Have you ever considered that accounting is the health sustaining organ of an operation, and that its health has an impact on success or failure? An operation will survive when there is sufficient cash flow, however, what about when expenses are exceeding the income for a prolonged period? Perhaps an analogy will help clarify this concept.
The human heart is divided into two flow systems, which continuously pump oxygen and nutrient rich blood to sustain life. The Income flow from the organs and tissues of your body enters the right side of your heart, pumps to the lungs to remove waste and recharge with oxygen, and returns into the left side of your heart. The flow then Expenses to all parts and organs, ensuring oxygen and nourishment for your body to work efficiently.
Finances also have two flow systems, Revenue (income) and Expense (outgo). To gain a better understanding of financial health, a tool is also used that helps identify where the transactions are going and that’s the Chart of Accounts (COA). Arteries and capillaries organize and direct your blood on a path to where it’s needed, the COA organizes your finances in a way so that you see how your cash flows, and determine if the income/outgo flow is healthy.
Independent of the operation type, size, industry, or structure all use a chart of accounts, generally organized the same with bank accounts, assets, liabilities, equity, income, and expenses. From there, the unique personal or business aspects will determine the necessary customization of the COA.
- Bank: where cash is deposited (petty cash, checking, savings, mma)
- Asset: bank accounts, accounts receivable, or other current assets (prepaid expenses or loaning money to someone for example), and fixed assets (major purchase like furniture and equipment).
- Liability: accounts payable, loans or lines of credit, credit cards, security deposits from customer, sales or payroll tax.
- Equity Account: track money invested in or money taken out by owners or shareholders.
- Income: money earned from sales of product or service, residual income, commission.
- Expense: categorizes money spent immediately during normal operations, not purchased as accounts payable (office supplies, rent, advertising, utilities, etc.).
Company finances can be very complicated, however, with the proper tools it is very possible to keep track of your operation’s health. Whether you are using the old-fashioned paper and pencil or using accounting software, it is vital to know where the money is coming from, and where it is going. Categorizing expenses properly gives insight into ways to adjust and improve health, and assists in getting every tax deduction entitled to.
As you would seek out professional advice to ensure that your body’s heart is functioning properly, consider the professional advice of a professional bookkeeper or accountant to safeguard the heart of your business.