Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9 pm ET. This is excerpted from my recent interview with Elen Rohr who is the president of Zoom Drain and Sewer, LLC. She also helps businesses and entrepreneurs to make business un-complicated, make their own money and live life un-leashed. For more info www.ellenrohr.com.
SmallBizLady: A lot of Small Biz owners struggle with the financials. Is it really that important to understand the numbers?
Ellen Rohr: Business owners may find themselves jumping into business and not wanting to crunch numbers, review spreadsheets or confront their financial situation. If you’re running out of time and digging a deep hole of debt, no one else is going to figure this out for you. It’s your responsibility. Others may work hard in other areas and don’t have the skill or bandwidth to pick up a new task; therefore, ready or not, set your mind to go over, under, around or through any obstacle between understanding your financial situation.
SmallBizLady: How long does it typically take to get your accounting in shape?
Ellen Rohr: On your own, it may take about a year to develop a firm understanding of the accounting. However, to lessen the time, it’s recommended that you hire a great accountant to eliminate the struggle, errors and serves as a check and balance. Also, look at mistakes as a learning experience and a crossword puzzle. Have FUN finding/fixing the glitch in your data entry. This will help you become more proficient and face your financials head on and make decisions based on the numbers.
SmallBizLady: If your accounting is a mess, where do you start?
Ellen Rohr: Commit to getting to a Known Financial Position – KFP, which is essential to your success & profitability. “Known” is the key element. It may be that you are losing money, or deeper in debt than you would like to be. Find out how much & how deep. That’s the starting place. Financial reports are the Scorecards in the game of business. You can always improve the score. But you must know where you are right now.
SmallBizLady: Can you just hire an accountant or a bookkeeper to do that?
Ellen Rohr: A good accountant helps to develop an accounting system that delivers the financial information to make good decisions. A good accountant will be excited when you tell them that you want to learn how to read, use financial reports and won’t feel threatened when you decide to move the accounting system “in house” instead of shipping it out to them.
A good bookkeeper will be meticulous about data entry and getting it entered on time. If you are the bookkeeper, figure out double-entry accounting and how to fully utilize your accounting system. When you are ready to hand off the position, you’ll be prepared to work well with your bookkeeper to receive on-time, accurate and relevant information.
You can hire some help, however, as the owner you are responsible for knowing where the money is and where it goes. It’s your money!
SmallBizLady: What financial reports are the most important ones you should really keep an eye on?
Ellen Rohr: The Balance Sheet and the Income Statement (aka The Profit & Loss, or P&L) are the biggies. If you have a manufacturing company, or if your sales cycle – from Sale to completion of product or service to payment is longer than one month, you might also run a Statement of Cash Flow.
SmallBizLady: Most people are OK with the P&L. It’s the Balance Sheet that trips them up.
Ellen Rohr: Oh, and the Balance Sheet is the numero uno report! The Balance Sheet reflects the financial condition of the company.
Assets = Liabilities + Owner’s Equity
ASSETS: The ‘stuff’ the company owns. Anything of value – cash, accounts receivable, trucks, inventory, land.
LIABILITIES: These are sources of assets – how you got the ‘stuff’. These are claims against assets by someone other than the owner. This is a reflection of what the company owes. Notes payable, taxes payable and loans are liabilities.
EQUITY: Equity includes funds that have been supplied to the company to get the ‘stuff’. Equity also reflects ownership of the assets earned through profitability. Equity shows ownership of the assets or claims against the assets, a reflection of what the company owns.
SmallBizLady: So, what if you have a few assets…and a lot of debt? Can you fix it?
Ellen Rohr: Maybe! The very good news, per Warren Buffet, is that you can always make your financial situation better. As a business owner, Job One is to protect the assets. Job Two is to grow the assets.
There’s only 3 Ways to Grow Assets:
#1 – Borrow Money. You could borrow money…assets go up and a Note Payable (a liability) goes up.
#2 – Invest Money in the Co. When you (or another owner/investor) put money in the company, assets/Paid In Capital goes up
#3 – Create a Profit. When you sell more than it costs, it creates a profit – reflected in Balance Sheet equity section. If Net Profit (an equity account) goes up, assets go up, too; the best way to increase assets, to create wealth.
Sometimes investing money in a company can buy time, or equipment, that will help build the profitability of the company.
SmallBizLady: So, what are the few numbers that you watch?
- Balance Sheet: Pay attention to Current Assets (Cash and Accounts Receivables) to compare bills for payment (Current Liabilities). This is a current ratio, or acid test. Can you pay the bills? Pretty important!
- P&L: Track Sales, of course. And I keep an eye on Cost of Goods Sold (COGS), or Direct Costs. These are the variable costs, primarily Materials and Labor, that are incurred after a sale. Look at dollars and percentages. Gross Profit, which is Sales – COGS.
- Gross Margin, which is Sales – COGS expressed as a %. Because payroll is typically your biggest expense, watch your total payroll as a % of sales. If it spikes, you may lose money.
- According to Jim Abrams, “Make money with the sales you have.” If you don’t have it, don’t spend it. This works very well as a service provider.
- However, as a manufacturer, you may have to invest in inventory prior to a sale. If that’s your situation, add a Cash Flow Projection to the reports you review.
- For bigger companies, over a million in sales, create classes or departments. Don’t go overboard though! Keep your Chart of Accounts short and focused.
SmallBizLady: Many Biz Owners struggle with budgeting and forecasting. What’s your recommendation?
Ellen Rohr: Start tracking these Balance Sheet and P&L numbers weekly…for Month-to-Date and Year-to-Date. AND, you can put a little budget together. Then, you can compare actual to budgeted numbers.
Budgeting is just goal setting. If you don’t love the “score” you can use a budget as a way to create that which you would rather have…more sales, more cash, better %s. Easy peasy!
SmallBizLady: What about using subcontractors?
Subcontractors could be a perfect fit for you! Choosing to use subcontractors involves another set of rules. Although, complicated, business is a game, and games have rules. Do your diligence by identifying, getting referrals and hiring great subcontractors.
SmallBizLady: If you don’t know accounting, should you take an accounting class?
Ellen Rohr: Maybe! However, the best bookkeepers I know do not have accounting degrees. You can figure it out, with the help of a good accountant, bookkeeper and even YouTube videos.
Ensure that you learn the basic transactions that covers about 90% of all the data entry:
- Entering Sales
- Enter Web Order
- Applying Customer Payments
- Making the Deposit
- Entering Bills
- Paying Bills
- Enter Credit Card charges
- Pay, reconcile the Credit Card Statement
- Entering Payroll – from an outsourced report
- Reconciling the bank accounts
Work with your accountant to help with more technical transactions:
- Entering a new vehicle or other asset
- Recording the sale of a vehicle or other asset
- Regular Depreciation expense
- Beginning Balances for a new company
- Year End adjustments to reflect your tax return information
- Making sure you are paying the right amount of tax, and paying it properly
SmallBizLady: What’s the biggest – most common – accounting mistake that Biz Owners make?
Ellen Rohr: They get balled up with payroll. I highly recommend using a payroll service, like ADP or Paychex or Wells Fargo, to avoid making accounting mistakes, or miss a due date. Many business owners have made payroll mistakes that end up costing them years of retroactive payments and penalties.
Note that outsourcing payroll doesn’t get you off the hook. Make sure you are paying taxes properly. Every time the owner puts money in or takes money out, there are tax implications. With employees, keep in mind that there are lots of rules about payroll taxes. Additionally, be careful with bonuses, overtime, benefits, fair wages.
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