Avionics News November 2013 - 30

COUNTING BEANS

Continued from page 29

Accounting System Components
A chart of accounts is a list of the business aspects you
want to track. An account is a unique record that defines
the different types of financial transactions and organizes
the business' finances. In other words, there is a separate
record for each type of asset, liability, revenue, expense and
equity. For example, if you want to track how much you
are spending on cleaning supplies, you'd create an account
for this specific expense. A report that tallies charges to this
account shows how much you spent on them during a period
of time.
The general ledger is a report that includes all of the
accounts on the chart. If your accounting is cash-based, it
is like your checkbook register, showing
your dated payments, deposits and cash
balance. Your actual checkbook register
does not count as a general ledger. The
real thing is a system of debits and credits
built on source documents, the "paper"
trail of invoices, bills and other applicable
documents. There are two parts to every
ledger entry, which moves money from
one account to another, from the payroll
account to your employees, for example.
When the debits and credits aren't equal,
the books don't balance.
Payroll accounts track everything related to paying your
employees, including federal, state and local taxes. Many
shops outsource this task to firms devoted to this aspect
of business because mistakes can lead to substantial fines.
Others use in-house computerized payroll systems.
A fixed asset account tracks items, such as test equipment,
that you'll use for an extended period, generally more than
year. They are not items frequently bought or sold, and
under the accrual system of accounting, fixed assets are not
expenses when you buy them; you depreciate them during a
given time period. This is an accountant discussion. Simple
depreciation divides the asset's cost by the years you'll use
it. If you buy a $5,000 test unit and plan to use it for five
years, it counts as an annual fixed cost of $1,000.
An inventory account tracks all of the items a shop buys
and sells, from cable and connectors to finished products.
This is another accountant discussion because it often
includes sub-ledgers for different types of inventory. A good
purchase order system supports the paper trail that traces
certificated parts. Equally important, inventory identifies
what's selling or sitting, when to reorder items and how
long jobs take. Inventory also can identify obsolete items,
McKinnon said, and if "you don't expect them to sell in the
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business cycle, you might be able to write them off."
Accounts receivable tracks who owes you how much
money, and when payment is due. A good accounting
software program lets you set up a separate sub-ledger for
each customer, which not only ensures timely billing and
collection but also provides a record of past transactions.
Accounts payable tracks what the business owes other
businesses that supply the things the shops needs in its daily
business. Timeliness matters here, too, especially when a
supplier offers a discount with early payment.
Business Plans and Budgets
A budget for the coming fiscal year plays a big role in
opening the doors every day, but good budgets are built on
business plans, according to Williams. At the very least,
the plan should define your market, explain how you will
reach it, and identify the competition. A
budget, an estimate of how the business
will perform, is based on this guidance.
It should address your fixed, variable and
hybrid costs.
Fixed costs include such things as
business licensing, rent, utilities, insurance,
human resources compliance and payroll,
the fee you pay an outside firm to prepare
your payroll. Variable costs are those
associated with sales. Marketing is a hybrid
cost, according to Williams. It's partially
fixed because, without it, there are no sales.
It's variable because its cost can depend on its intended
success.
A budget can address any activity, but it should predict
revenue and expenses for a given time period, usually the
coming year. This includes a number of line items. Start
with labor. What will be the total cost for every person in
the shop, including benefits and payroll taxes? Estimate the
quantity of goods and services the shop will sell, and then
build the production budget.
The budget's expense line lists your fixed costs and
captures things not addressed by the other line entries, such
as training, professional and association dues, travel, office
supplies, telephone and broadband services, and whatever
else applies to your business. Finally, the capital equipment
line predicts the total cost and maintenance of the shop's
fixed assets.
There are three ways to create a budget: top down, bottom
up and zero-based. The one that works best depends on your
shop. More important is periodically comparing performance
with the budget predictions. This measurement is one of the
many reports a good accounting system can provide, and it
will enable you to make decisions and adjustments that will
allow you to open the doors every day. q
Avionics News November 2013

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