While you can always hire a financial professional to deal with this sector of your business, it is in your best interest to at least understand the basics of accounting and figure out how to get your financials started. Dan Gordon, a certified public accountant for TurfBooks, specializing in accounting for the landscape industry, broke down the four main steps to take control of your accounting.
STEP #1: Choose your accounting method.
Unfortunately, managing your financials is not as simple as picking up a ledger and tracking your expenses. Luckily, however, if you take the time to research the two main methods of accounting (the cash method of accounting and the accrual method of accounting), you should be able to choose the right one for you and your business.
As Gordon explains, with the cash method “the books are kept on the flow of cash in and cash out of business.” Since it is a straightforward method to accounting, it is a favorite of small businesses.
“From a tax standpoint, it’s sometimes advantageous for a business to use the cash method of accounting,” Gordon adds.
On the other hand, if you are a larger business, the accrual method may be easier because, as Gordon says, “revenue is recognized when it is earned rather than when cash is received.”
With the inventory that the accrual method allows you to maintain, it will give you a bigger-picture look at your finances. It’s the best choice for those looking to get real insights on their businesses from their finances. But if you are a small business and just getting started, this method may be a little too daunting for you and not entirely necessary.
STEP #2: Understand balance sheets.
Once you have chosen the best accounting method for you, you can get more into the details of your financial statements. But these next steps do tend to get a little trickier than just understanding the differences between the cash method and the accrual method.
According to Gordon, understanding balance sheets is “the area of business that most business owners don’t get.”
A balance sheet is basically a view of your financial standing at a certain point in time. It shows what you own and what you owe, which gives you and investors and the bank an understanding of what your business is actually worth. While that is a simplified way to understand what can often be a confusing topic, Gordon discusses an easy way to see if you are managing your balance sheets properly.
“If you are running your balance sheet properly, you probably don’t keep much in the bank,” Gordon explains.
STEP #3: Use profit and loss statements.
Don’t confuse your balance sheets with your profit and loss (P&L) statements. While they are two completely different statements, it is equally as important to understand and use P&L statements as it is to use balance sheets.
Gordon simplifies the difference by explaining that “a P&L is what you make, and a balance sheet is what you have.” Basically, the balance sheet looks at a set point in time whereas a P&L examines a set period of time. These may seem like hard things to maintain and differentiate, but even if someone else is handling them for you, you should have a pulse on these two things as they are two of the main financial statements that you will come across.
And whether or not you have hired a financial professional, as a business owner you need to see how your company is performing. If it’s good, you can keep doing what you are doing and more of it. If it could be better, you know what changes to implement.
That’s where the P&L comes in handy. Because, as Gordon says about P&Ls, “at the end of the day, this is the way you determine whether or not you are winning.”
STEP #4: Start budgeting.
Last but not least, according to Gordon, is one of the most important and most easily understood concepts: budgeting. Using a document to project future income and expenses is one of the best ways to successfully handle your finances.
“Business budgets may be one of the most important accounting tools a company uses in their business,” Gordon says.
Using a budgeting tool will not only limit expenditures, it also provides you a financial roadmap for your operations. Knowing how your business is operating is important, but properly budgeting is even more important.
“Many companies review previous years’ budgets to determine how well they followed the guidelines and why budget variances occurred,” Gordon explains.
Running your own landscape business is an exciting and daunting endeavor. If you have experience in the industry, it can be easy to understand what potential employees and customers would expect of you. But to successfully go from landscape employee to landscape business owner, take the time to learn about accounting.