Most entrepreneurs just want to get on with building their dream business, but in reality, almost every business decision an owner makes will have financial consequences. And without some knowledge of how your books and financial results might be impacted, it’s hard to make the right choices. That’s why finance and accounting for nonfinancial managers and business owners is critical. Today, we’ll take a deep dive into the key skills for management accountants so you know how to manage accounting for small business for long-term success.
1. Know the hows and whys of journal entries
While you don’t need to be a double-entry guru, being familiar with basic accounting concepts behind journal entries can help you understand your financial reports.
Journals are records of business transactions and they form the backbone of your accounting system. Records are used for financial reports and they also provide management accounting information for creating and managing value.
So what’s difficult about journals?
Well, sometimes you have to make accounting adjustments to recorded transactions.
When you pay a year’s worth of rent upfront, your monthly financial results might actually be distorted. When using accounting principles, you’ll be recording the entire amount as an expense in the month you paid it. As you’ll be using these premises for the whole year, you should instead create adjusting entries to spread the cost.
There are plenty of other reasons why you might make adjusting entries. But the point to remember is that accounting numbers don’t always mirror the business transactions that take place
That’s one of our key skills for management accountants down, now let’s dive into understanding your financial statements.
2. Understand your financial statements
Financial statements offer a great way to keep your finger on the pulse of what’s really going on inside your business.
For example, even if your sales volume has been going from strength to strength, your balance sheet and cash flow statement might reveal a critically low level of cash – perhaps because your main customer hasn’t paid you on time. And if you’re unable to anticipate and resolve potential cash flow problems, you’ll have trouble paying your bills.
Your income statement might also show that despite healthy sales figures, you’re operating at a loss. Maybe the prices of your products are not high enough to cover costs, or perhaps costs have unexpectedly blown out.
Without the ability to interpret financial statements individually – and together – to form a complete picture of your operations, you won’t be able to identify the changes you need to make for a more profitable business.
You have to know the limitations of financial statements as well. One limitation is that the value of assets on the balance sheet reflect the money you paid. And this might be significantly different to their current market value. Also, even if your income statement is showing a net operating profit, it doesn’t mean you have surplus cash.
With greater insights into your financial statements, you’ll have a better understanding of how to manage accounting for small business. To make managing your financial statements easier you can also use document management software for accountants such as Xero.
3. Draw insights from financial ratios
One of the key skills for management accountants to bring to a business is ratio analysis. But even if you can’t afford an in-house management accountant, you can still learn about and measure key financial ratios so you can perform quick business health checks.
Financial ratios can tell you important things like how profitable and efficient your operations are, and how strong your cash flow position is. Your ratios can be compared to industry norms, across time and with other companies.
The values used to calculate your ratios are based on the financial statements of your business.
The most commonly tracked financial ratios are:
- Gross profit margin and net profit margin to measure profitability
- Current ratio and quick ratio for liquidity
- Inventory turnover ratio and accounts receivable turnover ratio for efficiency
Budgeting allows you to be intentional about what you want to achieve and how you’ll achieve them. It helps you to prioritise your goals and control spending. You can also build in a buffer so you can cope with unexpected expenses or take advantage of new opportunities.
When preparing a budget, it’s a good idea to start with prior year results or financial statements, then adjust numbers according to future expectations. Being realistic is integral to success, as is regularly reviewing and updating your budget. It’s often useful to consult an experienced accountant for management to ensure you’re making reasonable estimates.
Your budget also reveals potential challenges in the year ahead. If you’re not planning to invest in staff training, you may experience difficulties with employee motivation, morale and productivity.
5. Cash flow management
You need to manage cash effectively to ensure you don’t run out of money to finance your day-to-day business. Effective cash flow management is another of the key skills for management accountants. You also need to figure out if you’re generating surplus cash – money you can use to grow your business – or if all your funds are spent just paying the bills.
Cash flow statements are useful because they tell you how much cash comes in and goes out, and in which areas of the business. They could highlight the need to reduce credit to customers, minimise stock or inventory or extend credit from suppliers.
Because they require an understanding of technical terms and accounting adjustments, non-financial managers might have difficulty managing their cash flows. However, with the help of an accountant such as POP, finance and accounting for nonfinancial managers can be easy. If you want to learn more, head over to our blog dedicated to boosting cash flow and forecasting.
You can also use document management software for accountants such as Xero to make your cash flow management and easier. Accounting software can automate the invoicing process, making it easier to track when transactions take place and invoices are paid. More on this in the next section.
6. Maximising accounting software
These days, accounting software is a popular tool for real-time tracking of financial aspects of a business. And if you use Xero, an accounting and document management software for accountants and business owners alike, you’ll have access to a range of connected apps to run your company too.
When you know how to use the accounting software and tailor it to your business, then you can streamline processes, draw operational insights and take your firm to the next level. Depending on which software you use, you might even run your business and do your accounts from one central place.
If the skills discussed in this article are missing from your business, and you need a hand to get up to speed, POP Business can help. From connecting your accounting software to interpreting financial statements, our experts will collaborate with you so you’re set up for success.
We even offer a virtual CFO service so you can access affordable strategic advice for big decisions. So talk to us today!