28 Feb TRUTH AND CONSEQUENCES FOR FINANCIALS
Uncertainty…Merriam-Webster defines it as lack of certainty: doubt. Something that is doubtful or unknown. Uncertainty…kind of sums up being self-employed? Uncertainty… the ups and the downs throughout the life of a business.
We have learned in “Costs and Effects of Labor” that we as business owners never like to “settle” – as well we shouldn’t. We also learned in “Finding Your Way with Financials” that “business is a journey.” Both of which are true. Both are telling us that we have to take control, we have to be informed and that the information we have has to be accurate and timely. We have also learned that our numbers are everything – we have choices on how to configure those numbers but whatever you do or however you do it they are still critical.
Chart and Effect:
As stated in “Chart of Accounts and its Effect on Small Business” – “Your chart of accounts is the key to your financials”. You have had some time to think about it… what does that mean to you?
What type of an account should you choose when creating an account? Does it really matter? Does it affect anything? There are multiple chooses to choose from – Expense, Cost of Goods Sold, Income, Credit Card and many more. If you pick an Expense it will show on your Income Statement. If you pick a Credit Card it will show on your Balance Sheet. What type you pick is critical. Knowing the difference is even more critical in my opinion!
When using Management Accounting, the type of account chosen is exceedingly critical. Type has a direct effect on the placement of the account on your statements. Take your Materials account – is it an Expense or Cost of Goods Sold? If entered as an Expense it will not be included in your Gross Profit calculation. If entered properly as Cost of Goods Sold it will be included in your Gross Profit calculation, resulting in accurate numbers.
Account type has a direct effect on account placement which has a direct effect on calculations and totals.
Financials and Effect:
As we move forward through this blog series you will notice that they all build upon each other. The decisions you make from one blog to the next, affect your next decision. They ultimately all affect your financials and how you make management decisions.
This holds true with how you create, maintain and use the accounts within your chart of accounts. It is not enough to create an account properly, you than have to train others to the chart of accounts and its proper usage. What do I mean by that? Why is that so important?
You have an expense account for shop supplies, when the receipts are entered they are entered into miscellaneous. You have an expense account for office supplies, when the receipts are entered they are entered into miscellaneous. You have an expense account for dues and subscriptions, when the receipts are entered they are entered into miscellaneous. Do you really have a good understanding of where your money is being spent if everything that you spend is being dumped into miscellaneous – and do you take the time to actually sort it out? No visibility, no control.
There are accounts that can have far greater, longer lasting effects on businesses. Those would be how long term and short term debt. If payments on a short term debt are being logged under long term debt – it will look like you never pay your short term debts. Banks really don’t like that! We have seen clients denied loans based on improper account usage.
Once you have taken the time to set up your chart of accounts properly, take the time to train on its proper use. Know that your financials are correct – not only for yourself and your decisions but for your financial institutions and advisers.
Applied Management Group can work with you to create an accounting system that provides you with correct, informative and timely financial statements. We provide you with the mentoring and training needed to obtain your goals. Move your business forward with certainty!