From serving your first customer to generating revenue and turning a profit, there’s lots to be excited about when starting out in business. However, there are several less enjoyable aspects to entrepreneurship too – and a key one of these can be managing your business finance.
“To run a small business, you have to be at least a little skilled in the art of bookkeeping,” says Business.org author Joshua Adamson-Pickett.
“The thought might be overwhelming if you’re more passionate about, say, selling used books or offering excellent life-coaching advice than you are about numbers—but a basic understanding of bookkeeping can revolutionise your business.” With this in mind, here’s a brief guide to business finance, which should help your enterprise succeed.
As opposed to personal finances, accounts are more than just where your money lives in the bank. There are five basic business accounts:
- Assets – Cash and resources owned by the business. For example, accounts receivable and inventory.
- Liabilities – Obligations and debts owed by the business. For example, accounts payable and loans.
- Revenues or income – Money earned by the business, typically through sales.
- Expenses or expenditures – Money that flows out of the business to pay for certain items and services. For example, salaries and utilities.
- Equity – The value remaining after liabilities are subtracted from assets. This can take the form of stock and retained earnings.
As Adamson-Pickett explains: “If you plan to do your own books in house instead of outsourcing to an accounting or bookkeeping firm, you need to make one crucial choice before you start setting everything up: Are you going to use single-entry bookkeeping or double-entry bookkeeping?”
- Single-entry bookkeeping – You only enter each transaction once. This system is best for simple businesses with little equipment or inventory.
- Double-entry bookkeeping – Any transaction in one account requires an equal and opposite entry in another account. For example, credits and debits.
Balancing the books
When tallying your accounts at the end of the quarter or year, your debits and credits should match. When you combine accounts types, the adjusted balances should meet the accounting equation: Assets = Liabilities + Equity
“If two sides of the equations don’t match, you’ll need to go back through the ledger and journal entries to find errors,” says Adamson-Pickett. “Post corrected entries in the journal and ledger, then follow the process again until the accounts are balanced. Then you’re ready to close the books and prepare financial reports.”
Balancing the books is all well and good, but you’ll also need to decipher what these figures actually mean with financial reports, which can paint a picture of your company’s overall health. The most common include:
- Balance sheet – A summary of your business’s assets, liabilities, and equity during a period of time.
- Profit and loss (P&L) statement – A breakdown of revenues, costs, and expenses over a quarter of the year.
- Cash flow statement – Similar to a P&L but without non-cash items, this will help show where your business is earning and spending money.
And finally, don’t forget to store your records and statements securely to stay legally compliant.