Ask SCORE: Taking that next step with accounting skills

Question: I'm at the point in my small business where I need to know more about accounting. My number skills are pretty weak. Can you tell me in plain English, what are the most important things I need to know about how accounting fits into my business, and how can I find out more?

Answer: Yes, it sounds like you might have math-o-phobia. Maybe you're a candidate for a crash course in accounting. But before you jump into that, we should review the big picture. Relax; we won't be using any accounting-speak terms like "debit" or "accrual" or "amortization" today. Let's talk about this.

First off, we need to set the stage. Many people think bookkeeping and accounting are the same, but they're not. Bookkeeping is pretty basic: it involves tracking, summarizing and recording your business' financial transactions. Some examples include: posting entries to a daily sales journal; writing checks; and sending out invoices. By contrast, accounting is the compilation of bookkeeping data into financial statements and other documents that show the financial condition and performance of the company.

As a small business grows, it typically goes through several predictable stages of accounting sophistication. Early on, most bookkeeping is tax-driven. This means that typically, you as the owner (a proprietor) summarize the business checkbook after year end, and prepare a Schedule C to include in your personal income tax return. A second stage is often when the owner uses some basic bookkeeping software (or a spreadsheet) to track sales and expenses, and prepares a year-end summary. After this stage it makes sense to begin outsourcing some bookkeeping or accounting tasks to firms who specialize in that work. This is nearly mandatory when you hire employees, because then you have to do payroll processing and all that goes along with it, including quarterly employment tax returns.

The next stage commonly has some additional involvement with an accounting or tax professional, perhaps a CPA. He or she will set up the accounting system to meet your increasing needs as you grow. As this growth occurs, be sure to step up your accounting involvement accordingly. A common standard for an established business is for the owner or manager to have monthly financial statements in hand by the middle of the following month.

In accounting-land, there are four different common financial statements. Small business operators need to know about two of these: the balance sheet, and the income statement. Larger companies have other, additional needs. If this interests you, go to annualreportservice.com where you can view the annual reports and detailed financials of all large (publically held) companies.

But of course your small business' financial info is private. Your balance sheet is the fundamental business accounting concept and document. It presents a summary of what the business owns or controls (your assets) and what it owes (your debts, and your equity in the business). It became called a balance sheet because the asset amounts were often shown on the left side of the page and the liabilities and equity amounts were shown on the right. They are always equal in total, so the books "balanced." Note that the balance sheet tells you about your business' financial position at one moment in time. For that reason it's often compared to an economic snapshot.

The income statement is a different animal. It shows your company's sales and expenses over a specified period of time - an "accounting period" - usually a month, quarter, or year. You may also hear the income statement called a "profit and loss" or a "P&L." An accurately prepared income statement is an essential management tool. It's your key to tracking trends in sales, profit margins, expenses and other important business events.

Here are some sources for buffing up your accounting skills:

• The IRS issues Publication 583, "Starting a Business and Keeping Records" available online at irs.gov.

• For something more thorough, the "Idiot's Guide" and the "Dummies" series have several good offerings. Another particularly good book is "Accounting Demystified." Check the library around call number 657.

• There are numerous local accounting classes, including both one-time and for-credit classes at WWU, WCC and BTC.

• Both the SBA (sba.gov) and SCORE (score.org) websites have lots of helpful information on accounting topics. Other online learning opportunities range from brief and free, to involved and expensive.

• AccountingCoach.com offers credible instruction, mostly for free.

• Google "accounting basics webinars" and see what's of interest to you.

You're on the right track. A business owner who gains accounting savvy is moving ahead on the success path.

ABOUT SCORE

To learn more about managing cash flow, and other small business matters, contact SCORE, "Counselors to America's Small Business." SCORE is a nonprofit nationwide organization with more than 13,000 volunteer business counselors who provide free, confidential business counseling and low-cost training workshops to small business owners. Call the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization,visit SCORE.org.