5 Essential Accounting Skills Business Owners Need to Run Their Businesses Profitably
Accounting skills are essential to running the affairs of your business.
Accounting is the universal language of business.
Every business decision is related to the transactions and financial results of that business.
As a business owner or manager, you have to use the information accounting provides to make the best possible decision for your company.
It is the light of the above, you need to know the Five Essential Accounting Skills Business Owners Need to
Do You Understand Accounting?
The mere fact that accounting deals with numbers scare some business owners. That’s reason enough for some to stray away from it completely. The first step to sharpening your accounting skills is developing an understanding of what exactly it is.
Accounting is the collection, summarizing, analyzing, recording, reporting and interpretation of the transactional data and report.
Bookkeeping is a subset of accounting that is concerned with the collection, summarizing, and recording of transactional data.
However, accounting and bookkeeping is an area of your business that you shouldn’t ignore.
With good accounting, you are able to measure the success and future profitability of your business.
One of the most essential accounting skills to have relates to bookkeeping. Bookkeeping is the process of gathering accounting data for a business. It revolves around the record-keeping of transactional data.
Keeping accurate records and data is vital and germane to keeping a business afloat, If it fails to do so, you will lose track of crucial data, which could lead to miscalculations and bad decision making.
The first step for excellent bookkeeping is to gather source documents for all of your business transactions. That implies the collection of every relevant information for every executed transaction. These source documents provide the initial inputs for your bookkeeping.
As a business owner, you need to ensure that necessary controls in terms of authorizations and limit are put in place to avoid irregularities, errors, and fraud.
It also incumbent on you as the business owner to ensure that all the source documents are kept in proper custody.
The next step after bookkeeping is to generate reports in form of financial statements.
The most common financial statements generated are
- the Statement of Financial Position (balance sheet),
- Statement of Income and Comprehensive Income (income statement and
- Cash Flow
You can get our free ebook about FINANCIAL STATEMENT here
Together, these 3 statements paint a comprehensive view of the performance of your company.
Note that the financial statement supposed to be generated or prepared on monthly basis to keep abreast of the performance of the business.
As a business owner or manager, you need to know how to analyze and interpret Statement of Financial Position, Income Statement, and Cash Flow Statement
Cash Flow Management
Your accounting skills would not be complete without understanding cash flow management. This is because cash is the lifeblood of any business.
Cash flow management revolves around the monitoring of the inflow and outflow of cash. It is fundamental to growth analyses and forecasts, as well as to the survival of the enterprise. Poor cash flow management can wind down the enterprise, leading to debt defaults.
A profitable company does not always equate to positive cash flows. This is a common misconception that stems from the idea that revenue means cash collection.
You could be recording millions of naira in sales but have poor cash collection procedures, which enables you not to meet the payment of vendors. This is a prime example of poor cash flow management.
Cash deals with liquidity while profit is concerned with profitability.
Your accounting skills must include budgeting for your business.
Budgeting is very key to the gradual and steady growth of your business. At every stage of business growth, budgeting and forecasting remain a vital aspect of business management.
It plays a decisive role in operational financial performance management.
A budget is a very good operational tool which as a business owner you can use to measure variance between the actual and the budget. The resultant variance could be favorable or unfavorable/adverse. It is important to take the time to review the outcome of your budget and adjust where needed.
You can get our free ebook about BUDGETING here
Prior year accounting data are always a useful guide in creating a budget. These provide estimates and assumptions on which well-informed predictions of what and where you plan to spend your resources.
There are various types of budgets like master budgets, sales budgets, cash budgets production budgets, and so on. The budget is also time-bound it could be monthly, quarterly, semi-annually, or annually. The time-bound depends on the nature of the budget.
Your accounting skills must not exclude taxation
Taxation is part and parcel of managing a business. It is therefore incumbent on business owners to have a favorable attitude towards taxation by acquiring some basic skills that will make them be on the side of the law in running their business.
It is important to know your responsibility and duty as well as your rights and obligations as a taxpayer in terms of what are the expectation of tax laws as far as your business is concerned.
You need to know the tax system and structure in your country and also which tax authority administers the type of taxes you are supposed to pay. It will be necessary to know the taxes you are supposed to pay, what is the requirement for payment.
Day-to-day accounting practices entail more than sheer number crunching. But instead has the power to narrate the story of your business using figures as it unfolds by the day.
It can project a glimmer of hope as it draws up a positive balance sheet with an increasing asset base or the documentation of profits and losses via the income statement can also present the financial wellbeing of your business.
You can get our free ebook about TAXATION here
As the owner of your business, you have your hand in every part of your business. Accounting should not be any different. While the concepts and technical aspects of accounting can be quite daunting, understanding key concepts and acquiring certain accounting skills can help you take your business to the next level. It allows you the opportunity to have that deeper conversation with your Chartered Accountant or Auditor that will completely unlock the door of possibilities for your business.