In addition to watching for signs of theft or poor handling of inventory, make sure you have enough inventory on hand to satisfy your customers’ needs. Book III Chapter 1 discusses how to use your bookkeeping system to manage inventory.
Everyone wants to know how well sales are doing. If you keep your books up-to-date and accurate, you can get those numbers very easily on a daily basis. You can also watch sales trends as often as you think necessary, whether that’s daily, weekly, or monthly.
Use the information collected by your bookkeeping system to monitor sales, review discounts offered to customers, and track the return of products. All three elements are critical to gauging the success of the sales of your products.
If you find you need to offer discounts more frequently in order to encourage sales, you may need to review your pricing, and you definitely need to research market conditions to determine the cause of this sales weakness. The cause may be new activities by an aggressive competitor or simply a slow market period. Either way, you need to understand the weakness and figure out how to maintain your profit goals in spite of any obstacles.
While sales tracking reveals an increase in the number of your products being returned, you need to research the issue and find the reason for the increase. Perhaps the quality of the product you’re selling is declining, and you need to find a new supplier. Whatever the reason, an increased number of product returns is usually a sign of a problem that needs to be researched and corrected.
Book III Chapter 2 goes over how to use the bookkeeping system for tracking sales, discounts, and returns.
Payroll can be a huge nightmare for many companies. Payroll requires you to comply with a lot of government regulation and fill out a lot of government paperwork. You also have to worry about collecting payroll taxes and paying employer taxes. And if you pay employee benefits, you have yet another layer of record keeping to deal with. Book III Chapter 3 is about managing payroll and government requirements.
Running Tests for Accuracy
All the time it takes to track your transactions isn’t worth it if you don’t periodically test to be sure you’ve entered those transactions accurately. If the numbers you put into your bookkeeping system are garbage, the reports you develop from those numbers will be garbage as well.
The first step in testing out your books includes proving that your cash transactions are accurately recorded. This process involves checking a number of different transactions and elements, including the cash taken in on a daily basis by your cashiers and the accuracy of your checking account. Book IV Chapter 3 covers all the steps necessary to take to prove out your cash.
After you prove out your cash, you can check that you’ve recorded everything else in your books just as precisely. Review the accounts for any glaring errors and then test whether or not they’re in balance by doing a trial balance. You can find out more about trial balances in Book IV Chapter 5.
You may not find your books in balance the first time you do a trial balance, but don’t worry. It’s rare to find your books in balance on the first try. Book IV Chapter 6 explains common adjustments that may be needed as you prove out your books at the end of an accounting period. It also explains how to make the necessary corrections.
Finally Showing Off Your Financial Success
Proving out your books and ensuring they’re balanced means you finally get to show what your company has accomplished financially by developing reports to present to others. It’s almost like putting your business on a stage and taking a bow – well … at least you hope you’ve done well enough to take a bow.
If you’ve taken advantage of your bookkeeping information and reviewed and consulted it throughout the year, you should have a good idea of how well your business is doing. You also should have taken any course corrections to ensure that your end-of-the-year reports look great.
Most businesses prepare at least two key financial reports, the balance sheet and the income statement, which it can show to company outsiders, including the financial institutions from which the company borrows money and the company’s investors.
Assets = Liabilities + Equity
The income statement summarizes your company’s financial transactions for a particular time period, such as a month, quarter, or year. This financial statement starts with your revenues, subtracts the costs of goods sold, and then subtracts any expenses incurred in operating the business. The bottom line of the income statement shows how much profit your company made during the accounting period. If you haven’t done well, the income statement shows how much you’ve lost.
Book II Chapter 4 covers preparing a balance sheet, Book II Chapter 5 talks about developing an income statement.
Most small businesses don’t have to pay taxes. Instead, their profits are reported on the personal tax returns of the company owners, whether that’s one person (a sole proprietorship) or two or more people (a partnership). Only companies that have incorporated – become a separate legal entity in which investors buy stock – must file and pay taxes. (Partnerships and LLCs do not pay taxes unless they filed a special form to be taxed as a corporation, but they do have to file information returns, which detail how much the company made and how much profit each owner earned plus any costs and expenses incurred.) Book V Chapter 4 covers how business structures are taxed, and Book II Chapter 3 goes into more detail on business structures.
Wading through Bookkeeping Lingo
Before you can take on bookkeeping and start keeping the books, the first things you must get a handle on are key accounting terms. This section contains a list of terms that all bookkeepers use on a daily basis. This is just an overview, to get you more familiar with the lingo. Rest assured, all of this is covered in lots more detail throughout the book.
Here are a few terms you’ll want to know:
✔ Balance sheet: The financial statement that presents a snapshot of the company’s financial position (assets, liabilities, and equity) as of a particular date in time. It’s called a balance sheet because the things owned by the company (assets) must equal the claims against those assets (liabilities and equity).
On an ideal balance sheet, the total assets should equal the total liabilities plus the total equity. If your numbers fit this formula, the company’s books are in balance.
✔ Assets: All the things a company owns in order to successfully run its business, such as cash, buildings, land, tools, equipment, vehicles, and furniture.
✔ Liabilities: All the debts the company owes, such as bonds, loans, and unpaid bills.
✔ Equity: All the money invested in the company by its owners. In a small business owned by one person or a group of people, the owner’s equity is shown in a Capital account. In a larger business that’s incorporated, owner’s equity is shown