The Basics of Finance and How it Determines Success

I take pleasure in presenting hereunder three interesting articles on Small Business - The reasons for their success and failure.

The Basics of Finance and How it Determines Success

by BusinessDictionary 

Owning a business can be one of the most rewarding and satisfying ways of meeting financial goals and ensuring that a person’s future is secure and fulfilling. Today’s economy yields many opportunities to people with different skills and strengths.

One of the most basic aspects of running a business that is often left by the wayside is that of financial management. Usually only an afterthought, it is the financial management of a company that determines success. The perfect product or service doesn’t mean anything if the money generated goes into the business only to be misused or unaccounted for. Spending the money earned wisely and knowing when to save or invest in growth should be of paramount concern for a business.

Everyone is aware of the fact that most businesses fail within their first year of operation. Often a major contributing factor that leads to failure is poor financial management. A review of the financial information for many failed businesses shows that the business would have actually been quite successful if the owners had just made sound financial decisions in all aspects of the business. It is always recommended to employ the help of a professional like a banking institution, financial planner or accountant. However, a business owner should understand, at the very least, the basic principles regardless of whether a professional is hired or not. This protects the business and the business owner from fraudulent activities. Keeping up to date with the finances and being aware of the principals involved will also beneficially affect other aspects of running a business.

For smaller businesses it may not be practical to hire a professional for all of the financial work, but there are several software programs available that help to educate the owner on basic bookkeeping techniques.

A business owner should be familiar and comfortable with using the following:

Day to day expense tracking – an owner needs to be able create and analyse reports that give an idea of the health of a business.

Accounts Receivable and Accounts Payable – An owner needs to be able to tell when payment is expected and prepare for any outgoing expenditures

Of equal importance is the ability to determine the current financial state of a business and whether expansion is possible or even necessary due to competition. Being able to identify future trends that can positively or negatively impact a business will go a long way toward helping a business develop staying power in ever shifting market places.

Regardless of the size of a business, the goals of the business and the owner should be kept firmly in mind. While smaller businesses may not immediately benefit or be able to afford an accountant that is an expense that should be worked into a budget as soon as possible. Accountants and even financial planners are able to keep a business on track. They can help to establish realistic long-term goals to increase the chances of success. With the help of a financial professional, cash flow problems can be spotted and tackled.

Should a Small Business Owner Take Accounting Courses?

by Business Dictionary

While having an M.B.A. from Harvard is certainly not a prerequisite for running a successful small business, having some basic accounting skills and knowing how to use accounting software can save a small business owner a lot of money and frustration.

Even if the business owner has the resources to hire an accountant, a lack of accounting knowledge could allow an unscrupulous accountant to commit fraud without being detected for quite some time. Also, keeping track of money flows and having a good basis in accounting makes good business sense for owners of both small and large businesses. In many ultimately unsuccessful enterprises, failing to keep track of the money often results in the company’s money gradually or suddenly disappearing.

Learning Basic Bookkeeping: A Good Place to Start

Many a small business has failed due to a lack of proper bookkeeping. One of the most important elements shared by all successful businesses of any size is keeping accurate records, which is also a legal requirement.

Besides unnecessary fees such as overdrafts and late charges, a lack of poor records also attracts the attention of the Internal Revenue Service and can be the reason for an audit and other tax consequences. Poor record keeping can cost a business a lot of money and is the first step to ruin in many small businesses.

To help remedy any lack of understanding of basic accounting principles, a course in business accounting will generally include bookkeeping skills. Once you have taken the course, a family member could easily be taught to keep the company’s books until the firm’s profits allow for the hiring of a professional bookkeeper or accountant.

Furthermore, having basic bookkeeping knowledge will give you the possibility of effectively reviewing another person’s work. Having a working knowledge of bookkeeping is an essential financial element for just about any small business owner.

Learning About Financial Statements and Writing a Business Plan

Writing a financial plan for a business can be challenging for many business people. Nevertheless, knowing and understanding your company’s financial statements can be invaluable in running any size business.

The four principal types of financial statements for a business are:

Balance Sheet

Income Statement

Statement of Retained Earnings

Cash Flow Statement

Taking an accounting course can be extremely helpful in gaining the knowledge to write a business plan and in learning the particulars of each financial statement.

Learning How to Choose and Maintain an Accounting System

Businesses generally use either a cash method for accounting or an accrual method. In the cash method, income and expenses are tallied as they are made, and this is the accounting method most commonly used in small businesses.

The accrual method records income when a sale occurs, instead of when payment is received. Expenses are then recorded after the product is received, instead of when the product was paid for. The accrual method is generally used for larger businesses that use invoices and maintain a large inventory.

Maintaining your accounting system requires accurate record keeping. A number of accounting software packages are available that allow you to keep accurate records and save you the trouble of keeping records manually.

Overall, a basic accounting course can be invaluable to any business owner, especially if the entrepreneur has little or no accounting experience. The knowledge gained from a basic accounting course can make a difference in both profitability and efficiency. Furthermore, taking a course in accounting can now be done online, if you prefer to study at home. Also, many community colleges and business schools offer accounting courses if you have the time and prefer to study in a more scholastic environment.

The Price of Bad Financial Decisions for Small Businesses

by jayhawk

Start-up companies and small businesses have always had a relatively large percentage of failures, which is the ultimate price of making poor financial decisions. Fortunately, many of these business failures can be avoided if those managing the enterprise can keep from making some common financial mistakes.

Why Small Business Owners Often Make Bad Financial Decisions

Many people go into business for themselves having ample skills at making a business work on a day to day basis. This is often one of the chief motivations for becoming self employed by opening up a small business in the first place. Nevertheless, too much effort is often put into the daily operation of the business, while not enough attention is paid to bookkeeping and accounting practices, which are essential to running a small business efficiently and profitably.

Even though control over external factors may not be possible, avoiding simple financial mistakes and keeping accurate records will undoubtedly benefit any small business.

Common Financial Mistakes Made by Small Business Operators

The list below includes some of the most common bad financial decisions that small business owners often make when starting out:

Under capitalization – many businesses start out having too little capital to weather tough times. Sometimes small businesses suffer from too much optimism when the business is prospering. This can often be caused by inflation, which leads the company to make unnecessary investments in fixed assets.

Not Having a Bookkeeper – one of the most common mistakes made when starting a business is keeping poor records. Even though the added expense may be a burden, having a competent bookkeeper and keeping efficient records can pay for it many times over in the long run.

Over investment – many small businesses go overboard when it comes to buying inventory, especially if the business has any level of initial success. While increased inventory represents a potential source of revenue, if sales drop, the additional inventory becomes a stagnant asset. With the additional inventory, the business must sell additional sub marginal accounts. This causes the company to have to carry receivables, which can cause problems with cash flow.

Lack of Reserves for Contingent Funding -

In the light of the previous financial errors, the company will inevitably lack the funding for depreciation of assets, bad debts and other contingencies. Also, the company may not be able to afford to insure against flood, fire or inclement weather which could cause considerable damage to the business and in many cases, cause the venture to go belly up.

Other Important Factors Supporting Small Businesses

Another factor which can cause difficulties for a small business consists in failing to have or failing to follow a comprehensive business plan. Having a detailed business plan with contingencies for any eventuality could save the business in a market downturn and can help prevent bad financial decisions.

Furthermore, having enough capital at the onset is probably the most important consideration when starting a small business, especially recently. The ability to weather difficult financial conditions with a sufficient cash flow also often makes the difference between going bust and staying in business.