Guest post by Bryant L. Armstrong, Squire & Company, PC
Thriving businesses become successful with a mixture of good luck, good timing and good decisions. The French biologist Louis Pasteur once said, “Chance favors the prepared mind.” Business owners have a better chance of making their own luck and having good timing if their decisions are based on good information.
Sound business decisions begin with sound accounting principles. Even if you use a third-party accountant to manage your business’s finances, you need to have a strong grasp on basic accounting principles to ensure the smooth flow of daily business operations. Below are four principles to follow to make better business decisions.
When businesses make decisions based only on how much money is in the bank, they miss out on other critical components. Where will your future cash come from? What obligations to vendors do you currently have? How are sales doing? Are receivables being collected? What capital equipment needs does the business have? These are all questions left unanswered if the only measure you track is cash in the bank.
2. Learn the difference between cash accounting and accrual accounting
Businesses often do a good job of tracking who owes them money (if you’re not doing a good job, that is a whole other discussion!). But they do not always diligently track to whom they owe money. Tracking your obligations as they happen (accrual accounting) rather then when they are paid (cash accounting) will give you a better outlook of your finances. Learn to track your accounts payable as diligently as your accounts receivables.
3. Don’t ignore the cash flow statement
There are three main financial statements. The balance sheet measures the financial health of a business at a point in time. The income statement measures financial health over a period of time. And a cash flow statement measures your use of cash. An income statement may show great net income but if there is no cash in the bank, does a great net income really matter? The cash flow statement will help you understand how net income equates to cash in the bank.
4. Consistently review your financial health…and not only when it’s time to do taxes
If the only time you know how well your business is doing is when your accountant gives you your tax return, you’ve made a lot of decisions without good information. Prepare accurate finacial statements at least monthly. Review the numbers regularly. Learn what the key performance indicators (KPIs) of your business are and then track them.
Following these four simple steps will help you better understand your business and will lay a good foundation from which you can make solid decisions to help your business thrive.
This article should not be construed as legal or tax advice from Bank of American Fork. Please seek legal and tax advice from qualified legal and tax professionals.