8 Accounting Tips for Managers

How can accounting practices make you a better business manager?

Most business managers need to answer an important question, “Are we making a profit?”  Having a working knowledge of accounting information will give you the important facts so you can make important profit decisions.

1. Fixed Cost Hurdle

Every business has fixed costs that are locked in for the year. For a company to make a profit they need to get over that first hurdle of fixed costs. So, how does that happen?  It’s all in the sales. Each sale made brings in a certain amount of margin, which equals the revenue minus the variable expenses of the sale. Margin is before interest and income tax expenses, and before fixed costs are considered. Once you determine your break-even point, which is where you recoup your fixed operating costs you know where you are headed. After you cross over that hurdle your entire margin goes toward profit.


Your annual fixed operating costs total $2.5 million.  You earn 25% average margin on sales, in order to break even you need $10 Million in annual sales.  Since your profit is zero at this point you are ready to give up.  But wait; after you cross over that point each additional $1 Million yields $250,000 profit.  Not too shabby.

2. Set Prices Right

This is a critical factor in any business. The key here is to set sales prices high enough to earn an adequate margin.


Suppose you set sales at a 20% margin versus a 25% margin. On $16 Million annual sales, your margin would be $3.2 Million. ($16 Million sales x 20% margin ration = $3.2 Million margin). Deducting $2.5 Million fixed costs for the year leaves only $700,000.00 profit.  Compared with a $1.5 Million profit at the 25% margin ratio!

3. Profit and Cash Flow are Not the Same

Cash flow can be high or lower than bottom-line profit. It can be negative even when you earn a profit or positive when you have a loss. There is no natural correlation between the two. Four important elements to managing cash flow are listed below. Review these to help you determine exactly where you stand regarding your cash flow.

  1. Account Receivable-Where are collections? Are you carrying a high receivable balance? This will decrease your cash flow.
  2. Inventory-Has your inventory increased over the year? Your cash outlay for this will decrease your cash flow. 
  3. Total Cash Outlay-If they are lower than the amount of expenses recorded in the year, mainly because your accounts payable and accrued expenses payable liabilities increased during the year.
  4. You must keep close tabs on the changes in the assets and liabilities that impact cash flow from profit.

4. Budget, Budget, Budget

Budgeting is important for understanding the profit dynamics and financial structure of your business and for planning for changes in the upcoming period. Budgeting forces you to focus on the important factors of improving profit and cash flow. This will lay the foundation for changes in assets and liabilities that are driven by sales revenue and expenses.

5. Key Accounting Information

Experienced professionals can tell you that they spend a good amount of their time readjusting when things do not go according to plan. However, to be able to do that, you need to realize that the plan has changed. It’s critical to have the right information in front of you. The following accounting variables should always be reviewed.

  • Sales Volume 
  • Margins Fixed
  • Expenses Overdue
  • Accounts Receivable
  • Slow-Moving Inventory Items

6. Utilize Your CPA’s Knowledge

Your CPA is a trusted source to give you valuable income tax advice, audit your business to discover any issues, and guide you through the confusing federal and state income tax laws. They can also help you implement a computer based accounting system or review your monthly financials to check for accuracy. Often having a consultative CPA is critical for the long-term success of your business.

7. Employee Dishonesty and Fraud

Preventing fraud starts with establishing and enforcing sound business protocols.

Three ways to do that are:

  1. Installing good segregation of duties within your organization 
  2. Implementing internal controls 
  3. Consider external oversight

For a more detailed description please review our blog post, dated September 12, 2013, entitled “ 3 Ways to Protect Your Business Against Fraud”.

8. Own Financial Reports

Lend a hand in preparations of annual financial reports. The annual report is a good opportunity to tell the real life story of the business. It will also allow you to have an open and frank dialog with your Accountant.