Understanding Your Business Financials

Updated: Oct 12, 2021

The Importance of an Accounting System and Chart of Accounts Most business owners, when they think of financial statements, think of the compiled statements that their accountant produces at the end of the year for them.  In some cases, these were created by providing them a box of receipts and in other cases they were produced from your accounting system. In many cases, we find business owners are not looking at them unless they need them for financing or providing to their bank which is insufficient.

Financial statements provide a view into how your business is performing and should be looked at more than at the end of the year, because at that point it may be way too late to react to less than desirable results. This is why it is important that you have a professional accounting system such as QuickBooks, Sage, or even one specific to your industry.  Once you have the system, it is important that you have your Chart of Accounts set-up for your business.  You should want to see a breakdown of your revenue by product or service lines, target markets, sales channels, or maybe even geographies.  The same is true of your Cost of Goods.  It may be important down the road to understand the cost of raw materials, packaging, labour, shipping, or anything else that is included in your costs; especially if you want to understand how each product line contributes to your profit or loss.  Expenses within a business tend to be the same across industries.  Setting up accounts for your balance sheet should be very specific to your business.

If you are not sure how to set a chart of accounts up for your business, ask a professional for help. If you are putting receipts in a box and printing bank and credit card statements at the end of the year along with invoices and providing them to your accountant, you are not managing your financials and this is where we find businesses end up in trouble. Keeping your Bookkeeping Up to Date Once you have an accounting system, it is important that you keep the information up to date on a monthly basis.  Broadly this includes invoices, expenses, and purchases.  For other businesses this can include job costing and inventory as well. Bookkeeping is not a data entry job, it requires someone to understand the chart of accounts and have some understanding of accounting principles.  Most small businesses do not need a full-time bookkeeper and in many cases they can get by with a few hours a month based on the number of transactions their business has.  Speak to your accountant, as many firms have bookkeepers on staff and for smaller ones, we find they usually have one or two bookkeepers that they have worked with and can recommend. A good bookkeeper can be a business life saver.

If you are not keeping on top of your bookkeeping, this is where we find businesses run into trouble with paying GST / HST (depending on province)  and payroll taxes.  You may be small enough now to pay annually for GST/ HST, but at some point you are going to be required to pay quarterly and if you do not know what you have earned, if you are not tracking this closely, you may not have the funds to pay which paying late can result in fines and interest. The CRA (Canada Revenue Agency) are very unforgiving when business owners and operators borrow their HST funds for other business purposes – this is considered “trust funds” and should be allocated to any other use than remitting to the CRA.

The Importance of Finding a CPA As a business owner, you want to make sure that you find an accountant for your business that has a CPA designation and has experience in performing assurance exercises and filing taxes. Just as with any professional that you hire, you want to make sure that you feel comfortable with the individual and are able to sit down and talk to them about your business. Just like with any professional you hire, you need to perform due diligence.  Different firms will have different focus areas and designations of accountants with specific expertise.  Make sure you find one that meets the needs of your business. In some cases, there might be accountants who focus on particular industries as well. 

Too many times we hear from clients that they drop off their books once a year with their CPA and pick up their statements and taxes once completed and never speak to their accountant.  As an owner, it is up to you to build a working relationship with your accountant and meet with them to get their advice.  They are professionals, so this is not a free service, but is an important one.  Running  and Reviewing Monthly Reports There are reports that as a business owner you should be running on a monthly basis to understand how your business is performing.  At minimum you should be running the following reports.

  • Profit and Loss Detail :  This rep