key to having accounting records you can use to make informed decisions. You’ll want to capture all transactions that occur in your business (cash and noncash) in the simplest and most efficient manner. Based on your business or industry, you may need to consider tracking your business transactions in more depth.
Below are several considerations:
- Should I be tracking direct and indirect costs related to manufacturing or construction contracts so I am able to view the profitability?
- Do I have different departments, product lines, divisions, programs, etc. that I should be tracking so I am able to view the profitability?
- Do I pay commissions and should I be tracking transactions, such as revenues, by each sales representative to determine the proper calculation for those commissions?
- Do I work in several states and should I be tracking transactions, such as revenue and payroll, by state for tax return preparation?
- What sales tax jurisdiction do I need to track for sales tax reporting?
- Do I need to track certain items such as meals, donations, etc. for tax return preparation?
The impact of accounting on your organization is critical, especially during times of uncertainty.
The Importance of Financial Statements
Accurate financial statements are key to effectively running your organization and making smart decisions. Your financial statements can shed light on areas of your business and can help you identify areas for growth and for improvement.
The balance sheet tells you about the resources in your organization. It is measured at a point in time and can tell you things like:
- How much cash do you have?
- How much do people owe you?
- How much do you owe others?
- How much equity is left in your business after all your liabilities are taken care of?
- How much of your business is financed by long-term debt versus financed by you or your partners?
The income statement tells you about the profitability of your organization and is measured for a certain period of time, such as a month, quarter or year. It can tell you things like:
- What was the gross margin for the period?
- What were your operating expenses for the period?
- What was the net income for the period?
In addition, if you are tracking your income and expenses by profit centers (e.g. job, department, product line, etc.), you would be able to see measurements by those profit centers. This is especially valuable as it helps determine where you are making money or losing money.
The statement of cash flows tells you about the sources and uses of your cash. In other words, where did it all come from and where did it all go?
You can take your financial statements to the next level by comparing your current performance against historical performance, benchmarking yourself against your industry and peers and projecting your future performance.
Benchmarking and key performance metrics can help set organizations up for success.
Preparing for Month-End Close
Every organization should strive to produce timely and accurate financial information within a reasonable period of time after a month has ended. This information is vital to understanding your business and allows you to make informed decisions. The best way to do this is to create a monthly close process. The process should be thoughtful, documented and communicated to all parties involved.
How to Create a Monthly Close Process
- Record daily transactions.It might seem straightforward, but accurately recording day-to-day transactions is the basis for all financial reports. Ideally, these transactions should be recorded when they happen, which incorporates much of the work into the daily operations instead of waiting until the end of the month.
- Record monthly journal entries.Some entries don’t fall into the daily transactions category. These transactions, such as accrued expenses, amortization or depreciation expenses, are often only recorded once a month to present accurate monthly financial statements. Let your system work for you—set it up to help remind you and automate some of these recurring entries.
- Reconcile balance sheet accounts.The first account you should reconcile is the cash account. Nearly every accounting system has a built-in reconciliation feature, and going through this exercise is the easiest way to uncover any missing transactions, since cash is a part of most transactions. Once cash is reconciled and any missing transactions are recorded, you can move on to reconciling other balance sheet accounts, like credit cards, accounts receivable and accounts payable.
- Review revenue and expense accounts.Take a quick look through the balances in the revenue and expense accounts and assess if they look reasonable or not. This can help make sure things have been recorded in the right period, or on the right date.
- Prepare financial statements and have management review.Now that you’ve recorded all the transactions and made sure everything looks good, you’re ready to put together the financial statements. Most of the time, you can run a basic financial statement directly out of your accounting system. Consider running a balance sheet, income statement, accounts receivable aging, and accounts payable aging. After this, it’s important to have them reviewed and approved by management: the owner, the CFO or the Director of Finance.
- Close the accounting system.After the financial statements are approved, it’s important to close the month in the accounting software. This prevents future transactions from accidentally being recorded in this month and keeps people from accidentally changing a transaction.
Having the right accounting setup from the beginning is important. We’ve developed a guide to help.
The Importance of Understanding Accounting Basics
Following these steps will get you on the way to your goal of generating accurate and timely financial records. Financial statements provide a wealth of information for you to make informed decisions about your business. Knowing and understanding where you stand financially can mean the difference between success or failure of your organization.
Get the help you need to make accounting a priority in your organization.
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