So, you’ve turned your great idea into a lucrative business opportunity, started making sales, and are now thinking about processes that can help take your business to the next level. As a startup owner, your focus is likely set on acquiring customers and generating revenue. While those aspects are key to your business’ success, so are your finances.
Finance is one of the most basic skills that any business must embrace to be successful, yet, financial know-how, issues, and analysis are often the entrepreneur’s weak spot.
While the finance function is much more strategic than just financial accounting, both bookkeeping and accounting are vital to every business’s success. This article will provide you with the basics, as well as the other main benefits of thoroughly knowing your numbers.
Good accounting starts with great systems.
Without proper accounting, you can’t figure out your cash runway, budget for another salary, or provide your investors with the proper financials. And if you are seeking fundraising, you’ll need clear financials so that potential investors can make informed decisions about investing in your company.
Although founders don’t need to know in detail the mechanics of a startup, because it’s just not worth the founder’s time, it’s important to know the basics:
Bookkeeping: Day-to-day tracking of business finances and maintaining records. The responsibilities of a bookkeeper can include collecting and recording invoices from clients, paying your suppliers, reconciling bank accounts, and more.
Example: When you receive a bill from one of your vendors, your bookkeeper will ensure that it is paid and record the transaction.
Chart of accounts: a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger. A company has the flexibility to tailor its chart of accounts to best suit its needs, including adding accounts as needed.
General Ledger: A collection of related accounts is known as a ledger. This includes accounts payable, accounts receivable and general ledger. When a journal entry indicates a change in the accounts, the account balances are changed in the appropriate ledger accounts.
The information in the journal that appears chronologically is summarised in the ledger on an account-by-account basis.
Financial Statements: Accounting numbers are summarized into three main financial statements: the balance sheet, income statement and cash flow statement.
The balance sheet basically summarizes a company’s net worth, at any single point in time. There is only one equation in accounting: Assets = Liabilities + Equity.
Fiscal year: The year period you use for taxes and accounting. A fiscal year can be the same as the calendar year or different.
Net profit margin ratio: Measures the profitability of your business by determining the percent of profit that has resulted from business activities, minus your expenses.
How Do You Start a New Business Accounting?
To start a new business accounting, business owners need to follow this accounting checklist.
- Open a separate bank account for the business to keep your business finances separate from personal accounts
- Track your expenses regularly including receipts, bills, invoices, proof of payments, financial statements and tax returns
- Based on your business structure and accounting needs, establish a bookkeeping system for your business by either doing it on your own, outsourcing it or hiring an in-house bookkeeper
- Understand your tax obligations
- Use the balance sheet and other documents to evaluate the financial health of your business regularly
Now that you know the basics of accounting, it is time to apply. Have fun with numbers!