Accounting Tips for Business Managers
Part of the Accounting For Dummies Cheat Sheet
Business managers should get the most out of their accounting information — to know how the business is doing and how to do better, and whether or not it is on the verge of serious cash flow and financial problems. You wouldn’t pilot a plane without knowing how to read the flight map. A business manager should know how to read the financial map of the business provided by accounting information. Here are some useful tips to keep in mind.
Take charge in choosing the accounting methods for your business and the design of your accounting reports. All too often, business managers adopt the policy that accounting is best left to the accountants. Unfortunately, this may result in your not fully understanding your own financial information.
Make sure you have a smartly designed P&L (profit and loss) report that serves as a hands-on tool for managing profit. A good P&L report highlights the key variables that drive performance for each major profit center of your business. It should serve like a well-used guide that directs you to the right destinations. You may need different formats for different profit centers in your business.
A P&L report generally should focus on margin, sales volume, variable expenses, and fixed expenses. Margin per unit equals sales price minus product cost and minus the variable expenses of making the sale. Your business must sell enough volume to earn total margin equal to fixed expenses before breaking into the profit zone. After sales reach the breakeven point, the margin from additional sales goes entirely to profit (before income tax).
Remember that relatively small changes in profit factors can yield dramatic results. A small slippage in margin per unit can have a devastating impact because unit margin is multiplied by total sales volume. On the other hand, even a slight boost in sales price or a little more sales volume yields a lot more profit.
Make sure you clearly understand every cost figure you use. Product costs depend on which accounting method is used, such as the choice between the last-in, first-out (LIFO) and the first-in, first-out (FIFO) methods, or they depend on rather arbitrary allocation methods. Know how your costs are calculated! Press your accountant to explain if you aren’t clear about costs.
Establish and enforce strong internal controls. Businesses handle a lot of data and money, which present countless opportunities for errors, customer theft, embezzlement, and fraud. Make sure bulletproof internal controls are in place and working well. When your internal controls are weak, you can be sure that some of your hard-earned profit will go down a rat hole.