We often write our articles about the nuances of our profession. Whether it’s useful financial equations or the latest changes to tax law, you’ll find it on our blog. What we don’t often do, however, is talk big picture. If you’re reading this, it’s likely that you are a small business owner, facing a world of expanded accounting that may not be on your level of experience. We love being a resource and thought leader in this space, and as such, have put together our “Business Accounting 101” article to help get you started on your new journey!
Here are three steps every new business owner should take:
Open A Business Account
Once you’ve established your business, it’s important to open a business account as soon as possible. This will be where you store your company’s earnings, as well as the place from which much of your debts will be paid moving forward. This step is especially important for Corporations and LLCs in particular, as owners are required to separate personal and business expenses as much as possible. It also alleviates much of the stress during tax season, as you will have an easier time categorizing your filing.
Keeping a detailed tally of your business expenses and revenues will pay huge dividends in the long run. Categories like travel, meals, and vendor bills should be separated from one another. Learning to track your debits and credits effectively is the foundation of solid bookkeeping practice. Without it, you risk falling out of touch with the pulse of your business, as certain metrics can be indicators of good or bad business health. Make sure you also commit to either a cash method or accrual method with your bookkeeping efforts. The cash method recognizes revenues and expenses at the time they are actually paid, while the accrual method recognizes them as the transaction occurs.
Understand Gross Margin
Now that you’ve opened a bank account and documented your revenues and expenses, it’s time take a look at your company’s gross margin. This metric, above other options, will indicate whether or not your business is heading in the right direction. To calculate it, take your cost of goods sold (The price of raw materials + labor for the items/services you sell), and cross reference it with your overall revenue. The final equation for calculating your gross margin percentage is as follows: Gross Margin % = (Revenue – Cost of goods sold)/Revenue. The final number you get will reflect the percentage of profit you make with each sale. Increasing this number will reflect positively on your company’s overall income.As a new business owner, we understand you may have a lot of questions pertaining to the ins and outs of accounting. If you’d like to work with a professional to cross-examine your finances to help identify the best ways to increase profit, we’d love to get in touch. For more information on other financial topics, check out our blog.