It is a sad but true story that some small-business owners do not know how to calculate correctly value-added tax on the products and services they sell even after years of being in business. There is no shame in being wobbly at mathematics, but a leader of their own firm must patch lacking skills by outsourcing financial tasks to bookkeepers or accountants. In this first post of our blog series First Steps Into Accounting, let’s look at some basic concepts of accounting to help you get started!
In This Post
We will cover the following in this blog post:
- From Metal To Paper
- An Overview Of Accounting
- 1. External Or Financial Accounting
- 2. Internal Or Management accounting
- Why Care When Your Sales Look Fine Already?
- Wrapping Up
From Metal To Paper
It sounds a bit cryptic perhaps, but I’m talking about coins and paper money. Sometimes people work 16-hour days yet remain in the coin category. We want to help turn all that hard work into something tangible in the bank account.
Do numbers scare you? Do you have a good relationship with your bookkeeper? You do have a bookkeeper!?
Wemla has outsourced our bookkeeping to a clever person, who is supportive and very knowledgeable about even the latest changes of tax laws both nationally and on EU level. It is a blessing not to fight with double-entry bookkeeping, but to upload into a cloud folder all necessary data and then someone else files taxes etc. for us. This doesn’t mean we can stop thinking altogether about financial matters though, but it is still our responsibility to understand what is going on.
So, we warmly recommend hiring help, although be picky. Only a year after having registered for business we were already on our third bookkeeper due to complete lack of service, or lack of honouring contract.
Someone may promise you the sun on the sky, then deliver a picture their kid drew, and we are talking about your firm here, so asking for recommendations from peers is a really good idea. Do save your own copies of every single file you send them, too, and consider hiring only if they communicate digitally. We have heard horror stories of file folders of receipts left outdoors after contracts ended.
An Overview Of Accounting
Accounting (sv. redovisning, fi. laskentatoimi) is about understanding and visualising money and its flow within a business. Where does it come from, where is it headed?
There are two reasons for juggling the numbers:
- External/financial accounting (sv. extern redovisning, fi. rahoittajien laskentatoimi)
- Internal/management accounting (sv. intern redovisning, fi. johdon laskentatoimi)
1. External Or Financial Accounting
Financial accounting is for entities outside the enterprise such as investors, analysts and distributors of inventory.
Do you have the means to pay them for goods? There will be no contract or deal unless your finances look stable.
2. Internal Or Management accounting
Management accounting is for internal purposes such as budgeting, or deciding one’s range of products or services offered and their pricing.
Does it make sense at all to invest in developing a new product? What does it take to break even? And when could you expect a profit?
In addition to budgeting for a new year, you could use managerial accounting for project management (to estimate costs and sticking to the budget), or sales and revenue projections (sales forecasting and, based on them, some revenue projections).
Having a business isn’t just about making money but ensuring continued financial health and optimal decisions regarding what to sell and when.
So what is bookkeeping (sv. bokföring, fi. kirjanpito) then? It is a system of recording and categorising financial events within an enterprise.
Sounds fancy, but at least in Finland if you own the simplest form of businesses, the sole proprietorship (sv. firma, fi. toiminimi), it is not necessary to do double-entry bookkeeping, which is the complex form, but a chronological list suffices.
On the other hand, if you are stuck with double-entry bookkeeping, its logic is in explaining an event twice. If you buy for example inventory to sell, one bookkeeping account explains it as a decrease of cash in the bank account, whereas another bookkeeping account shows an increase in the calculated value of inventory.
It may seem complicated at first, but once you view it a bit like a dance of numbers, you realise one move is always followed by its partner move such that balance is created.
Why Care When Your Sales Look Fine Already?
Knowing your numbers is key in the value creation of your business. You may be one of few, who become astronomical successes without having many business skills. Most successful firms, however, invest resources in the work of their financial department, alternatively bookkeeper for small businesses.
In reality quite a few entrepreneurs don’t know their numbers, don’t do any budgeting and don’t quite grasp basic accounting. Winging it keeps the business afloat, but what to do if you want more people on board?
How do you know in which direction you should take your business next, if you don’t base decisions on what bookkeeping has provided accounting with?
This is particularly frequent among people, who have started a business on a hobby basis or as a side hustle, so if you feel in the spotlight right now, know that you are far from alone! Your first step is to sit in possible discomfort when facing these facts, and next is to start paying more attention to what your bookkeeper does.
Okay, maybe you are ready to throw in the towel? Or would you rather roll up the sleeves to get ready for more? Up next in this mini series is an overview of the financial statements. It will be a breeze!
And now I invite you to share your thoughts in the comments below. Love or hate numbers?
This blog post is the first in our beginner-level series First Steps Into Accounting on accounting and bookkeeping.
Photo credit: StellrWeb.