The number one reason why businesses fail is leadership failure. If the leadership of a business is uninformed and fails to make proper decisions for the business the business will fail. Do you know how to insulate yourself and your business from making those mistakes? What part does your accounting practices play in this? How can your accounting software program help you make informed decisions?
How is it that your accounting software program is so critical in the decision making processes within your business? To break it down it’s not actually the software program itself but more of how you use it. You may be tilting your head and asking what exactly does that mean….
To be exact it means how you enter your information and what accounts you use within your accounting program has a drastic effect on what is available to you on your financial statements. For proper terminology it is the difference between Management accounting and Financial accounting.
Management accounting is cost accounting – it is the process of measuring, analyzing and interpreting the numbers in order to create your businesses’ blueprint for growth. What does it mean? It means having the proper accounts in your chart of accounts – using cost of goods sold accounts properly to have a clear picture of how much you spent on parts, equipment and direct labor. It means using your expenses accounts for your overhead expenses. It means controlling your income accounts giving you a clear picture of where you’re receiving your income. It means knowing how each account is being used and that it is being used properly.
Management accounting includes dividing your business up into different departments and entering the income and cost of goods sold into the proper department. You are already entering the numbers into your accounting software program; take the time to enter them properly to give you the information you need. Departmentalizing in conjunction with a proper chart of accounts generates a you gross profit for each department within your business.
Know what each department is generating in revenue. Know what each department is spending on expenses. Know what each department is spending on direct labor. Know the specifics for each department. Know your numbers – they’re your numbers.
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business. What does that mean? It means simply entering your numbers into a simplified chart of accounts to produce financial statements to be reviewed by for tax preparation and banks for loan applications.
This form of accounting provides the bare minimum information. Did you make money or lose money? How much money do you owe others? It is not focused on the growth of the business; its sole purpose is for financial purposes not decision making purposes.
Yes, it will give you your income and expenses. Yes, it will tell you how much you own and owe. It will not tell you where the growth over the past year was within your business. It will not tell you where your growth opportunities lie. It will not tell you what you need to know to grow your business.
If you are going to take the time and the effort required to enter your numbers into your accounting software program why not have those numbers work for you. Why not utilize all of the information you have available to you on a weekly, monthly, quarterly and yearly basis. Know where your leaders and bleeders are! Control your numbers and your business proactively verses reactively.
Failure should not be an option. You have the ability to use management accounting to create the proper pricing structure for your business based on your data. Let your accountants and bankers use financial accounting while you use management accounting to move your business forward to lead your business into profitability and growth.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.