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What is Gross Margin and Why is it Important?

What is Gross Margin and Why is it Important?

As a business owner, you understand how important bookkeeping is. The information a professional bookkeeper can provide will allow you to make informed decisions about your business. One piece of information your bookkeeper can provide is your company’s current gross margin or gross profit margin. Gross profit margin is a good yardstick for measuring how efficiently your company makes money from your products and services because it measures profit as a percentage of sales revenue. You can use your gross margin to compare your company’s profits to others that have different sales revenues.

 

Gross Margin Defined

Gross margin is the profit you’ve made after you subtract the direct costs of your products and services. It’s typically calculated as a percentage. A positive gross margin indicates that you have made back your costs and then some. A negative gross margin, on the other hand, means that it cost more to make your products than you made from selling them.

Essentially, the percentage is how much of a dollar you make as profit. For example, if your profit margin is 42%, you are making 42 cents for every dollar spent as profit. In other words, you spend $1 to sell your products, then make $1.42 from each sale. This means you paid back what you spent and made 42 cents in profit.

 

Protea Financial Gross Margin Outsourced Bookkeeping

Calculating Your Gross Profits

To calculate your gross margin, you first need to determine your gross profit. To do that, first add up all of your sales income. Next, add up all of your costs that are associated with manufacturing, procuring, and selling your products. Now that you have your gross profit, you can divide it by your total revenue. The resulting percentage is your gross margin.

Here’s an example. Say that your company made $100 million dollars in income. After subtracting out all of your expenses, you get a gross profit of $32 million. Divide 32 million by 100 million, and the result is 32%. That’s your gross margin.

 

Gross vs Net Profits

One important fact to remember is that gross margin is not your total profit. There are some indirect costs it does not take into account, such as taxes, licensing fees, and other expenses. Net margin or net profit deducts all of your expenses and costs from your revenue. It represents your true profit. Net margin, like gross margin, is very useful to business owners. Both percentages are useful when making decisions about your company.

 

What Information Can a Business Owner Gain from their Gross Margin?

Gross margin can provide business owners with a number of key insights that can be applied to maximize profits and minimize loss. First, it can tell you if your prices are too low, your costs too high, or both. If you have a very, very small profit margin, then you may not be charging enough for your products to fully offset your costs. You may also be paying too much for raw materials or for the manufacturing process.

Some businessowners make the mistake of assuming that just because their sales are good, they are profitable. Others may believe that their high gross profit margin indicates that they have good sales. Both of these statements can be true, but that’s not always the case. You may have thousands of sale transactions within a quarter yet still not be making a profit because your prices are too low or costs are too high. On the other hand, you could have a good profit margin yet not be making as many sales as you could be.

Knowing your gross margin will help highlight these issues. You may discover that you are making a very small profit even though it seems like your sales are good.

 

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How Gross Margin Can Help in Calculating Prices

When calculating your gross margin, you’ll also calculate your overall product costs. By looking at these numbers, you will be able to determine if you are selling your product for too little or too much. High sales but low profit margins may indicate that you are under-valuing the product. Low sales but a high margin could also indicate that your prices are too high.

A good bookkeeper will remind you that you cannot look at gross profit margins in a vacuum. There are many factors that can affect pricing, and you need to take all of these factors into consideration. The market sets the prices. If the market dictates lower prices, you will need to adjust your costs in order to meet those prices.

 

Gross Margin Also Provides Insight into Labor and Material Costs

In addition to looking at price, you can also use your gross margin to see what you’re spending on your products and services. New business owners may be surprised at how much they spend. If your gross margin is low but you feel that your prices are fair, there are two factors to consider. One factor is marketing, but that is a separate area of discussion.

In relation to gross margin, the factor you will want to focus on is your overall costs. Are you spending too much? You may want to consider alternative materials, new partners, or renegotiating current contracts to lower these costs and grow your business.

 

Who Should Pay Attention to Gross Margin?

All business owners should consider their gross margins on a regular basis, whether that’s monthly, quarterly, or annually. Small business owners can use gross margin to help them determine if they are pricing products correctly or if they could potentially save on costs. Marketing experts can look at gross margins to see if their marketing plans are meeting their goals. Even experienced business owners and bookkeepers can use gross margin to compare previous fiscal years and project their company’s growth over the next few periods.

If you have a bookkeeper, they can calculate your gross margin and help you understand what it means in terms of your profits, expenses, and sales. However, if you don’t have a bookkeeper, you run the risk of miscalculating your margin or not fully understanding how to use it to make financial decisions.

If you’re in need of a bookkeeper, Protea Financial is here to help. We provide bookkeeping, payroll, compliance, and inventory management services to wineries of various sizes. Contact us today with any questions or to discuss partnering with us

What Makes Wine Accounting Complicated?

What Makes Wine Accounting Complicated?

You may have only been drinking wine made in the United States for a few years, but people have been making wine in this country for nearly 500 years. American wine was an undervalued industry for decades, and it has only been in the last 50 years that people have really savored good wine made in America. If you are in the wine business, you already know that the winemaking industry is a different business, especially when it comes to accounting practices. Accounting for wineries and vineyards is difficult. To make things easier, you’ll need an accountant with experience in winery and vineyards, specifically. Anyone without that experience is more prone to making mistakes, which could lead to financial woes for you.

Two Types of Accounting in One Business

Most agricultural bookkeeping—whether with crops and crop rotation, produce, or livestock—is straightforward. Accountants in the agriculture business only have to keep one set of books. However, the wine making process is different in terms of accounting. In reality, there are two types of accounting going on at the same time in the wine business.

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Cash Accounting

First, in accounting terms, vineyards—the fields where the grapes are grown—operates as a traditional farm. This means that farmer built arbors or trellises to hold the grapevines, planted the grapes, waited for them to mature, and harvested them. The farmer handles pesticides, replanting, and other issues with a vineyard. The farmer selects specific grapes to grow depending on the type of wine desired, the soil conditions, and the planting or growing season. Because vineyards are an agricultural crop, accountants can keep the books as a cash accounting business.

If the grower has a vineyard without a winery, the cash accounting method of bookkeeping is still acceptable because the crop is planted, grown, and harvested in a cycle that typically spans one growing season. Payments for the growing season occur at one specific time.

 

Accrual Accounting

Many vineyards are attached to a winery business. If you own both a winery and a vineyard, the cash method of accounting isn’t enough. Wineries must be measured on an accrual accounting basis. In accrual accounting, revenue and expenses are recorded in the books at the time of the transaction. Many wineries use accrual accounting as part of the bookkeeping process, because not all wine sells at the time of bottling.  A bookkeeper would record expenditures for wine barrels at the time of the barrel purchase. The wine that goes into that barrel may not be sold for months or years, at which time the bookkeeper records the revenue. Cash accounting is easier than accrual accounting, because expenses and revenues happen in the same growing season. Accrual accounting takes someone with far more knowledge of accounting practices.

Because of the operations of a winery with a vineyard, a wine accountant must be able to balance two books—using cost and accrual accounting practices—rather than a single ledger.

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Wine Production Has a Long Expenditure Capitalization Process

Not only does a wine accountant need to manage two books, they must also understand the long period of vineyard growth. Beginning operations as a vineyard is an expensive initial investment. After you purchase the land, you must pay for arbors or trellises for the grapes and pick the type(s) of grape you want to plant for winemaking. Grapes used in winemaking take several years to grow and become good wine producers. People who plant vineyards must be in it for the long haul, and not mind excessive spending with a return on investment in years rather than months.

Wine accountants know that to operate a successful winery, expenditures must be capitalized throughout the growing process. When commercial production begins, the accountant can begin to account for both expenditures and income on the ledger. Capitalization is important during the wine production process to allow the business room to grow without all of the expenses taking the operating and production capital out of the business when production begins.

 

Cost Accounting Is Different For A Winery

When an accountant uses the cost accounting procedure for a winery, they must use a non-traditional method. Two of the processes during making wine, crushing grapes and bottling the wine, take a short amount of time. That means the expenses or income happen quickly. However, two other processes for winemaking are long term. Wine is aged in barrels for a period before it is poured into a bottle. After the wine is poured into a bottle, it is aged again. Any costs incurred here happen over a period of months or even years. In fact, the higher grade a wine is and the more expensive it is, the longer the aging process takes.

 

Activity-Based Cost Analysis

In activity-based cost analysis, costs are assigned by wine type. That way, an accountant can figure the cost to produce the wine by the gallon or by the bottle. However, activity based cost analysis can get complicated for an accountant. Each wine has a different storage time, and this impacts cost accounting. Wine accountants must take shrinkage into consideration, as the volume of wine in a bottle shrinks during the aging or bottling process. A winery may sell some of the wine in bulk in the barrel or in the bottle before it is aged. Also, wineries may value inventory in different ways, including last in—first out, or by the dollar value of each bottle.

One other factor that wine accountants must take into consideration is charitable donations of bottles and the effect on inventory. Wineries are often asked to contribute bottles to charity auctions, and it is good advertising for any winery or vineyard. Because each bottle must be accounted for, a wine accountant must check inventory against a list of charitable donations of wine bottles.

 

Let Protea Make Wine Accounting Less Complicated – We Are Here to Help

Wine accounting is understandably complex, especially if you own or manage both a winery and a vineyard. If you are the owner of a winery and a vineyard, you want to find an accountant who is familiar with the bookkeeping and inventory practices of wineries. Don’t trust your accounting to someone who isn’t familiar with keeping books for the wine industry. When you need a wine accountant, contact Protea Financial, and let us help you keep the best books in the wine business. 

Cut Your Winery’s Operating Costs with a Winery Bookkeeper

Cut Your Winery’s Operating Costs with a Winery Bookkeeper

Operating a winery is a challenging job. It requires an in-depth knowledge of many aspects of growing produce. You need to understand your plants, keep your soil healthy, watch for signs of infection or pests, and know when your plants are ready to harvest. Then you need to harvest your grapes and go through the entire winemaking process. Once the wine is bottled, aged, and ready to sell, you then need to take on the marketing of your product.

As the owner, it is your job to keep track of all aspects of this business. You need to know your details readily, including expenditures and income. Not having accurate finances can cut into your bottom line. It can even cost you money instead of making a profit. Some business owners struggle with this aspect of their winery as they do not properly keep up with the numbers of the business. That is when outsourcing to a winery bookkeeper may be the best option to prevent your winery from taking a loss.

By outsourcing your winery’s bookkeeping to a bookkeeper who understands the wine industry, you can reduce your operating costs. There are several benefits to using an expert bookkeeper that make it worth the cost. By knowing your strengths and weaknesses when it comes to running your business, you know where to reach out to experts. This is one of the easiest places to seek help.

 

What Does a Winery Bookkeeper Do?

A winery bookkeeper can assist you with virtually any task related to managing your finances. They will oversee your accounts payable and accounts receivable. Plus, they work with clients to ensure that invoices are paid in a timely manner and communicate with vendors to make payments. They will also reconcile your monthly bank statements with your internal financial documents and coordinate with the bank if there are any issues.

Tax preparation is another task that a winery bookkeeper can assist with. Your bookkeeper can work closely with your accountant on your annual tax returns. They can gather much of the information your CPA needs, reducing the amount of work your accountant must do. This, in turn, can reduce the cost of your professional accounting services.

Depending on your organization, a winery bookkeeper may even take on tasks related to inventory or order tracking. Some even manage all aspects of the winery’s inventory. Your bookkeeper will also be a sounding board for financial decisions you need to make. They can provide expert advice on potential projects or expansions.

Where a traditional bookkeeper would have to take time to look up regulations or requirements, a winery accountant knows these things from experience. What that means is you pay for fewer hours hiring a winery accountant, but get more accurate and detailed financials as a result.

 

Protea Winery Bookkeeping Saves You Money

How a Winery Bookkeeper Can Save You Money

Using a bookkeeper instead of handling your finances yourself will reduce your operating costs in several ways. To fully understand where these savings come from, you must look beyond the cost of using a bookkeeping service. Here are some of the ways you can reduce your overall costs of using a winery bookkeeping service.

 

Focus Your Efforts Where They Are Needed

As the owner of the winery, you likely handle many different aspects of running the business. This often includes many or all your financial tasks. If you had an expert to handle that work, you would be able to refocus your efforts on tasks that only you can do. By giving you back some time, you can focus on earning more income for your winery in that time. Bookkeeping is not something that requires your personal attention, but making major business decisions is.

You can also leave all the bill paying to your bookkeeper. It is often their responsibility to ensure that your bills get paid, accounts are billed, and payments are received on time. They then track these expenses and income, providing you with more accurate budgets and insight as to how financially healthy your winery is at all times.

 

Prevent Costly Mistakes

Bookkeeping mistakes, even those that may seem minor, can have a large impact on your business. These mistakes can result in lost income, missed opportunities to save money, or even fines. A professional bookkeeper can catch many of these mistakes and correct them before it is too late.

Your bookkeeper can prevent other mistakes as well. They will ensure that your bills and incoming invoices are paid promptly, which helps you avoid late fees and keeping your professional relationships intact. They will also carefully watch your budget, so you do not over-spend. A good bookkeeper will also make certain that all clients are invoiced correctly and keep on top of unpaid invoices.

 

Reduce Overhead

Finally, by hiring a bookkeeper, you may be able to reduce some of your overhead operating costs. These include costs such as:

  • Office supplies
  • Office furniture
  • Technology-related costs
  • Other expenses that are necessary to operate a business regardless of what industry that business is in.

According to Intuit, overhead costs should ideally make up less than 35% of your total costs. Bookkeepers typically have an understanding of what a reasonable cost is for these products and services. They may be able to identify areas where you are overspending and move you to a different vendor or renegotiate your contract. This is one area you may not have ever found the time to focus on, but a dedicated bookkeeper can.

 

Turn to Protea Financial to Get Help with Cutting Your Winery’s Expenses

Interested in learning more about how a winery bookkeeper can help you reduce your operating costs? Contact us here at Protea Financial today with your questions. We will gladly explain to you how we can help cut your costs and give you back time to focus on what you do best. 

Starting with a Budget Can Help New Wineries Succeed

Starting with a Budget Can Help New Wineries Succeed

Starting your own winery may be a dream, but you must understand, with that dream comes expenses. Many who enjoy a glass of wine have thought about what it would be like to start their own winery. Starting any business is a challenge, and this is especially true in the wine industry. Thankfully, you can use our experience and expertise to help make this process easier. Here are some important notes for creating a winery budget in general.

What Goes Into a Business Budget?

If you want to be able to apply a business budget to a winery, you need to step back and look at what it takes to create a business budget. There are many steps involved in this process, but overall, here are the basics:

  • An outline of expenses (both fixed and flexible) and returns on a monthly or annual basis
  • One-off costs, such as equipment or software purchases
  • Projected sources of revenue outside of the product you plan to create, if any
  • A list of areas where the expenses may vary and guidelines

Ideally, you do not want to spend more than you make, but when you apply this to a winery, that is rarely the case to start. That is because wineries take time to make a profit. They need to mature before a harvest becomes available, so you need to budget for that time.

How a Budget Changes for Wineries

Your budget for a winery starts with the purchase of land in most instances. Rarely are you going to go out and buy a fully functional winery to start. Your upfront costs are going to include the land, plants, and the actual planting process. Your one-off costs can include any equipment you need on top of these costs, just to get off the ground. The cost of land is as cheap as it is going to be, so buying now is the best option, even if you cannot start your winery right away. The cost of one acre of land in California’s wine region is expected to climb to approximately $1,000,000 by 2050.

Down the line, you will need to factor in other costs, such as

  • Fermentation equipment
  • Harvesting equipment and labor
  • Equipment to make the wine itself
  • Bottling equipment
  • Storage facility
  • Licensing
  • Trademark
  • Wages for any employees
  • Branding following a label approval
  • And more

Your winery should be able to begin making wine in three to five years from when the land is planted. However, there are some deterrents to that timeline. You may struggle with crops due to limited water resources, frost, diseases that can damage plants, or even pests, and all of this only if your plans to plant are approved by the local government. All of this may slow your return. 

Also you need to consider that wineries are seasonal. That means you need to budget costs that you must pay all year, even if you only harvest or produce wine part of the year.

Tools to Help You Stay Financially Focused

There are many tools you have at your disposal to remain focused on keeping your finances in order. One of those tools is your budget. It gives you a reminder of where your money is coming from or going to at all times. However, that is not the only tool you can use. 

Setting up a spreadsheet may be a simple, yet effective way for you to visualize your flow of money. Most accounting software titles have something like this you can use. However, if you do not have one of those already, this is an inexpensive alternative. Just understand that you must be dedicated to adding in all the information you want to track. If you forget, you will have to go back, track down the information, and put it all in. 

Another tool you may want to use should be software to manage your inventory. You need to track your plants, their age and location, how much produce they provided, and more. This is an essential part of the winemaking process, since it will factor into how much you charge per bottle. 

Payroll is another aspect of starting a winery you must keep in mind. Unless your winery is incredibly small, you will need help. This means paychecks for the employees you hire. Payroll is more than ensuring they get their hourly wage, as there are taxes at the federal level, most states have state taxes as well, unemployment, Social Security, and more. These are numbers you must track carefully, as being wrong can lead to IRS penalties and fines. 

Protea Financial Starting with a Budget Can Help New Wineries Succeed

Why is Winery Accounting Important?

The best tool you have at your disposal to remain focused on finances as you start a winery is going to be a winery accountant. They understand what goes into starting a winery, they have experience in setting up and following budgets, and they can help with things like payroll and managing your inventory. They become a tool that minimizes your time requirements while also saving you money. 

Great bookkeeping is the backbone of any successful business. Many businesses believe that they can track the books themselves. Unfortunately, this can lead to missed expenses, incorrect payments, and a budget that does not cover everything it should. The best thing any business can do to ensure that the financials are always in order and nothing is overlooked is to hire a bookkeeper. 

By putting a professional in charge of taking care of day-to-day activities like your finances, you can then pay attention to any part of your winery that would require your specific expertise. You get peace of mind knowing that your employees will always be paid when they should be. Plus, you also have the security of knowing your taxes are correctly filed and all your documentation is current. Those are simple assurances you get when you hire a bookkeeper for your winery.

Winery Accountants Keep You Focused

Understanding the costs of running a wine business can help you create the most appropriate budget for your winery. Do you have everything at your winery insured? This is an expense that is overlooked at times, and that could lead to major problems down the line. It is vital you have everything insured if you want to run and grow your winery into a solid business. The insurance should cover both your equipment and your property.

When you begin having a harvest, you also need a winery accountant as they can help you determine your cost of making wine. If you sell the wine for too little, you may lose money. However, if you price it too high, then no one is likely to buy. You need to know the right amount to sell it for, and that should be based on the exact costs you have per bottle you create.

Turn to Protea Financial for Help with Your Winery Expenses

Wine is the drink of choice for many of us after a long day at work or just to warm us up on a cold winter day. For those who have considered starting a winery, make sure you have the right approach in mind. Focus on your budget and expenses from the start.

Making wine is a challenge, but those challenges become easier when you have the right tools. A winery accountant is a tool that is necessary if you want to truly succeed in your endeavor. You want someone that can use their experience and knowledge to help you push forward. You need someone you can trust to go through this experience with you.

Turn to the experienced winery accountants of Protea Financial. We can answer any question you may have on financials, budgeting, or accounting for your winery. We are here to help. 

Don’t Let Accounting Problems Sour Your Wines: Avoiding Common Accounting Issues

Don’t Let Accounting Problems Sour Your Wines: Avoiding Common Accounting Issues

Wineries need to pay attention to every detail when it comes to accounting. You need to keep an accurate record of the total amount of wine made during the year. Even a simple mistake can cost money and time. There are two mechanisms that ultimately decide whether you will stay in business.

First, how much profit you make is determined by the market based on how much someone is willing to pay for your bottle of wine. The wine industry is growing rapidly in many parts of the country. Because of increased competition, wineries will need to be creative to differentiate their products to demand higher prices.

Second, the costs of making and selling wine determine how much profit is left. Since there is not much wiggle room to increase the revenue from one bottle, how you understand and control your costs has the greatest impact on how profitable your winery is.

In this article, we are going to discuss some of the difficulties wineries face when it comes to tracking the accounting of cost of goods in producing wine.

Protea Financial Blog Don't Let Accounting Problems Sour Your Wines

Winery Operations

A winery has four main operations. Well, five if you are vertically integrated and harvest your own grapes. 

  • First, after harvesting is the crush phase where grapes are pressed and squashed.
  • Second is the fermentation stage; this is the most vital part of producing wine. Fermentation continues until all the sugar is converted to alcohol and a dry wine is produced.
  • Third, clarification is where the juice is separated into tanks. This allows the sediment to drop out. Winemakers will rack or siphon their wines from one tank to another. Wine is separated from the solids, which is known as pomace.
  • Last, the wine is aged and bottled. There are many choices and techniques in this stage, which results in the many distinct types of wines.

Of these steps, the crushing and bottling phases are quite short, while the other stages can be exceptionally long.

Keeping Track of Costs

Because of the time it takes to create different types of wine, you will need to keep careful track of how long each type of wine takes to produce. For example, a red wine with low production values would take less time to process than a high-grade red wine. Consequently, the high-grade red wine should accumulate more indirect costs.  Indirect costs include depreciation on the production facilities, labor by the wine master, utilities, production supplies, testing expenses, etc.

Your record of costs will include taking into account any wine that was transferred from barrels or tanks, any wine that spoiled before you could sell it, as well as any wine that you gave away for free or dumped because it became unsellable.

These costs are what is called cost of goods produced (COGP) and includes all the costs that went into making the wine. They include the raw materials, labor, overhead, direct, and indirect costs, which were incurred from the crushing phase all the way through bottling and storing the wine.

When a bottle of wine is sold, the cost of producing that specific wine is recorded as cost of goods sold (COGS). The difference between the revenue generated and the cost of goods sold is the gross profit on that wine.

Allocating Costs

Activity based costing (ABC) assigns overhead costs and indirect costs to related products. Activity based costing enhances the reliability of assigning costs. This enables wineries to have a better understanding of the costs associated with producing wine.

Wineries use a variation of ABC where they assign expenses to each of the functional areas in the winery. The costs are then allocated to what is a gallon-month for each wine product. For example, 100 gallons of Pinot Noir aged for six months equals 600 gallon-months. If it costs $10,000 to store the wine, those costs are assigned to the Pinot Noir based on its share of gallon-months of wine stored.

Because of the unique aspects of making wine, tracking costs can easily become complicated. Wines are commonly held in storage for longer than one year. So, not only do you have to allocate costs to several types of wines, but you also have to allocate costs to vintages of each varietal. Due to the lengthy process to make wine, it is common to lose some to evaporation. Additionally, if the wine master engages in blending two or more types of wines, the calculations change because of how these separate costs are allocated between multiple wines.

Protea Financial Blog Don't Let Accounting Problems Sour Your Wines Avoid These Common Mistakes

Accounting Helps Keep Track of All Channels to Make Your Life Easier

As complex as tracking costs is, you may be asking whether it is even worth it. As a winery you have various sales channels that have various profit margins. Many wine sales go through distributors who expect lower prices so they, too, can make a profit. You may only make 10-30 percent. Where performance is measured, performance improves. As you meticulously track your costs you can improve those margins.

Other than to improve profit margins, another compelling reason to keep track of costs is because it is required by the federal Alcohol and Tobacco Tax and Trade Bureau (TTB). Federal regulations include tracking weight tickets when harvesting and how much wine is available after production.

In addition to the TTB, the Internal Revenue Service (IRS) wants to see the profit levels for each product sold, as well as proof for the calculations. When the production process takes greater than two years, the IRS wants wineries to allocate interest costs. Furthermore, they want to see separate calculations for the source of the grapes, the type of wine, how long it takes to age, and the size of the storage containers used. The IRS has even created a Wine Industry Audit Technique Guide.

Let Protea Financial Be There to Help You with Cost of Goods Accounting for Your Winery

All this can seem overwhelming. It can be, but it does not have to be. Our expert team has worked with the wine industry for years. We can help you navigate the difficult terrain of tracking costs and staying in compliance with Federal regulations. Reach out to us here at Protea Financial. We would love to help! 

 

Accounting Tips to Improve Your Knowledge

Accounting Tips to Improve Your Knowledge

At Protea, our mission is to help as many people as possible have a better understanding of accounting and hopefully understand the value good information adds to the success of their business. Better accounting for everyone!

With this in mind, for the last 3 months I have been sharing a weekly Accounting tip of the day to my LinkedIn page. To date, it seems to have been very popular (relatively speaking). I like to believe these tips have added value to those who need to improve their accounting knowledge. To help you improve your understanding of accounting, here is a journey through my thoughts.

Nothing Beats the Basics

The simplest form of accounting is bookkeeping, but honestly it is the most important. Without accurate bookkeeping, everything else cannot be correct as the more advance accounting will be based on bad information.

So how do you get good bookkeeping? Hire the right person. Hire someone who is consistent. Get the basics correct. It will make everything so much better.

Simplify for Success

Do not over complicate your chart of accounts. Keep it simple.

Fewer accounts (generally) makes is easier to read, but more importantly, drastically improves consistency. With too many accounts, it can become ambiguous and lead to charges ending up in a lot of different accounts, making analysis difficult.

Use your accounting software’s industry basic chart of accounts and then focus on what you need to know from your chart of accounts. Then develop the chart of the accounts from there. A little bit of customization will go a long way.

Simplicity = Consistency = Ease of Use

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The Accountants Trick

Understanding accounting is as easy as understanding left and right.

The accounting equation A = L + E is a process of understanding the left and right hand need to match. Now remember left is DEBIT, and right is CREDIT.

Simple.

Here are the basics:
Assets increase = DEBIT
Assets decrease = CREDIT
Liabilities increase = CREDIT
Liabilities decrease = DEBIT
Equity increase = CREDIT
Equity decrease = DEBIT

Knowing your accounting equation is a key basic to being successful in the world of bookkeeping.

Save Your Backup

Always attach a backup to your vendor bills and journal entries in your accounting software. It will provide clear indication as to why the item was raised, plus make your life so much easier when trying to remember what a cost was for in the future.

Separate Personal from Business

If you are a small business owner or solopreneur, your business and personal life start to blend into one, but this does not mean your expenses should blend.

Keep your business and personal expenses separate from each other.

One of the major reasons to separate your personal and business finances is for tax purposes. The ability to take advantage of tax deductions, including writing off business expenses, is a huge reason many business owners choose to split their personal and business finances

Another important reason is to be able to see the true performance of your business. How well are you really doing?

Clean books will also make it a lot easier to sell in the future if a future buyer does not have to try and strip out your personal expenses.

Make Sure You Keep Supporting Documents

If you are spending money outside of the normal AP process, say on a company credit card or even a personal credit that you then claim back, keep the backup of the expense, and store it with all other expense backups.

The IRS requires businesses to keep receipts for all business expenses of $75 and up. Though if your business is audited, you’ll still need to be able to provide basic information about expenses under $75, such as the date of the purchase and its business purpose. So, generally, I say keep them all.

If you are transacting a lot on a credit card, make sure to make notes on each receipt or make use a third-party app to track what the expense is for.

Be Aware of Journals

If you are doing accrual financials but need to do accrual-to-cash basis adjustments for tax accounts, remember general journals are picked up as cash transactions in most accounting software. Knowing this will make your life a lot easier.

 

outsourcing accounting services

 

Analytical Review Can Be Your Friend

Reviewing your profit and loss using 12 months and a monthly view will not only allow to take a look at the historical performance of your business but will also allow you to look at trends.

From a pure review standpoint, it will allow you to identify if any costs were missed and help you be more consistent in your processing.

Accurate Costing Is Critical

Make sure you are costing your inventory and then raising the cost of good transaction for each sales transaction raised. Most accounting software would handle the second portion as long as you are selling inventory type items on your invoice (don’t use service if you are selling a product).

Costing can be simple if you buy a finished product, but can be extremely complicated if that product is being manufactured. Make sure the person handling your costing understands cost accounting principles and understands what needs to be allocated in terms of GAAP (tax could be a totally different story).

And Finally, Outsource to People With The Correct Skill Set

If you are a small business, it likely that your accounting does not require a full-time commitment. Rather than trying to do it yourself, outsource your accounting.

Getting the expertise from someone who does accounting daily allows you to save money in the long run as it will be done correctly, consistently and on time from the start.

Remember, good information allows you to make better decisions, which allow you to increase the odds of being successful.

Turn to Protea Financial for Any Other Accounting and Bookkeeping Questions

Here at Protea Financial, we want you to turn to us when you need accounting resources of any kind. We can help answer questions, set up accounting software for your company, and even be your outsourced accountants.

Accounting is something many find confusing. Let us help keep it simple for you. Call us today.