What accounting fundamentals do you need to understand as a business owner? Read on to gain an understanding of the accounting basics you need to gauge the financial health of your company.

Accounting Fundamentals: Chart of Accounts

Accounting Fundamentals: Chart of Accounts

by Patty Lawrence | TurboCharge Your Business

A chart of accounts is a framework for accounting for your business.

But why does it matter?

As a business owner, you need a basic understanding of your financials. You need to know this to:

  • Communicate it better with your advisors, bankers, etc.
  • To better understand and communicate what your needs are for your business.
  • To know which metrics and KPIs are important to watch in your business.
You should be watching those metrics on a regular basis to take action on them and stay in control of your business…rather than descend into chaos!

There are a few main buckets that make up the chart of accounts:

  • The income statement, where you can measure your revenue, cost to deliver on your revenue promise, and overhead costs. This resets every year.
  • The balance sheet, where you can see your assets (such as inventory, cash, and accounts receivable), liabilities (such as accounts payable, sales tax payable, and loans), and equity (what you as the business owner have as far as the business’ financial value). This is cumulative and represents a snapshot of our business since inception.
The chart of accounts is the framework that holds all of these different areas. We can structure it to see more clearly and get the reports that really matter and support all of the decision-making in your company.

Accounting Fundamentals: Balance Sheet

Accounting Fundamentals: Balance Sheet

by Patty Lawrence | TurboCharge Your Business

The balance sheet is the most critical of your financial statements because it’s the report that’s been with you since you founded your business. It’s cumulative, and it shows the numbers in your business since inception.

It includes:

  • Assets – what you own
  • Liabilities – what you owe
  • Equity – the difference between the two (hopefully, a positive number!)

Assets include two distinct areas:

  • Current assets, which are liquid (easily convertible to cash). For example: cash, accounts receivable, inventory, other cash equivalents.
  • Non-current assets, which are more long term over at least a year. For example: investments, property, plant equipment, office furniture, computers, goodwill.

Liabilities include two distinct areas as well:

  • Current liabilities, which are one year or less. For example: accounts payable.
  • Non-current liabilities, which are longer term in nature. For example: debt, like a mortgage or vehicle loan.

Equity breaks down into:

  • Capital – what you paid into the business
  • Retained earnings – profits retained into the business over time
  • Owner distributions – a reduction in your equity

Accounting Fundamentals: Income Statement

Accounting Fundamentals: Income Statement

by Patty Lawrence | TurboCharge Your Business

The income statement is the most paid attention to report in all of accounting.


Because it includes those vanity numbers, like top line revenue/sales.

The income statement breaks down into a few different buckets:

  • Revenue – sales of your product or service
  • Cost of sales / cost of goods sold – the direct cost to deliver on your revenue promise
  • Gross profit – revenue minus the direct cost of sales.
You need to have cash generated in your business above and beyond profit, because you have obligations for that cash and towards the growth of your business. You need to be generating lots of profitability in your business so that you can fuel your growth and move the business forward.

Gross profit is the engine that prints money and generates that cash flow. This number needs to cover your overhead costs (such as administrative expenses, utilities, rent overhead, marketing expenses, R&D, general expenses), cash flow items, debt payments, charitable contributions, etc.

A monthly income statement, set up to measure against a budget, will help you have your controls in place and understand what your numbers are actually communicating. With a budgeted income statement and an income statement for this period versus a prior period, you can understand progress and where to make adjustments.

Accounting Fundamentals: Cash Flow

Accounting Fundamentals: Cash Flow

by Patty Lawrence | TurboCharge Your Business

As I always say, cash is king! It’s the most important aspect of your business because without it, you can’t take your business anywhere. Cash gives you options, and you want to have as much of it in your business as you can.

Profit isn’t necessarily cash flow. Profit really only looks at income and expenses. You can be profitable, but cash poor because you can be making sales that aren’t generating enough cash to afford the activities that you have going on (like your balance sheet items). You won’t see vehicle loans or a mortgage on your income statement, and yet you need to be generating sufficient cash and profit to satisfy those cash requirements that sit on your balance sheet. That’s what cash flow is all about.

Cash flow concerns the movement of money in and out of your business. It moves in ebbs and flows, and it functions as the gas of your business engine because you need cash to make cash.

Something important to consider when it comes to cash is: where is cash tied up in your business? Obviously, you have cash in your checking account and we need that on hand. But where else could you have cash tied up in your business? It could be on your balance sheet in accounts receivable or inventory as cash to be converted. You can rework those AR terms to pull cash back into your business more quickly or free up that inventory back into your checking account.

There are other places cash could be tied up in your business, and I call these leaky buckets. Maybe you’re spending cash you don’t need to be spending, or labor inefficiencies are costing you money. We need to fix those leaky buckets because they’re costing us not only profit but cash.

When we understand what our cash flow is, we can start to manage our cash better. Because remember: cash is king!

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