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Must Learn Accounting Terms

This transcript is from Thrive15.com, a premium Ohio business college, featuring Clay Clark, US Small Business Administration Entrepreneur of the Year, and Marvin Morse reviewing more need-to-know accounting terms.

Clay:                So you continue as the accountant to have to be the non-fun guy.  You have to bring up all the detailed expenses that entrepreneurs need to think about.

Marvin:           No fun at all.

Clay:                Yeah, now term number 9 here, we're talking about the accounting period.  This refers to the amount of time for which financial information is being tracked.  Walk me through what that means in layman's terms.

Marvin:           Well the accounting period is the period that's covered by the income statement typically.  Preferably, you're looking at your monthly accounting period, seeing your results of operations for the month.  You probably should be comparing that to the month from the year before.  You probably also want to be looking at the year to date accounting period.  Say the first 6 months through June 30 and again comparing that to the prior 6 month period.

Clay:                So if you're talking to your accountant and he says, he mentions the word "accounting period" hopefully you're not going to anymore.  What are some common mistakes people make when they get into their accounting period?  Do they kind of every month make it a little different or do they change things around to make the numbers look better sometimes or do they get?

Marvin:           I suppose that's possible although I don't see that a lot with the advent of the accounting software, it kind of blocks you into your reporting periods.  Some businesses might make a mistake on choosing their tax year-end, that type of thing.   Although most businesses anymore are dictated under Internal Revenue Code regulations to use the December year-end.  But I really don't think it's so important what your year-end is as long as you're tracking and when you're comparing this month and this period to the previous period.  I'd see that as being a big mistake or a big tool that entrepreneurs don't take advantage of.  They tend to just look at "Here's my profit and loss for the last 6 months.  It looks good.  There's money on the bottom line".  They don't compare it to the 6 months a year ago and see that sales are actually trending down.  The cost of goods sold are actually trending up.  Suddenly general administrative is up 10 percent, and over time that can create problems of course.

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Clay:                Now how often do you recommend someone meets with their accountant so they can detect these trends?  Is monthly a good idea?

Marvin:           Probably quarterly.  I think there should be some initial counseling and training.  Ideally the entrepreneur would learn to do this on their own.  Therefore they wouldn't have to go to their accountant unless there was something they didn't understand about their analysis but I would think a good accountant would attempt to train their client to do some of this analysis themselves and then maybe meet periodically with their accountant to just make sure they're interpreting it correctly and that type of thing.

Clay:                How much time should an entrepreneur be devoting to looking at their numbers each month?

Marvin:           Well I would vary a tremendous amount by the size and type of the business but they should, at a minimum, be studying those financials even for the simplest of business, well one thing is they should do it every month.  Not once a year or when they get something back from their CPA.  Maybe that's too late of course so in order to spot trends and identify problems before they get to be a larger problem, you need to be looking at it monthly.  Maybe you could take a look at your financials and it might take you 4 hours to analyze.  Mine may be very simple and I can look at it in 30 minutes so I don't think you can say, I think it's just whatever time is required to get a thorough understanding.  If you can't do it on your own, then seek help from your accountant.

Clay:                At least every month?

Marvin:           A minimum of every month.

Clay:                Okay, just want to make sure you're hearing that.  If you're watching this and you're going "I haven't looked at my numbers in a while".  That's a bad deal.  We want to just look at each month at least.  Get in there, do a deep dive, know what's going on so that way you don't get behind the 8-ball and find yourself in a bad situation. 

Marvin:           Correct and a lot of entrepreneurs say "Well, I don't need, I've got money in the bank.  I don't need to worry about my numbers."  But that of course obviously isn't true because even though there's money in the bank, there could be liabilities piling up that are more than the money in the bank.  A good example: Your deposit for future services.  Even though you've got money in the bank, if you collected that $4000 deposit for future services and immediately spend it on a new car, then you've got to do an event in the future that for which you won't have any more revenue or less revenue coming in.  So that's a good example of how just looking at the money in the bank can be very deceiving. 

Clay:                Yeah, absolutely especially if you're an entrepreneur, you're watching this, and you're saying to yourself "Man, I had no idea how important this is", don't feel like you're lost.  Don't feel like there's no hope.  We just need to find a good bookkeeper, a good accountant and have that diligence to monthly look at these numbers.

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