3 Basic Accounting Principles For A Successful Business
Updated: Dec 12, 2019
Various factors can be attributed to a business’s success, such as smart investment decisions, innovative solutions, and standout products. Although the keys to success can vary among different types of businesses, there’s one particular essential skill that most high-performing firms share: familiarity with basic accounting principles.
Having a proper understanding of certain basic accounting principles can make a difference in how you get a handle on your business’s finances and growth. These two are vital to success.
For most business owners, accounting may seem difficult and intimidating at first, especially if they don’t have a business or accountancy background. But the truth is that basic principles can be applied easily as long as they’re understood. Being intimidated by accounting is no excuse for any business owner to not take advantage of every opportunity to stay on top of their finances and growth.
When accounting is overlooked or ignored, most business owners tend to end up paying for their mistakes, especially when tax season is right around the corner. Thankfully, taking note of key numbers, managing finances, and achieving profit through basic accounting principles is much easier than one might expect.
Here are a few basic accounting principles that you should know as a business owner:
A common reason for companies going out of business is that there is little to no cash flow, as opposed to the possibility of a lack of sales or profit. Unbeknownst to most people, cash and revenue are not the same things. Sales happen when a company manages to sell a product or service, and cash is a product of collecting payments.
Behind every successful company is a well-oiled cash flow that keeps a business’s engine operating and primed for success. The best way to stay on top of your cash flow is to put matching accounting principles into place. It basically entails recording sales or revenue along with the expenses incurred to attain it.
Per cent of Gross Margin
Gross margin is one of the biggest contributing factors to every single company’s overall profit and success. Simply defined as the difference between sales and cost of goods sold, the gross margin helps give insight into how well a company performs in terms of its sales and profit.
Also expressed as a percentage of sales, the gross margin can act as your basis on whether you have to adjust prices or lower costs of production to perform better over time. During the calculation process, make sure that you include every single detail that goes into making a product when determining the percentage of gross margin to have an accurate report every month.
Variable and Fixed Expenses
Every business attributes its success to the proper management of both variable and fixed expenses. Variable expenses are the expenses or costs that shift or change based on the total amount of sales in any given month. Typically, they are inclusive of customer shipping, cost of inventory and storage, and sales commissions.
Fixed expenses, on the other hand, are a type of cost or expense that remains the same every month, regardless of how many products you sell or produce. Examples of fixed expenses include utility expenses, space rental, employee salaries, and the like.
By keeping a higher amount of variable expenses and the lowest amount of fixed expenses as much as possible, it can be much easier to make or attain higher profits during low and high months. An example of turning a fixed expense into a variable expense is swapping out regular workers for seasonal workers or freelancers who will only be paid for when they work. This move effectively lowers costs on both high-performing and low-performing months.
Accounting can be intimidating to take on without any background or proper knowledge as it is the science of managing numbers for profit. Having the right knowledge of basic accounting principles, however, can help you make informed decisions as a business owner. Brushing up on the previously mentioned accounting principles can prove to be beneficial in the long run. So don’t miss out on the chance to succeed and implement them into your routine starting today!
If you’re looking for a business accountant or bookkeeper on the gold coast, get in touch with us today for a free consultation.