Help Small Business Owners Know Their Key Accounting Numbers

Pennsylvania is friendly to small businesses and entrepreneurs. These entrepreneurs need accountants to help them navigate their financial records and avoid financial mistakes that can doom their companies. 

As an accounting, tax, and financial expert, you are in the position to educate your clients on the most important reports and metrics to track in order to help them make the most profitable decisions. There are many different reports that can be generated, but small businesses and entrepreneurs can be overwhelmed if you throw too many at them at once. Start with the basics, and discuss them with your client to determine what areas of financials need a deeper dive.                                                         

Most important metrics for a small business

Profit and Loss (P&L) statement or income statement

The P&L provides your client with the “bottom line” of net income or loss. It’s important that your client properly report all sales and other income, as well as all expenses, including the cost of goods sold, office expenses, payroll, etc. This will help the client see his or her net profit. Often entrepreneurs wear many hats and don’t report their expenses or client payments in a timely manner. Discuss with your client the variety of software programs, even phone apps for those on the go, that can submit the information in an easy and timely manner. 

Even if all income and expenses are properly recorded, your client’s P&L may not be accurate if your client draws a distribution rather than a salary. In order to have an accurate vision of profit, you’ll need to add back the distribution, which will significantly affect net profit. With these accurate numbers, you can discuss with your client the actual profit and determine a target profit margin. Every industry is different, but most aim for at least a 10% net profit margin.

Balance sheet

A balance sheet shows the client the big picture of assets to liabilities. By looking at the distribution of the assets and liabilities, you can walk your client through any strengths or weaknesses you may see. 

Assets include cash and cash equivalents, accounts receivable, inventory, property, equipment, intangibles, and any investments the company may have. If the accounts receivable seems unusually high, you may want to dig deeper and break down how far out some of these receivables are, then discuss with your client strategies to shorten the time it takes for clients to pay.

In looking at liabilities, you may see high accounts payable, or maybe excessive salaries and wages for the level of sales. These indicators can aid in your discussion with your client regarding areas that need to be addressed. 

Cash flow

Track the income and outflow of money by month to determine how much cash on hand is needed on a regular basis. The ideal should be to have the equivalent of two months’ worth of business expenses in the business account so that there is always wiggle room for months in which expenses are unexpectedly high.

Even if the P&L statement shows the company is making money over a period of time, if the money isn’t in hand when it’s time to pay the bills, the company has a cash flow problem that could eventually doom the business.

Profit by client, product, or project: Whether your client is selling goods or services, break down profit to determine if that product or person is worth the time, effort, and investment. Include customer acquisition costs in your evaluation. How much money went into acquiring that sale or project? That includes the cost of ads as well as the website, email campaigns, and salaries for the sales team. 

Helping your client

The information in these reports can help you guide your client on what changes the company may need to make to improve profitability. Do they need to shorten their accounts receivable turnover rate? Control costs? Raise rates or prices? Focus on certain clients, services, or products that are more profitable? All of these are questions you can use to help your client evaluate their business.

Once you’ve demonstrated your value to your client, you may find other areas in which your expertise can be of service. This may include taxes, business strategy, financial forecasting, applying for loans, and more. When you provide accounting expertise that helps your client’s company grow, you will likely find your work for that client grows, as well.