When you are starting a business from scratch, it’s important to gather as many resources as possible so that your launch is strong and successful. You should hire the best employees, stock the best tools and materials, and be fully ready for your first customer. However, you also want to make sure that you are able to make ends meet. This might mean cutting a few corners. One way to reduce costs is by managing your payroll expenses. For example, if you’re starting a small cafe you should hire staff to cover the positions, but you should also be prepared to do some of that work yourself.
Much the same thinking applies to the financial life of your business. While it is optimal to employ a CPA to help with taxes, payroll, and other financial matters, they also are expensive. Like your payroll issues, you can take on the accounting duties and save your business a lot of expense.
Why Entrepreneurs Need Accounting Skills
Many entrepreneurs are visionaries. You are looking at the big picture of the goods and services you will provide to your customers. You’re possibly more concerned with overall value of your business to the community than inventory issues or tax deductions. Thus, you and other entrepreneurs might overlook things like accounting. In the midst of formulating your business plan you surely went over some numbers but might not have done a full accounting.
To achieve the most success, and long-term viability for your business, you need to acquire accounting skills. That’s because things like taxation, payroll, and inventory are all rather complex issues. You will thus need foundational accounting skills so that you maintain a firm grasp on every penny that comes through your accounts. When, for instance, you are on top of your inventories, you’ll have confidence in what you should order or when to reduce your holdings by having a sale.
Thankfully, it’s fully within your grasp to attain the skills you’ll need to maintain your business like a well-oiled machine. Contemporary software packages and a strong set of business practices and protocols will ensure that your pride and joy grows and develops to suit your long-term vision.
What Do Entrepreneurs Need to Know?
One of the key skills you’ll need as an entrepreneur is record keeping. You need to set protocols in place for storing every receipt, recording every transaction, and noting every time you bring in or ship out inventory. You might consider using tools such as a computer tablet where you can record notes on a text tool or numbers in a spreadsheet. If you decide to use an accounting software package, you will use something called journal entries to track each debit and credit. Using these, you can maintain consistency and accuracy and make notes on losses about why you might need to write off an expense. This will help you when it comes time to do taxes or prepare documents for investors.
Your income statement is an aggregate of all your profits and losses over a period of time. Specifically, your income statement should include your revenues, expenses, gains, and losses. That is, every dollar that comes through your accounts; the costs of your business, the profit from sales, and any losses – perhaps due to shrinkage, breakage, or promotional giveaways – will be recorded.
You’ll need to keep records that reflect the nature of the items in your income statement (journal entries). For instance, you can realize revenues through non-business operations. You might gain revenue through investments, interest on accounts, or a court settlement. When you record the source and value of these gains, you can determine how those monies should be taxed.
Once you are able to master your income statement, you can determine how profitable your business truly is. You can then compare your expenses versus your profits and arrive at a profit margin. This number will be of vital importance when you seek out investors or additional bank loans.
As you see, when assembling the data for your Income Statement, you must make an accounting of your total expenditures and losses in addition to your total revenues. You should make a distinction between operating revenues and non-operating revenues. That is, any one-time gains from things like asset sales or other investments don’t necessarily reflect your business over the long-term and should be factored out when assessing the true health of the operation.
Predictive Accounting / Financial Estimates
You need to have some way to prepare for the future. However, in your first year(s) of business you will likely have no basis for such determinations. This is where your precise records, journal entries, etc. will come in handy. For instance, if you have a record of past business activity during the summer, you will know what sort of staff to have on payroll and how to manage inventories. For instance, if you run a sporting goods shop, you’ll know not to stock so many snow skis and to be prepared for a possible downturn when everyone in town heads to the beach in July.
When you can refer to your past numbers, as well as create a narrative account of the past, you will be better prepared for the future. For instance, your business may have faltered last July. According to the numbers, you should be wary of bringing on payroll expenses or inventories during that time. However, if your narrative account reminds you that there was significant construction on the road in front of your retail operation, you’ll thus temper the pure financial data. The improved roadway might bring more business this year.
Setting Profit Goals
After your business has been in operation for a while, you will be able to predict your numbers with greater and greater accuracy. You’ll be able to tell what items produce more sales and which languish on your shelves. In more general terms, you’ll have a strong handle on your market and how to meet its demands in ever more efficient ways. Thus, you can start setting reasonable goals for sales and profits.
Use A Specific Software
There are many software packages on the market these days. Though there is little replacement for a true financial professional, you can let the software store and process your data for personal analysis. Make sure to keep back-ups of all of your records so that you both keep your data in the event of a system problem and for when you do hire an accountant. The most important thing is to make sure that there is one system for everything. You don’t want to keep a little data here and a little data there. Collating it when you are ready to get a professional in will be a very difficult process.
Separate Your Business and Personal Account
This is a very important tip that might seem like it’s common sense. However, too many business owners start making a habit of blurring the lines between their personal and business accounts. This can happen when you start using a company vehicle for personal use and then rely on the business expense accounts when it’s not altogether appropriate. When you keep your personal accounts and expenses separate, it will be far easier to assess both in real terms. It will also help you realize more quickly when a business is failing and allow you to follow the next bit of advice more freely.
You work hard so make sure to pay yourself. However, try to pay yourself as low of a salary as possible. This might seem foolish until you pay yourself a hefty bonus at the end of the year or quarter. This is one way to avoid paying as much payroll tax. You will still need to account for the bonus on your personal income tax, but your business will avoid that extra expense. You might look into a bonus structure for your top employees as well.