While most entrepreneurs focus on getting their business up and running, many often forget the importance of accountancy and financial management. Understandably every entrepreneur wants their business to grow and be profitable, but to be profitable you have to understand your finances and the process of your financial management from day one. We advise that if you are still studying and have the option of picking up some accountancy classes, it may be worthwhile, especially as it will help build a foundation for running your own business.
But why do I need basic accountancy skills?
- To communicate effectively with stakeholders (investors, suppliers, employees, creditors, accountants etc)
- To keep track of income and expenditure
- To understand the worth of your company and monitor its success
- It will help you make better, more informed strategic business decisions and plan for the future
- To help understand the position of your competitors by looking at their annual reports
- To provide sufficient information with which to prepare your income tax and/or corporation tax returns accurately and on time
- In the case of a limited company – to comply with the statutory accounting requirements
What are the basic steps?
- Keep your business and personal finances separate even though initially it may feel like they are one in the same if you are a one-man shop. By keeping your personal and business finances separate you can avoid problems at the end of financial year when you are filing for tax and creating financial statements for shareholders (if you are an incorporated company).
- Learn some of the basic accounting terminology (Turnover, gross profit, net profit etc), and understand the different financial statements and their purpose. All this can be found via the internet or text books. Or I am sure a friendly accountant would be able to explain the basics to you.
- Learn about cash and accruals accounting methods. Many startups use cash basis accounting. This accounting method records and recognizes transactions when cash changes hands and provides entrepreneurs with a simple method for maintaining accounting information. As your company it’s likely that you may need to change to the accrual accounting method which is the most broadly used method in business. The accruals method records and recognizes transactions as they occur, regardless of cash changing hands.
- Start some basic accounting by keeping a record of all the economic activity within your organization. Initially your records can be kept using a simple spreadsheet program or they can even be handwritten on analysis paper. As your business develops, you will need to have more sophisticated systems such as an ‘off the shelf ’ computer accounting package such as Quickbooks.
- Try and avoid using cash to pay for bills or supply. Pay either by cheque or credit/debit card, as you can much easily account for where the money is going.
- Start budgeting – account for the expenditure that is required and stick to your targets, especially if you are bootstrapping your business.
- Get some advice from professional accountants
- Understand that the accounting requirements may differ according to your legal structure.
In the current economic climate those businesses that have little understanding basic accountancy and bookkeeping will fail quickly. We realize that Entrepreneurs thrive on a DIY mentality, but if you need help please seek professional advice. (Check the accountants listed in our business solutions directory).