1. Accounting Is Not Just a Measuring Unit
Accounting is not just a yardstick to figure out how much money you made last year or what your tax liability is. Used properly, accounting also helps you identify trends in sales and expenditures. The ability to track and identify trends allows you to make decisions that can quickly boost your profitability or help you avoid cash shortages.
2. Do It Monthly
Every month, you should calculate the profitability of your business by putting together an income statement. Ideally, you should also examine your balance sheet. By looking at your financial statements every month, you can quickly adjust expenditures and sales efforts to keep your business within budget. Otherwise, at the end of the year, you will probably find that your expenses have crept upward, leaving your profit margin below your initial projection.
3. Keep Meticulous Records
No matter how strong or weak your understanding of accounting is, you need to keep very careful, well-organized records. Don’t use the fact that you are uncomfortable or consider yourself to have a poor understanding of accounting as an excuse not to keep good records! In fact, I would say it’s much more important to keep financial records extremely well organized but not understand accounting that well, than to understand accounting well but keep sloppy financial records.
One reason to keep good records is for tax purposes. If you ever get audited, the tax people are going to want to see some receipts, not just cancelled checks. If you can’t produce the receipts requested during an audit, the IRS isn’t going to be understanding!
There are lots of other reasons to be organized. For example, it is not uncommon for large, as well as small, companies to pay the same bill twice—sometimes even overpaying by thousands of dollars. It also isn’t uncommon for vendors to claim that you never paid a particular bill, even if you have.
One year, the Massachusetts Division of Revenue came after me for taxes they claimed were unpaid. I had organized records and could prove payment—I had the cancelled check! Even after I provided the state with a copy of the cancelled check, they continued to insist I hadn’t made payment! Finally, I sent a short one-line letter by snail mail to the Director of Revenue. The next day the Deputy Director of the Massachusetts Department of Revenue called me to apologize, and asked whether I thought someone in the tax department was targeting me. No, I told him, you people are just totally incompetent! But at least I do give them credit for reaching out to me!
4. Understand Basic Principles
Don’t be awed by accounting or its fancy terminology—the basic concepts are very simple. Even if you decide to use an outside accountant on a regular basis, you need to invest some time in understanding the basic principles yourself. It’s not that hard, but some people just get a mental block about it. But if you can add 2 + 2 and get 4 most of the time, then guess what? You have what it takes to master the basics of accounting!