Accounting is the process of recording and reporting a company’s financial information. Small businesses often use accounting to determine how well they are generating profit compared to the amount of money spent on business inputs or resources. Although many small business owners do not have a wide range of accounting experience, they may be able to learn accounting through informal education processes or hire a professional accountant to complete this function. Accounting also provides several tools small businesses can use for managing their financial operations.
Budgets represent a written guideline for how much money small business owners expect to spend on various economic resources or business functions. Many businesses create budgets on a semiannual or annual basis. This allows business owners to the focus on developing the budget and outline financial goals for the year. Extremely small or home-based businesses may not need a detailed budget. These businesses usually have fewer costs that can be easily managed through the use of the traditional business checking account and basic spreadsheet.
Cost Allocation Analysis
Cost allocation analysis is a management accounting function used to determine how a small business allocates specific costs to its goods or services. Costs commonly allocated to goods and services include raw materials, employee labor and overhead. Small business owners need to ensure they are accurately allocating costs to products since the sale of goods or services to consumers is the primary way small businesses recoup business costs. Small businesses may also review the cost allocation process to determine if their billing clients for everything involved in completing a job.
Financial statements are the primary result of accounting. The income statement, balance sheet and statement of cash flows are three financial reports small business owners can use to determine how well their business is operating. Business owners may be able to use basic financial ratios to break down their financial statements and compare the ratios to a leading competitor or the industry standard. These ratios often indicate a how well the company generates profit through sales, the use of debt to finance business assets, the long-term cash flow potential from current operations and the small businesses ability to collect outstanding receivables owed by clients.
Forecasting is a detailed and sometimes complex accounting tool small businesses can use to determine potential sales in the current economic market. Forecasting may be completed by reviewing the small business’ previous sales history, target market or demographic information released by the Small Business Administration (SBA) or reviewing how many competitors are in the current business industry. An increase in competitors may indicate a higher sales potential where competitors leaving the industry may indicate lower consumer demand.
- "Accounting: Tools for Business Decision Making"; Paul D. Kimmel, Jerry J. Weygandt & Donald E. Kieso; 2007
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