As for accounting skill, I would concentrate on the skills of:
- keeping all records relating to money transactions i.e. cash receipts, invoices, sales dockets, bank statements, loan agreements, credit card statements
- separating those records that directly relate to your business from those that are purely personal expenses
- classifying each business transaction according to a set list called a ‘chart of accounts‘ or an ‘accounts list’ that classifies ‘the things the business owns’ as Assets, ‘the money the business owes to others’ as Liabilities, ‘the money invested by you’ as Owners Equity, ‘the money received from sales, fees earned or interest’ as Revenue and ‘the money the business paid out to earn that revenue’ as Expenses. (Look for ‘chart of accounts’ examples from the internet)
Doing these three activities make it an easy task (less expensive) for an accountant or bookkeeper to prepare your Profit and Loss Statement and a Balance Sheet. Better still is to purchase some accounting software and enter the information in yourself and print out your own reports.
Understanding financial reports
As for understanding the reports, there is plenty to read into financial reports particularly when compared against previous periods, but I would concentrate on finding answers to the following critical questions:
- Is my business profitable? – This is the bottom line of the Profit & Loss statement which is calculated by taking Expenses away from Revenue. Net Profit explains how sustainable your business is.
- How much net worth do I have in the business? – This is the total of the Owners Equity found on the Balance Sheet which is calculated by taking the Liabilities away from the Assets. Owners Equity explains how strong your business is financially.