For most small business owners, financial management is not a passion. For some, it’s a dreadful administrative task and for others, a mysterious set of processes and reports that seem like a waste of time and energy. But just as I can’t ignore things like marketing or leadership in my business, you can’t ignore financial management in yours.
Owning a small business is challenging and failure rates are high. In fact, 50% of small businesses don’t last more than five years. Cash flow problems cause a lot of small business failures. And an overwhelming number of entrepreneurs say their number-one regret is launching their business without spending enough time learning about financial management.
Knowing your cash balance is not enough. You need accurate, relevant and timely financial information to make decisions about your business. You need intentional, focused indicators to quickly tell you how things are going and where you are headed. You need your team to be engaged and empowered to grow the business along with you.
Whether you’re starting a small business and looking to get off on the right foot, or already own a small business, you need to understand the foundational financial topics to empower you for greater financial success. With strong financial management and a sound business plan, you can be part of the other 50%.
You could have all your financial information laid out in front of you, but if you don’t know what’s relevant, it’s not helpful at all. The key is to make sure your financial reports are organized in a way that provides relevant information, so you can make decisions. To do that, you must analyze and refine your chart of accounts and reporting formats to give you quick access to the information you need.
Almost without exception, an organization’s chart of accounts needs to be cleaned up or restructured to provide more meaningful information. You may have started with a simple chart of accounts, and it’s grown and expanded over time. Or you may still be using a generic chart of accounts provided by your accounting software. Regardless of how you ended up with your current chart of accounts, you need to refine it to provide you with the financial information that’s most relevant and important for you to run your company. The three important areas to consider when refining your chart of accounts.
Refining Your Chart of Accounts
- Sales Mix – Sales mix is the relative proportion or ratio of an organization’s products or services that are sold. Sales mix is important because a company’s products or services usually have different degrees of profitability. You can also evaluate sales mix by customer, industry, distribution channel, or geography. This data will give you a clear picture of how your company makes its money. Make sure your chart of accounts is set up to gather information at this level of detail. It can be tempting to think you know this information in your head, but you really need to capture and analyze the data. Then, you can focus on growing the revenue streams that are the most profitable, assessing those that are performing at a mediocre level, and stop wasting energy on those that are not producing.
- Profit Centers – Your Profit & Loss statement (P&L) provides information about the revenues, expenses, and profit of your business as a whole. Reporting on profit centers provides insights about the revenues, expenses, and profitability of specific areas of your business such as departments, geographic locations, or business units. Most accounting systems, including QuickBooks, have features for reporting on profit centers so you can run a P&L for each profit center, in addition to your overall P&L. Accounting by profit center requires some discipline on the front end when entering transactions, but it’s well worth the value of the information you gain to run your business.
- Expense Categories – You will need certain categories of expenses for your annual tax return. Beyond those accounts, it’s up to you to determine what additional expense categories are relevant. It’s important to keep things simple and only get more detailed or granular when you really need the information. Chances are, you have accounts right now that can be consolidated. When you put profit center reporting in place, you won’t need a bunch more accounts—you’ll use another “dimension” in your accounting system, such as the “class” feature in QuickBooks.
Focus on What’s Profitable
Refining your chart of accounts starts with understanding the information needed to manage your business. The result will be a well-planned chart of accounts that allows quick access to reports so you can focus on running your business and making well-informed financial decisions.
We have a tool that can guide you through this process. Download the Chart of Accounts Guide to begin collecting your most relevant information now. When you know where your company really makes money you can stop falling into the trap of selling more and making less and use the energy and capacity you save to sell more of what’s already profitable.