'Thousands of businesses failed because they couldn't read the warnings in their accounts'
These are the nitty-gritty details to know to keep on top of your finances.
NOT ENOUGH RECOGNITION is given to the thousands of Irish entrepreneurs who have taken the plunge to set up on their own.
It’s an incredibly brave step to create a job – not only for yourself but also for some 1.2 million other people across the island. Small businesses are the backbone of the Irish economy and account for the majority of jobs here.
But it’s not all plain sailing. The fact is that our education system, in the main, does not prepare entrepreneurs to understand, let alone manage, their business accounts. The result is that the energy and enthusiasm of many entrepreneurs is stymied by this shortcoming.
There are sadly many thousands of businesses that have failed, not because their product or service was not fit for market, or even that they were exposed to an economic downtown, but because they were not able to read the warning signs in their accounts and prepare accordingly.
Mastering accounts is really just another term for being in a position to take control of your own financial destiny. To do so, there are a number of basic accounting concepts you need to grasp.
Here’s the thing: once explained, these basic concepts are easy to understand and take into your business for immediate effect. We’ve identified six main areas where businesses experience problems while dealing with their finances:
1. The sales cycle
A lot of small businesses struggle to understand how much profit they earn from each sale and therefore they fail to understand what areas of their business are actually profitable. To overcome this issue you need to ensure that sales and cost account classifications are set up correctly from the start.
2. The purchase cycle
Not getting all invoices booked into your accounts before the end of the year will mean that unknown liabilities could exist. A small business needs to get in contact with all its major suppliers and get statements from each to ensure that all invoices are accounted for.
3. VAT
Not understanding their exact VAT liability at any given time can be fatal for a business if you are unable to find the funds available when Revenue calls. Setting up the correct VAT rates in your systems and ensuring that you have also set up a VAT control account will help you overcome this problem.
4. Bank reconciliations
If these aren’t performed, a business has no concept of unpresented cheques or when funds haven’t cleared into their bank accounts. You can end up being embarrassed when a payment bounces even though you believed you had sufficient funds. Regular bank reconciliations will ensure that you are on top of your cash flow.
5. Profit and loss
Businesses that struggle to produce profit and loss accounts and balance sheets can experience huge problems, particularly when looking for finance from a bank or potential investors. A small investment in good accounting systems and some time spent setting up and training on them can ensure these issues never arise.
6. Cash flow
Managing this is one of the key issues new businesses face. By understanding your sales and purchase cycles, combined with your VAT liability, you should be able to manage cash flow and ensure your business’s survival.
There is a wealth of information available online if you want to check out these basic concepts – some paid, some free – including our own, six-part video series that explains the core concepts in less than 40 minutes.
This post is not groundbreaking in its recommendations. What we do know is this: those small business owners who master the basics of their accounts not only run more profitable businesses, they are also happier individuals. Why? Because they are in control. They are working on their business as opposed to in it.
Marc O’Dwyer is the CEO of Big Red Cloud.
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