Successfully managing your accounting is a daunting challenge for most small business owners. Sometimes, the most valuable accounting tips start at the basics. Where does it all start when it comes to accounting? What makes accounting work? The first step is your chart of accounts. This is key in tracking where your money is going, how much your spending, and what costs you need to take control of.
Chart of Accounts
So what is a chart of accounts and what makes it so important? A chart of accounts is a list of accounts to which your money is allocated (income, parts, equipment, labor, office equipment, etc.) Simply put, its exactly as it sounds, a chart of accounts, such as checking accounts, inventory, accounts receivable, accounts payable, and income. It also includes other costs such as labor, materials, equipment, advertising, communications, and more. While the list can be extensive, it is critical it is to take the time and the effort required to have a properly constructed chart of accounts as it directly impacts your financial statements.
A common mistake small business owners make is distinguishing either too many or too few accounts. A great example of having too few accounts is having everything you spend thrown into a miscellaneous account. I have seen it time and time again when I ask a client how much they spent on anything from credit card fees to materials and they’re not able to answer the question. Due to a poorly created chart of accounts, hundreds of small business owners fail to keep track of where they are spending their money. This causes a complete lack of visibility and control which is what makes it one of our key accounting tips for small business owners.
Defining and Redefining a Chart of Accounts
Defining and redefining a chart of accounts is not as difficult as it sounds. As with anything worthwhile in life, it does take time, but if done correctly it is time well spent and the return on investment can shortly realized.
To begin, look at your existing chart of accounts and determine what is it telling you and what questions does it leave unanswered. For instance, does it tell you how much you spent on materials verses equipment? Does it tell you how much you spent on the different types of advertising? Are your long term and short term debts separated? Do you know how much you have given away in discounts to your customers?
The information received from all of these accounts can be critical to how you make informed decisions on how to allocate your money and if money is allocated to you. You may not owe any creditors but if the accounts are not set up correctly or are not being used correctly, you may not receive that loan from the bank that is critical to the growth of your business.
Therefore, your chart of the accounts is the key to your financials, which is why properly organizing it is one of our top accounting tips. We here at Applied Management Group can work with you to set up your chart of accounts so that it gives you the information you need. Do not let something as fundamental be the downfall to your business. Contact us today at www.appliedmg.com to move forward with creating a chart of accounts that works for you and your business.
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