7 simple tools for a basic accounting analysis of your business.

 

Here are 7 simple, commonsense ways to keep your business healthy.

A basic accounting analysis will show you what kind of shape your small business is in.  There are a lot of ways to do this. Some business owners use their checking account balance as a guide. Others let the bottom line on their Income Statement do the talking. The truth is, you should monitor several accounting basics to keep your business on track.

accounting analysis

Here are 7 basic accounting analysis tools to use to monitor your business.

1. Balance Sheet
Let’s start our basic accounting analysis with the Balance Sheet. This financial statement gets ignored by a lot of small business owners, but it’s a very important tool.

What is on a basic accounting Balance Sheet? Assets, Liabilities, Equity. Remember this equation:

Assets – Liabilities = Equity

Put simply, this means what you own minus what you owe is your business net worth. If you owe more than you own, you end up with a negative net worth. Not good.

But there’s more to a simple accounting analysis then just looking at this equation.

The Balance Sheet also shows you more details, like how much cash you have, how much customers owe you (accounts receivable), how many bills you owe (accounts payable), how much you owe in loans, and how much your business has earned up to now (equity or retained earnings).  It also shows you if those figures are increasing with time or decreasing.

2. Cash Balance

Your cash balance is on your Balance Sheet, but it bears digging into.  How much is in your checking and savings accounts? Cash is vital to your small business health. You can’t survive without it.  If you have to keep borrowing, your debt will overtake your assets, and your net worth will disappear. And banks don’t like negative cash flow. So monitor your cash balance.  Reconcile your bank statement every month. Know when your business cycles up and down, and plan ahead to make sure you have the cash you need to move ahead.

3. Income Statement

The next step in your basic accounting analysis is to take a look at your Income Statement each month. Your Profit is your bottom line. But it’s so much more than that. Your basic accounting analysis should dig deeper than just your Profit or Loss number.

Look at your total revenue and total expenses. Are they increasing or decreasing? Ask your accountant for a comparative Income Statement. This shows the comparison of this month and this year to date with last year, this month, and last year, year to date.

That way you can see at a glance what expenses are increasing, for instance. If you’re doing financial statements yourself, just keep copies of your Income Statements, and lay last years next to this years, and compare.

4. Statement of Cash Flow

This financial statement is another step in your basic accounting analysis. It takes the change in your cash balance for a time period, usually a year, and dissects that change into 3 areas – operations, financing, and investments.  From this statement you can see whether your business is holding its own just from operations, or needs influxes of cash from sources outside day to day operations to keep afloat.

Let’s say you have a $50,000 increase in cash for the year. Great, right? Maybe. Maybe not.  Look deeper. If most of that increase came from operating activities (day to day operations), that is great. But if it came from financing activities (loans) or investing activities (liquidating investments) then it’s not so great. Your operations should provide your cash flow.  So this statement should be prepared at least at the end of every year. Make it part of your accounting basics.

5 – Employee Turnover

Another part of your basic accounting analysis is taking a look at your employee turnover. Do employees stay a while or leave right away?  Certain employees are a very important part of your business. They may be the ones greeting customers, or helping customers on the phone, buying your materials, or selling your product. The longer they work for you the more wealth of knowledge they have, the more your customers count on them, and the harder they’ll be to replace. Each new employee needs training. That takes time and money. In some businesses, your employees are your business.

If you have trouble keeping people, find out why and rectify the problem. You’ll save money in the long run. And remember, you’re employees are out there talking about you. Make sure it’s positive!

6 – Supplier Relations

How well do you get along with your suppliers? When you need something in a pinch, are they willing to work with you or do they not return your phone calls?  No basic accounting analysis would be complete without looking into the strength of your supply chain. Make sure you pay on time, and take a little time to develop a personal relationship. You don’t have to be buddies, but make some time for those sales reps. If they know you, they’re more apt to go to bat for you in a pinch to get what you need.

7 – Customer Relations

Last on my list, but certainly not any less important, is customer relations. How are your customers? Do they come back for more? Do they send their friends to you? Are they angry or happy with you?  This is an important part of your basic accounting analysis because there is no business without customers. There is no sales income without customers.  Again, word of mouth is the greatest advertising. Make sure your customers are happy and giving you the thumbs up to their friends and business associates.  Keep in touch with them, and let them know how important they are to you.

 

These 7 tools are simple, commonsense things, but if handled well, they will help your business grow and be successful.

If you have positive net worth, a decent amount of cash in your checkbook, a profit, great employees that stick with you, suppliers ready to back you up, and customers raving about you, how can you go wrong?

And if you don’t have all these things? Find out why.

It’s a good idea to take a good look at all these items on a regular basis. Nothing about business is static. It’s always changing.  Spot problems when they’re small and more easily and quickly fixed.

Growing a Small Business

 

Ideas to help you expand your business and make it more profitable.

growing a small business

 

Growing a small business takes a lot of thought and planning.

One of your greatest accomplishments has been opening a small business. Maybe it took years of saving, doing without, or maybe you were the victim of corporate downsizing and decided to take your future into your own hands and start a small business.

But here you are. Your own business, in all its fledgling glory.  Now what?

You need to keep the wheels turning and move things forward.

Growing a small business can take many forms, depending on the business, but let’s look at a few ideas.

 

Ways of growing a small business

 

1.Add a complementary product or service.

Maybe you run a greenhouse and sell to retail outlets like grocery stores. What about opening a store on your premises and sell some of the flowers right there? Or maybe you provide computer repair services. What about adding computer software training as well?
2.Teach a seminar at your local community college or write an article for your local paper

This could give you some added exposure for your small business. You’ll be tapping into another customer base by providing them with useful information.
3.Friends and family.

Ask your friends and family to refer folks they know to you. After all, they know you best and can give a glowing referral!
4. New Employees

Have you added new employees lately? Tap into their circle of friends and family for some new customers.
5.Expand into a new territory.

Maybe you operate a business consulting firm, and have just been advertising in your town.  Expand your advertising to nearby towns for new customers. For retail operations, think about setting up a keosk in a nearby mall or, if you have the volume, research setting up a branch location.

 

6.Increase your profit margin.

Profit margin is part of your accounting ratio analysis, but to be very simple this is the percentage of your profit. You sell a widget for $50 and it cost you $25 to make, you have a 50% profit margin. To increase this percentage, you would need to increase your price or decrease the cost to make it.
7.Get online.

Is your product or service something you could sell with a website? Lots of books on small business advise encourage businesses, even small ones, to have a website, even if it’s just for giving potential customers information about your business and your service or products.
8.Foster good relationships with your vendors.

If you suddenly need to double your order, will they try to work with you? They will if you’ve worked at the relationship. Pay your vendors promptly and maintain goodwill between your businesses. They will also try to get you a better price the more you purchase if it increases their sales as well as yours.

 

9.Ask for referrals.

Adopt a refer-a-friend policy.  Satellite tv providers use it, even banks use it.  Ask your customers to refer a friend that buys your service and get $50.
10.Plan for growth.

Don’t just assume growing a small business will just happen, or that everything else will just fall into place once it does. If you expand into a nearby territory and increase your business by 30%, will your staff be able to handle it? Will your suppliers? Will your cashflow? Plan first. Then go after the new business.

 

No matter if you’re just pondering opening a small business, or if you’ve been running a small business for a few years, growing a small business should always be on your planning calendar.

So always be on the lookout for new products or services you can add and new markets for your business.

 

Need help planning ahead?  Here at Small Business Accounting Solutions we can help you plan for upcoming changes in your business.  Check us out.