September 24, 2013
What You Must Know About Accounting
2 min read
I dislike accounting. OK, I hate it! But, unfortunately, every business owner needs to understand basic accounting and must pay attention to the books if they want to stay in business. I can’t teach anyone accounting in a blog, for that you need more, and better help. But I’d like to share with you a few nuggets of experience, if I may, in the hopes that you will progress in growing your agency with less pain than I had.
The first nugget I’d like to share is that what your Profit & Loss (P&L) statement shows you can be very misleading. When you subtract your expenses from your income you have a profit or loss, right? Right. But it is a rookie mistake to assume that where there’s profit there’s cash.
Profits include non-cash items like receivables. And profits distort the impact of non-cash expenses like depreciation and amortization. So, you need to understand that and before you make spending decisions (like writing yourself a check!) take that into account.
Also, the P&L statement often misleads us into thinking we’ve got more money than we really do because it fails to account for expenses we’ve incurred but not paid, or obligations we’ve committed to but haven’t gotten a bill for. That’s where a Balance Sheet can sometimes, but not always help! More on that next time.
Another thing a P&L can distort is how we’re actually doing at that moment in time. Most new and growing agencies write policies on direct bill these days. That’s great because there are no customer receivables but it’s often hard to know what period’s sales the commissions received are for. Do you have more money coming next month for last month’s sales? What are your real receivables? It’s often hard to know.
Also, after you’ve been in business a year or two you will find that you don’t always get paid at the same time for the same business written. So, how do you know whether you’re doing well vis-à-vis your plan or not? I learned long ago to ignore monthly results. They are just too volatile. But usually things smooth out on a quarterly basis. So, that’s the P&L to really scrutinize.
A final tip. Try as hard as you can to keep expenses posted in the same month as the income they generated. This makes things much less confusing over time. For example, pay sales commissions based on current month gross commissions received, not last month’s. As your agency grows it will make life easier I promise.