Accounting: The Numbers Every Successful Business Owner Must Know
By CJ McClanahan
Raise your hand if you are interested in starting a small business because you love accounting.
Unless you are starting up a small CPA practice, I’ll assume that you kept your hand down.
Accounting is not fun.
For nearly all small businesses, Accounting generates absolutely zero revenue. Accounting doesn’t help find new prospects, and it won’t improve your marketing.
However, you can’t run a successful small business without a crystal clear understanding of what’s going on with the numbers.
In fact, I often tell entrepreneurs that if you aren’t committed to getting their arms around the financial fundamentals, they should shut their operations down immediately .
That’s right – close the doors and bar the windows.
Unless you know your numbers, you can’t effectively monitor your progress, thus you won’t have any idea how to grow profitably.
For those thinking, “I didn’t get into business to make money, I just want to do what I love and help people...” – this good and all, but understand that you don’t have a business, you have a hobby, at best... you need an education from Michael Gerber.
For anything to become a true business, the numbers have to matter.
But do not be discouraged. The good news is that getting your arms around the financials isn’t rocket science.
Once you understand that it can be boiled down to a handful of rather simple concepts, it’s a lot more manageable.
First, calculate your gross margin.
For example, let’s pretend you’re a General Contractor and have been asked to remodel a kitchen.
Your variable costs would be the sum of all the materials, subcontractor and labor costs, and permits associated with this particular job. You’d then subtract the sum of these costs from the fee you invoiced the customer for the kitchen remodel. The remaining number is your gross margin.
Next, set your budget.
Most business owners make excuses for not setting a budget or sticking to it. Did I also mention, that most businesses fail too? Coincidence?
It doesn’t matter what accounting software you are using, all you need to do to build a budget in go to the HELP section and type in “creating a budget.” Within minutes, you will have your first budget in place. Voila!
It’s okay if your numbers are completely wrong in the first year of having a budget – guessing in year one is encouraged, as all budgets go through recalibration.
SIDE NOTE: The process for setting a household budget isn’t much different, however, instead of using QuickBooks, you may be using a Excel File.
In your first year of business, the most important metric you absolutely must understand is your break-even number. This is calculated by dividing your total fixed costs by your per unit contribution margin (the difference between selling cost & total variable cost).
This break-even number represents the bare minimum you need to sell each month to stay in the black.
Finally, get a good accountant.
Your accountant should be much more than the individual who prepares your tax return.
He or she should help you with the aforementioned financial fundamentals throughout the year and serve as a trusted advisor through many of your toughest business decisions.
The best way to determine if you have a good accountant is to ask them the following questions:
Do you think I have a healthy gross margin? Why or why not?
Can you help me with my budget?
If your accountant‘s eyes glaze over, it’s time to choose a new accountant.
Now, let’s say you have a more extensive business model. You have inventory in multiple locations, sell across state or country lines, and employ people in part-time, full-time and contracted roles… you’re situation is a bit more complex.
However, even in this scenario, the fundamentals remain the same.
Additionally, the more complex your business model, the more important it is to quickly get your head around the numbers.
One of the most important lessons entrepreneurs must embrace is that the numbers are part of growing a business–no matter how far it pushes them beyond their comfort zone.
The numbers are part of maturing as a business owner.
Sure, you can put it off, but when the worst case scenario is you lose everything or even spend time in prison, it makes little sense not to get a grip on them.
And when you do it right, you’re business will flourish and your life will be great! (Okay, maybe that last part isn’t guaranteed, but at least you’ll have your business!)