Managing accounting and finances tops the worry list for most business owners who are starting or running a business - and for good reason.
With 30% of new companies failing due to cash flow problems in their first two years, it pays to master business accounting basics. Putting in the effort now sets your company up for scalable, sustainable growth.
This comprehensive guide covers everything entrepreneurs need to know to manage their accounting. Expect actionable tips on how to:
Choose the right accounting method.
Set up bookkeeping and reporting systems.
Forecast budgets and optimize cash flow.
Comply with tax obligations.
And more fundamental money management skills!
First up — a crash course in crucial accounting terminology. Mastering these concepts and conveying your company's financial story becomes much easier.
Business Accounting Basics — Common Terms Entrepreneurs Should Know
Assets, Liabilities, Equity, Cash Basis, Accrual Basis—learning B-school jargon can seem daunting when you want to get your business going. But understanding a few accounting and bookkeeping building blocks pays off.
Think of it as learning basic grammar before writing an epic novel. Mastering core conventions means smoothly conveying the financial narrative of your business to stakeholders.
Key accounting terms on entrepreneurs' radar include:
Assets - Resources owned by your company with monetary value. Cash, inventory, equipment, and real estate all count.
Liabilities - Money your company owes, like supplier invoices, rent, loans, and other debt.
Equity - Assets minus liabilities. Amounts to the total value owned by you and other shareholders.
Revenue - Money brought into the business from sales of products and services before any expenses are taken out.
Expenses - Money spent to operate your business across payroll, supplies, and advertising.
Cash Flow Statement - Reports the money moving in and out of your company over time.
It lets you track income and expenses impacting liquid cash.
Now that the language lesson is out, what basics do small business owners need regarding accounting practices and financial reporting? Read on to find out.
What are the Basics of Small Business Accounting?
Accounting goes way beyond just reporting numbers tied to your business. Sure, it lets stakeholders "follow the money." But more importantly, routinely tracking your financials gives you insight into what's working, what's not, and where to steer your company next.
So, what are the fundamentals for entrepreneurs in managing money? Here are three cornerstones:
1. Reporting Key Financial Statements
As a business owner, regularly compiling and reviewing essential financial statements should top your priority list:
Income Statement – This monthly or annual statement sums up how much money your business brings in (revenue) and spends (expenses) over a set timeframe.
Net Income - Subtracting expenses from revenue gives you net income or profit. Comparing multiple income statement periods highlights growth trends.
Balance Sheet - Like a financial snapshot, balance sheets outline account balances at a specific date. They cover your company's assets, liabilities or debts owed, and equity or leftover amounts after paying liabilities. Comparing sheets over time shows improving or declining financial health.
Cash Flow Statement – Not to be confused with income statements, cash flow reports track the actual inflow and outflow of cash over a month, quarter, or year. Cash flow lets you spot discrepancies between profit and liquid funds. Healthy cash flow means you can cover expenses without unsustainable debt obligations.
2. Following Accounting and Reporting Standards
How do you ensure the financial statements presented to stakeholders like investors and lenders convey an accurate picture? By setting up proper bookkeeping processes and sticking to reporting standards.
On the bookkeeping side, it is critical to record every business transaction in journals using double-entry accounting principles. This impacts accounts on your general ledger and trial balance reports. Develop clear procedures for handling things like processing invoices, collecting receipts, and payroll.
Most small businesses follow GAAP (generally accepted accounting principles) standards regarding reporting. GAAP guidelines provide frameworks (plus plenty of nitty-gritty details) on how companies should present financial statements and related disclosures. Getting statements reviewed annually shows you adhere to standards.
3. Analyzing Financials and Controlling Costs
More than simply simply compiling mountains of data won't cut it. To leverage your accounting efforts, get into the habit of regularly analyzing statements. Look for trends impacting profitability and cash reserves so you can respond accordingly by cutting expenses or changing strategy.
Functional analyses for small biz owners include:
Ratio Analysis - Compare line items to Assess liquidity, solvency, efficiency, and profitability. This helps you benchmark against competitors.
Cash Flow Analysis – Track short and long-term cash positions. Look for expensive outflows and places to improve income faster than costs.
Break-Even Analysis – Determine the minimum unit volume where sales cover total costs. Helpful in setting sales goals to turn a profit.
Budgets: Set targets for sales and costs annually and monthly. Compare variances to stay on track and meet financial objectives.
Pro tip: If dealing with the financial nitty-gritty feels overwhelming alongside your other leadership duties, don't hesitate to enlist help.
Whether leveraging accounting software or working with a bookkeeper or accountant, find ways to automate routine finance tasks. This leaves you free to focus on accelerating business growth.
Key Financial Statements Every Small Business Owner Should Know
As an entrepreneur, you don't need an accounting degree to understand financial statements. However, regularly reviewing statements should be non-negotiable. After all, they tell your business's ongoing monetary story.
Think of it this way: While an income statement summarizes a song's words and an assets list names the instruments, the blended statement trio makes your finances sing harmoniously!
So, what does each critical statement cover, and what insights can small business owners glean from tracking them? Here's an overview:
Income Statement
The income statement (sometimes dubbed P&L or profit/loss statement) totals up how much money came into your business (revenue) and went back out (expenses) during a month, quarter, or full year.
Specifically, you'll see:
Revenue - All sales of products and services before any expenses are deducted.
Cost Of Goods Sold (COGS) - Direct production costs like materials and labor.
Gross Profit - Revenue minus COGS.
Operating Expenses - Overhead costs for operating.
EBITDA - Earnings before interest, taxes, depreciation, and amortization.
EBT- Earnings Before Tax – Bottomline profits left after operating expenses paid
Operating expenses include accounting fees, advertising, insurance, legal fees, office supplies, maintenance, rent, salaries and wages, taxes, travel, utilities, vehicle expenses, and a website.
Monitoring income statement trends lets you track revenue growth and profitability over time. It also helps determine pricing and budgets. Savvy entrepreneurs generate this report monthly.
Example of the income statement - Multi-Step Method:
Balance Sheet
If income statements detail the lyrics to your finances' song each quarter, consider balance sheets an annual snapshot of their instrumental assets. This statement tallies everything the business owns and owes at a fixed date.
Specifically, a balance sheet breaks down into three sections:
Assets - Resources owned with monetary value. Ex: cash, inventory, property.
Liabilities - Debts and obligations owed. Ex: accounts payable, loans.
Equity - Assets minus liabilities. Amounts to total shareholder ownership.
Comparing sheets annually highlights increasing or declining company health. It also lets you demonstrate business stability when securing financing.
Cash Flow Statement
Income statements and balance sheets focus on profits, assets, and the broader financial position. For tracking liquidity timing, having accessible funds to cover expenses and cash flow statements is crucial.
These reports summarize cash inflows and outflows over a month or quarter.
Inflows include:
Operating - Sales of products and services
Investing - Selling long-term assets like property
Financing - Raising funds via loans or investors
Outflows encompass:
Operating - Paying salaries, supplies, etc.
Investing - Purchasing assets
Financing - Returning loans
Analyzing cash flow helps ensure sufficient reserves to meet operating needs. Shortfalls indicate faster revenue growth, or reducing expenses may be necessary.
Example of the cash flow statement:
The Bottom Line
Understanding the differences between financial statements aids intelligent business management. Rather than seeming intimidating, get into the groove of regular reporting.
Remember, just like with music charts, sometimes you'll have a chart-topping hit financially. Other times, it may need to do better. Adjust strategy accordingly based on what the numbers tell you!
Establishing Proper Bookkeeping Practices and Following Reporting Standards
With the broad reach of cloud accounting today, does tracking income and expenses broadly suffice for small businesses? Do they need more sophisticated software to consolidate the numbers?
While leveraging accounting tools removes grunt work, a hands-on role still matters. Here's why:
Bookkeeping Practices Set the Foundation
Yes, pie charts showing this month's profit split nicely pop out of accounting platforms. However, remember - garbage data in equates to garbage insights out.
That's why nailing down bookkeeping workflows for recording each transaction sets your company's finances up for success. This includes:
Recording every sale, refund, invoice, vendor payment, payroll batch, and petty cash spent across journals using the double-entry methodology
Designating someone to enter data (in-house bookkeeper, accountant, business manager, or the entrepreneur wearing all hats)
Tracking transactions daily or weekly, at most, data is compiled to report the financial position when the period closes. But don't assume software alone reconciles everything perfectly—spot-check reports to catch discrepancies that could signal issues like fraud or duplicate entries.
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Standards Guide Proper Reporting
The other piece entrepreneurs must address involves conveying financial status details to outside stakeholders annually through official reporting channels.
Thankfully, standards cover best practices for internal and external reporting use cases. Most businesses use GAAP Standards, which are Generally Accepted Accounting Principles. These standards encompass broad guidelines for reporting private company financials in the US in areas like revenue recognition, payroll, inventory, and more.
While GAAP dives deep into guidelines and technicalities, core tenets apply to small private companies. These include correctly categorizing transactions across financial statements and providing disclosures that give context to the numbers reported.
Seeking guidance from a qualified accountant ensures your reporting properly adheres to standards. This keeps leadership focused on accelerating business growth rather than sweating magnum opus-sized financial reports destined for shareholders!
The Bottom Line
Approaching accounting as a hands-off affair rarely bodes well for entrepreneurs. Taking an active role in bookkeeping processes and understanding reporting standards helps ensure your company sings on key financially.
Going Beyond the Numbers: Financial Analysis and Budgeting Best Practices
Preparing income statements, balance sheets, and cash flow statements checks the compliance box for small business owners when closing quarters and years financially.
But to leverage accounting data for increasing profits and enterprise value in the long term, getting into habits like:
● Performing regular financial analysis
● Creating and tracking budgets
...becomes mission critical.
Let's explore basic approaches to each area:
Financial Analysis Techniques
Just like assessing sports stats or music charts helps coaches and musicians shape strategic decisions, analyzing financial ratios and cash flow metrics should inform your company's next moves.
Prioritizing three analysis techniques quarterly works for most small biz owners:
Ratio Analysis - Calculate liquidity, efficiency, solvency, and profitability ratios using line items across financial statements. Use this benchmark to uncover problem areas and opportunities vs. competitors.
Cash Flow Analysis - Combine line items across operating, investing, and financing flows to gauge longer-term cash positions for covering expenses/debts without sinking into technical insolvency.
Break-Even Analysis - Use cost and revenue data to determine the exact unit volume sold needed to generate a profit. Useful for setting production goals.
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Building Budgets
Another way to elevate financial management capabilities involves creating budgets - projected targets for driving sales and controlling costs monthly or annually.
Best practices when building budgets include:
Basing targets on historical performance, then factoring in growth estimates for the coming year
Involving department heads early when setting top-down goals
Monitoring variance to stay on track, meet targets, or quickly adjust tactics
Pro Tip: Yes, preparing budgets requires estimates. However, the exercise forces discussions that lead to optimized strategies before execution. When reviewing past periods, identify drivers behind discrepancies as well.
The Bottom Line
Getting hands-on through routines like analysis and budgeting helps small business owners ascend from mainly reporting past financials to strategically shaping future company performance. Why wait? Dive into the numbers today!
Choosing the Right Accounting Method and Setting Up Systems
When starting, many entrepreneurs default to using basic spreadsheets or cash-based tracking to log income and expenses. After all, what matters most involves jumpstarting sales, not debating accounting methodologies, right?
While moving fast matters for young companies, consider this - 75% of businesses fail due to cash flow issues. So, putting efficient systems in place early on to control cash ultimately fuels growth in the long term.
Here are two key areas to address that trip up many founders when scaling.
Selecting an Accounting Method
Small businesses generally record transactions using either cash or accrual accounting. Which route makes the most sense for your company?
The cash method records revenue when payments hit bank accounts and expenses when funds clear accounts to cover costs. Simple and immediately reflective of cash positions, it can present distorted earnings pictures for creditors.
Accrual accounting recognizes income when sales are made and allocates expenses to periods when transactions occur, regardless of payment dates. It is more complex but presents precise earnings results crucial for obtaining financing.
Choosing Fitting Accounting Software
Today, over 80 percent of small businesses rely on accounting apps to:
Track income/expenses
Manage invoices and bill pay
Automate reporting
Improve accuracy
Enable mobility
Consider capabilities matching your needs - receipt capture, invoicing complexity, and inventory ties.
Also, evaluate setup and ease of use if you opt for DIY accounting instead of working with a bookkeeping professional or CPA to outsource management.
The Bottom Line
Pay attention to decisions like accounting methodology and infrastructure used to manage finances. The right choices provide efficiency and cash flow visibility, allowing small business owners to scale confidently.
Staying Tax Compliant and Managing Inflows: Payroll & Other Financial Inflows
With so many critical pieces to juggle when starting and scaling a business, entrepreneurs often ignore tax compliance and tight cash management.
However, staying on top of obligations and diligently managing inflows saves significant headaches (and dollars).
Navigating Tax Requirements
First, addressing various tax elements head-on eliminates stressful, last-minute filings each quarter and year-end. Be sure to understand requirements like:
Sales Tax Permits - Obtain appropriate permits for collecting state sales tax on taxable goods and services sold, even online, across state lines. Rates vary based on location.
Payroll Taxes - New employers must obtain an EIN for each employee and pay ongoing payroll taxes, including income, Social Security, and Medicare withholding. Independent contractors require different year-end filings like 1099 forms documenting compensation.
Estimated Quarterly Income Taxes - Business owners must prepay taxes each quarter toward final income tax liabilities based on prior year amounts using 1040-ES forms. State taxes also apply in most regions.
Getting Paid Faster
Cash is king for business longevity and growth. Yet many customers hesitate when asked for upfront deposits or payments compared to net 30 terms. Savvy entrepreneurs overcome reluctance by:
Offering Customer Payment Plans - Allow installment options with defined payment dates. Services like PriceYourJob provide support here.
Securing Merchant Services - Accept credit card payments immediately and directly or through POS systems with appropriate card reader hardware and payment gateway partnerships.
Automating Payment Tracking - Use accounting systems providing automated invoicing, reminders, and tracking to get paid faster while controlling income and accounts receivable.
The Bottom Line
Reconciling taxes while accelerating customer collections keeps small business bank balances growing rather than scrambling amid shortfalls. Stay proactive in both areas!
Knowing When to Call in Accounting Reinforcements
As an entrepreneur, juggling the vast array of accounting, bookkeeping, payroll, tax, and general finance tasks often feels daunting. Yet acknowledging limitations around financial competencies and seeking help converts frustration into fuel for entering growth mode.
So when should small business owners swallow pride and call in accounting pros? Consider three typical scenarios:
1. Requiring Advanced Accounting Acumen
All goes smoothly until suddenly your fast-growing company faces acquisition offers, needs audited financials to enter new markets abroad, or must value stock options to attract top talent. Complex activities like these demonstrate why enlisting skilled finance veterans pays off.
2. Needing Ongoing Bookkeeping Assistance
Repeatedly dropping balls matching bank statements, coding expenses incorrectly, and tallying accounts receivable/payable indicates inadequate bandwidth for routine finance. Outsourcing takes these critical basics off crowded small biz owners' plates.
3. Preparing for Tax Time
Approaching filing deadlines with records scattered across piles of receipts, no processes for compiling contractor payments, and other missing pieces makes compliance highly inefficient and stress-inducing. Seeking help organizing financial data to submit taxes saves headaches.
The Bottom Line
All entrepreneurs must start somewhere by learning accounting basics. However, waiting too long to address gaps or seek reinforcements when scaling financial complexity stifles growth.
Mastering Small Business Money Matters
While entrepreneurs' imaginations are captured by visions of launching game-changing products and scaling innovations, making magic with money matters just as much.
From veteran business owners to aspiring founders launching passion projects on the side, ignoring finances fails companies.
What concrete steps can leaders take towards accounting enlightenment without raiding the piggy bank for a bean counter?
Let's recap key accounting fundamentals covered across our financial journey together so far:
Know core accounting terminology
Regularly compile and analyze financial statements
Establish tight bookkeeping practices and reporting standards
Perform key analyses and create budgets
Elect optimal accounting methods and infrastructure
Stay tax-compliant and accelerate cash inflows
Now, by no means must checking every accounting practice box occur on day one. Start wherever makes sense on your entrepreneurial path. Just commit to continuous improvement and financial agility over jumping through quick-fix hoops.
The journey of business maturation from startup to institution calls for accounting perspective shifts anyway. So, implement new capabilities over time as needs evolve from mainly recording transactions to strategic steering based on numbers.
Finally, feel free to ask for help. All new leaders need guides when traversing unfamiliar terrain – money matters included. Build knowledge through literature, online courses, financial modeling tools, or human advisors. The confidence and control gained over the business's economic song—are priceless in the long term.
Now, equipped with accounting basics, it's time to put your hands on the financial keyboard and start tickling those ivories. Play on boldly towards your entrepreneurial opus!
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