The role of a small business owner can be difficult because they are required by necessity to assume a number of different roles including that of an accountant or bookkeeper. Staying on top of your accounts is critical to the success of any business small or large. Although there are many accounting skills that can be of benefit to small business owners I regard the following as the most essential ones.
Accounting Skills: Recognition of loss making business activities
Small Business Owners must recognise any business activity which is not turning out a profit. These business activities may include long running business products which are in demand from the business’s customers but which have become expensive to produce, due perhaps to a shortage of raw material. If the increased cost o production cannot be reflected in the sale price, then production of the product should be discontinued. Continuing to sell a product line below cost will inevitably lead to serious losses within the business.
Small Business Owners will sometimes consider the loss of some of its customers with the lack of profit on a certain product line. If the product line concerned is an inexpensive product which contributes a very small profit margin it may be acceptable o suffer a small loss on the product line in order draw customers to the store. This concept is generally known as a “Loss Leader” and is often seen in certain industries such as the furniture retail business. One item, say a coffee table is put on display at or slightly below cost in order to attract the public into the shop with the view that everything is priced similarly low there. When a customer enters the shop they will usually purchase one or more expensive products along with the coffee table.
Cash flow monitoring
Small Business Owners should continually monitor the business cash flow in order to ensure that any up and coming cash surpluses can be invested profitably and earn a good return on investment. Any expected cash flow shortages must also be carefully provided for with additional short-term bank finance or personal loans. A business may be running profitably with a full order book and loyal customers but a cash flow shortage for even a short period of time can lead to the business becoming bankrupt or being forced into liquidation.
A business will have a set bank overdraft limit and this usually cannot be increased at short notice. If the business is delayed a large payment from one or two customers for eight to ten days it can have a devastating effect on it. The business will have to pay its suppliers and its staff and if it cannot raise short-term finance or organise a loan to the business then an unpaid supplier or a union representing unpaid staff will apply to the courts for a winding up order for the business.
Control of overhead expenditure
Small Business Owners should keep a careful watch on overhead expenditure to ensure that profit margins are not being exhausted paying for excessive day to day running expenses. Overhead expenses will include business rent, rates, light, power, telephone, advertising etc. Some of these overheads are fixed and unavoidable such as rent and rates but other overheads such as advertising are variable and must be controlled to avoid excessive use of profit margin and cash flow.
Annual budgets should be prepared to determine the correct amount of variable overhead expenditure each year in line with expected sales income. Strict adherence to budgeted overhead expenditure is necessary and any excessive spending on; advertising for example, can eat into gross profit and create an accounting loss which may not be discovered until the financial year end.
Controlling staff costs with staff production
Small Business Owners should ensure that labour costs are adequately matched with the revenue created by each staff member. Staff should not be reimbursed for merely attending the work place during work hours. Staff attributes such as skill, timekeeping, loyalty etc. should be taken into account when a new member of the workforce is being recruited.
A Small Business invests heavily in its work force and a return on this investment is essential if the business is to continue profitably. Controlling of staff costs and recognition of each staff member’s productive capabilities is an essential skill for all Small Business Owners.
Business break-even analysis
Small business Owners should analyse the business break-even business projections at the beginning of each fiscal year or each major business contract. This analysis will always form part of a business plan prepared by a new business prior to commencing trade but should be prepared by business owners when quoting for a new contract or at the beginning of a financial year.
If this analysis provides evidence that the business will not break even, in other words the business will run into a loss making situation, then the business venture should not be undertaken.