Entrepreneurs interested in venturing into the world of business have several elements to ponder. The state of global political and economic climates is a concern depending on the industry selected. Determining if the business idea fills a niche in the market needs to be the subject of research before finalizing a business plan.
Human resources, attracting investors, and advertising strategies are components to work on before the business can be launched. In addition to these areas, upstart business owners will need to be realistic about accounting. There is much more to this aspect of the business than keeping track of numbers.
Many people who graduate with business degrees have studied accounting to one level or another. Today, more and more entrepreneurs do not have business degrees because E-commerce websites, gaming development, homemade products, and other types of businesses are successful without higher education. Understanding the basic principles is a minimum requirement for any new business owner.
Upstart business owners will want to look at accounting services if they have no accounting knowledge. The advantages of outsourcing accounting include the ability to focus money on income-producing staff instead of hiring an in-house accountant, and professional income tax preparation and filing. Another benefit is updated finances to present to investors.
Learning the Basics
It is not difficult to educate yourself or a key staff member about accounting through online courses, adult education offerings, and seminars dedicated to helping people start their businesses. Three of the five things to know about accounting for the business deal with differences among concepts and terms. The first is learning how profit differs from cash.
Three Types of Profit
It is vital to keep in mind that cash-on-hand does not translate into business profit. The calculation of profits varies depending on the type. Gross profit refers to the simple calculation of the total amount of sales minus the business cost of the goods.
The next type of profit, called operating profit, subtracts the operating expenses from the gross profit. The last type, which is of interest to banks, investors, and the government is the net profit. This is calculated by taking the total income and subtracting the total expenses to determine if the business has experienced a successful quarter or year.
Managerial and Financial Accounting
Some finances can be tracked via software programs, online applications, or using the operating system of the business computers. The day-to-day tracking of internal sales and expenses is often completed in-house because it involves placing numbers into the appropriate categories. This is known as managerial accounting.
Financial accounting is typically outsourced by small and medium-sized businesses without accounting departments. All transactions of the business are kept, reported, filed and presented to external entities. Reports for investors or shareholders, tax information and spreadsheets to provide banks if applying for a loan are all part of financial accounting.
Assets and Liabilities
This business concept appears to be straightforward but can be confusing when it comes to accounting. Assets refer to what the business owns while liabilities include what the business owes. These two components are very important to the business when it comes to taxes.
Assets are subject to taxes which will raise what the business must pay to the IRS. If the equipment is owned by the business, for example, it will be taxed. Equipment or vehicles that are leased by the business are considered liabilities and can be written off as business expenses.
Business owners must be aware of any discrepancies in these categories whether they complete accounting tasks in-house or have them done by an accounting firm. The news headlines are often filled with stories of businesses that have reports that do not coincide. This leads to investigations by state and federal tax bureaus.
Update the Balance Sheet
The significance of keeping the balance sheet updated cannot be overstated. This sheet is the business at a glance because it indicates the assets and liabilities in every category. Payroll, invoices, loan payments, sales, inventory, income and equipment valuations are a few examples of what is found on the balance sheet. Totals are available monthly, quarterly, and year-to-date to establish if the business is performing to projections.
More Than Figures
Knowing what the figures are and what to do with those figures are two different skill sets. Yes, it is detrimental to have figures add up, balance and match on internal records and external reports. It is also crucial to learn what decisions to make based on the figures.
Proper accounting allows owners to decide what equipment, branches, divisions, and departments to maintain or terminate. A decrease in sales of home decor, for example, may result in the decision to stop carrying those items. If banking branches located in grocery stores cost more money than they generate, closing them down is a sound business judgment.
A change in tax policies will dictate whether the business continues to lease vehicles or invests capital in purchasing them. In most cases, operating old machinery is more expensive than replacing it with new models. The newer machines are more energy-efficient, have advanced technology and can increase productivity.
The Bottom Line
There are a few business decisions that are not motivated by money. Excellent accounting practices inform prosperous decision making. Errors can lead to a business catastrophe that would otherwise be averted.
Starting a business with no clue regarding the aspects of accounting is ignorant and irresponsible. The money will come and go quickly, there will be no basis for bench-marking progress, and it is likely the business will fail. Investors and lenders review the business plan and the system in place for accurate accounting before they consider risking their money.
Prepare to spend a great deal of time and energy into developing ways to meet business challenges before leaving a day job or seeking seed money. An innovative idea or creative solution to problems is not enough to start a business. Turn to the small business association (SBA), start-up teams at accounting firms or a mentor to be sure you have all the essential knowledge for success.