Q: How can accounting help me make money?
A: Quite simply, accounting tells you whether you are making money. If you create a profit and loss statement each month, you can ascertain your position quickly. If you are losing money, you can make changes in your operations, such as increasing prices or reducing expenses, to correct the situation well before the year is over and thus ensure that your overall year will still be profitable.
Q: Can’t I just write checks, make deposits, and file taxes?
A: If you don’t do any accounting, then that’s probably all you’ll be doing—making deposits, writing checks, and paying taxes, but not making any profit! Even in a very small business you need to be in control of your expenses.
This doesn’t just mean having the money; it also means knowing which portion of your revenue gets spent for which purposes. What percentage of revenue do you spend on marketing each month? Labor? Supplies? If you don’t track and control these expenditures, you are not managing your business—you are just blindly hoping there might someday be a profit.
Q: Can’t I hire a bookkeeper to do the accounting for me?
A: A good bookkeeper, or even a good accounting software program, can help you organize your accounting quickly. However, you still need to understand the basic principles of accounting. This will allow you to use the information supplied by the bookkeeper or software program intelligently, so that you can make the changes in your business that will lead to success and profitability.
Q: What’s more important: income statements or balance sheets?
A: At the risk of sending all accountants into apoplexy, I feel that the income statement is the more important document. The income statement tells you whether you are making money and delineates your costs and expenses. Accountants would say the balance sheet is more important.
Q: How can a balance sheet help me?
A: A balance sheet shows you how your assets are being used. For instance, from a balance sheet, you should be able to tell whether your inventories are too large, whether your receivables are growing, or whether your ratio of debt to equity is getting too high.
Q: Do I really have to understand the different depreciation formulas?
A: Not at all. Let your accountant figure these out at the end of the year. Just plug “ballpark” numbers into your monthly profit and loss statements. In fact, you can use a simpler method such as a straight-line depreciation figure each month, and then see whether the accountant suggests adjusting it at the end of the year, either for GAAP (generally accepted accounting principles) and/or for tax reporting, which will often be different for depreciation.
Q: Do I really need to create a balance sheet each month?
A: If your business is really small, you can manage fine without creating a balance sheet each month. But any business, no matter the size, needs to create a profit and loss statement each month. If inventories or accounts receivable are important in your business, then balance sheets will clearly point out any significant fluctuations that you should be aware of.
