What are the key things an entrepreneur should know about accounting?
I am working on turning my hobby into a full-time business. I don't have accounting experience and want to make sure I keep everything organized and do things right with respect to money matters. What are a few of the most important things I need to know about accounting for a new business?
As someone in the bookkeeping field working with small business owners, I suggest the following:
1. Make sure you are aware of all compliance issues and deadlines (city business license, sales tax filings, etc). Many who start their own businesses aren't aware of these deadlines until they receive a penalty notice.
2. Truly understand how the accounting software works and enter the information correctly. QuickBooks is an easy software to use, but because of that, it's easy to enter information incorrectly. If you are going to do the work yourself, pay for some training from a professional who can show you the proper way to enter your information. It's much more expensive to fix data entry errors later.
3. Don't put off doing the bookkeeping. Many entrepreneurs work so many hours they put off the bookkeeping until later thinking they'll get to it before tax time. But often tax time comes around and the data entry hasn't been done. Set a time on your calendar each week (no less than once a month) to have the information entered into the computer.
4. Use the information from the financial reports to see how you are doing and make any necessary changes. Businesses most often have losses the first year or two (at least) due to start up costs and low income, but there are some expenses you can forego. Especially look at your cost of goods compared to income to make sure you aren't pricing your products/services too low.
Good luck with your new endeavor!
Hi Deana -
Looks like you got a good technical answer from Mr. Phelps. Since I don't want to duplicate, I'll only add one practical piece of advice. And that is: don't put it off.
After the fact, your bookkeeping/accounting tells your story for outsiders like investors and the tax man BUT on a regular basis accounting should tell you key statistics you need to know to make business decisions. Inventory levels, sales to date, gross profit, net profit, who owes you money, cash account balance, who do you owe money to and how much etc etc. If you or someone who works for you don't do the bookkeeping or accounting, then the numbers in your system are worthless, and you run the risk of making a decision based on wrong information.
So make it a point to regularly get your numbers done and review them so you know what's going on in your business.
If you need further help, comment here or you could PM me. Always happy to help.
Best advice I can give would be to take a basic bookkeeping/accounting course offered in your community, perhaps through a local college. This will give you a basic foundation in how the books are kept and how financial statements (income statement, cash flow statement, and balance sheet) are put together, what they show, and how they are related to each other. If you are not strong in finance or don't really have an interest in keeping your company's books, then I would suggest finding a part-time bookkeeper that can do this for you. Same goes for marketing, by the way: if you're not passionate about it, then find someone who is to do it for you. Keep your focus on doing what you do best, which is usually delivering your products or services.
1st - Remember your hobby was for your enjoyment, your business is also for your enjoyment, but mainly to make a PROFIT. Understanding Practical Accounting is to gain an understanding of what you can accomplish through using it. Accounting is an "Economical History" of your company, resulting in an explanation of what has economically happened throughout the life of your business. A non-accountant can learn the advantages in using an accounting software program such as "Quick Books" to record this economical history. An owner/manager must learn how to read their company's "Financial Statements" - the Balance Sheet, Income Statement, and Statement of Cash Flow. As an example: If you take your financial statements to your banker to secure a loan and you ask him to read them (rather then you reading them to him) he will rightfully think that you can't explain what has happened to your company economically during the period under review. The reverse to this is you showing your banker your understanding of what has happened to your company during that period by reading your financial statements to him. He will immediately know that you are truly managing your company as you can explain its economical history. I wrote a small, simple, book explaining basic accounting functions for the non-accountant. The title is "Cover Your Nut" - Practical Accounting in Plain English for the Real World. I explain the keys to understanding of and ability to read your company's financial statements. You may need help in setting up you accounting software program; developing your "Chart of Accounts" is such a way that will give you customized information about you company. By doing this the accounting information (through these customized accounts) will place them on your reports (financial statements) in such a way as to make them understandable to you, and therefore easy to read. Without accounting knowledge, you should seek a consultant to guide you in the initial setup of your software. Have your accounting consultant show you the keys in reading your financial statements. Its not "Rocket Science" and you don't need to worry about the debits and credits as you accounting software will take care of that behind the scenes during your entries in your check register, sales invoices, or daily sales receipts (as an example). Before purchasing your software, make sure that "Help Tutorials" are available to guide you through your initial understanding of the software.
As a woman owner and CPA, I would suggest you meet
with your accounting/tax advisor, and:
1- properly setup the right entity type (to reduce your tax debt)
2- setup a chart of accounts that is customized to your industry
3- setup some key performance indicators that help you measure your progress
4- decide if you want to outsource the accounting work or if you want to be involved in
part of that process.
Deana, it's a great point from Richard. Make time every week to keep your bookkeeping up to date. It's far easier to hand off an organized folder of receipts and well-documented books to your accountant at tax time than to spend be faced with a pile of papers that you need to sort through at the end of the year.
Quickbooks or http://www.easyrecordbooks.com are great solutions for regular bookkeeping with or without the assistance of a bookkeeper. Even if you decide to do the bookkeeping yourself, be sure to hire an accountant to do your taxes.
Your specialty is creating storybook albums, a tax specialist will be well-versed in small business deductions so you want to make sure you get all the credits and grants you're entitled to and don't miss any you may not be aware of.
The first you should look into is how you want to set up this company...LLC, partnership, limited liability. Each one has their own set of legal and accounting details which will define how you operate....revenues and expenses.
The next things to look at are not necessarily in any specific order but all should be considered:
Business Environment: the variety of products produced and sold and the market served by your company.
Market Requirements: customer and market segments targeted by your business, their present needs, competition and existing sales growth.
If planning to produce or be the middle person you should consult a CPA or a Cost Accountant or both as well as a corporate tax accountant.
Hope this helps.
Hi Deana Andriolo,
The basics of financial accounting tell you about outside reporting to bankers, creditors, shareholders and the public. The reports your company produces will be centered around financial accounting. Then knowing the basics of managerial accounting. This helps you to manipulate the financial accounting numbers to be usable by your company. It can (and usually does) give you a boost against competition. The last class would be microeconomics. This would tie it all together to know what type of business structure you have economically and help you to predict advantages and problems you will have now and in the future.
It seems like a great deal of work but it is worth it. You truly do not need to remember and know everything in these classes. It just would educate yourself to be competitive. You could probably get away with online or shorten courses. College is nice and the best option but you are probably very busy. These classes would give you enough information that you could properly define your problem. You can then go about solving it.
What I suggest is very basic. Other individuals here offered excellent specific advice that is usable immediately. Although you will probably need an accountant and lawyer.
Accounting is the backbone of business world.
The foremost decision of any business responsibility is regarding choosing right accounting methods which are accrual method & cash method.
Accrual Method: Income and expenses are recorded as they arise, regardless of whether or not cash has actually changed hands. An excellent example is a sale on credit. The sale is entered into the books when the invoice is generated rather than when the cash is collected.
Cash Method: The cash method is the most simple in that the books are kept based on the actual flow of cash in and out of the business. Income is recorded when it is received, and expenses are reported when they are actually paid.
Liability accounts: Accounts payable, notes payable, accrued expenses, deferred revenue, long-term bonds payable and others.
Revenue accounts: Sales revenue and others
They should know about balance sheet, it collects everything including assets and liabilities at a specific point in time resulting from past transactions.