People often think of accounting as some complicated math exercise. In truth, it’s really just a system for categorizing transactions in your business. A sale is a transaction. A check is a transaction. A deposit is a transaction. All accounting does is keep track of each transaction and total it up. Those totals tell you what you need to know about your business.
Keeping track of the expenses of your business is a critical matter. It’s not complicated, but it is easy to let slide the day to day tracking of those expenses. That’s when business owners get themselves into trouble.
Let’s think about accounting in terms of buckets. Let say you have a big green bucket to keep all your revenue or income in. You collect it like rain water. From that big green bucket, you start taking out the rain water in smaller cups, let’s say they’re red plastic cups. You dip out some cash in a red cup for electricity costs. Another red cupful for rent. Another cup for insurance. If at the end of all that dipping, you have rain water left in your big green bucket, you have a profit for the month or the year. That’s all accounting is. It’s just one big green bucket and a bunch of red plastic cups.
The magical part is when you actually start using the information provided by the bucket and the cups to help you run your business. It all starts with a plan.
Let’s say you have a pretty good idea of how much rain water will come into the big green bucket. And let’s say you have a pretty good idea of how much each red cup will scoop out. You can begin to make some plans on how to ensure you have rain water left over (profit.) If your red cups need more to fill them then what’s in big green bucket, you end up having to borrow from someone else’s green bucket (the bank, your personal savings, your credit cards.) Or, if the big green bucket has exactly enough in it each month to satisfy the thirst of the red cups, you are at a breakeven point, but no profit! You can begin to look at increasing what goes into the big green bucket or decreasing what is needed for the red cups so your business can sustain itself.
Unfortunately, for most small business owners, knowing exactly how much rain will enter the big green bucket is often unpredictable. There may be a drought or a deluge. This is why planning and knowing your numbers are such an important part of running a business. What happens to your business if you have a slow month? Do you have a contingency plan? A rainy day fund (or in this case a drought fund)? What happens if your expenses increase unexpectedly? Thinking about these important questions before you have a slow down in revenue or an increase in expenses helps keep you in control of your business. It’s all part of getting your ducks in a row.