Things Every Entrepreneur Needs to Understand
Every entrepreneur should have a basic understanding of accounting practices and principles to effectively manage their business. Here are the key accounting concepts with which every entrepreneur should be familiar:
1. Financial Statements
Entrepreneurs should understand the three primary financial statements:
- Income Statement (Profit and Loss Statement): Shows revenue, expenses, and net income over a specific period.
- Balance Sheet: Provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time.
- Cash Flow Statement: Tracks cash inflows and outflows, helping to assess liquidity.
2. Accrual vs. Cash Accounting
Know the difference between accrual accounting (recording transactions when they occur, not when cash changes hands) and cash accounting (recording transactions when cash is received or paid). Understand which method of accounting is appropriate (or legally required) for your business.
3. Double-Entry Accounting
Understand the basic principle that every financial transaction affects at least two accounts, with debits and credits ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced. This is called double-entry accounting and is an essential element of business financial record-keeping.
4. Chart of Accounts
Be familiar with the structure of a chart of accounts, which organizes financial transactions into categories for reporting and analysis. This typically includes five main account types:
- Assets
- Equity
- Revenue
- Expenses
- Liabilities
5. Revenue Recognition
Know when and how to recognize revenue based on generally accepted accounting principles (GAAP) or applicable accounting standards.
6. Expense Tracking
Understand the importance of tracking and categorizing expenses accurately to determine profitability and make informed financial decisions.
7. Depreciation and Amortization
Learn about depreciation (for tangible assets) and amortization (for intangible assets) and how they affect financial statements. These are things every entrepreneur needs to understand in order to maximize tax deductions.
8. Cash Flow Management
Be able to manage and forecast cash flow effectively to ensure the business can meet its financial obligations.
9. Budgeting
Create and maintain budgets to plan for revenue and expenses, track performance against targets, and make informed financial decisions.
10. Taxation
Understand the tax obligations of the business, including income tax, payroll tax, sales tax, and any industry-specific taxes. Familiarize yourself with tax planning strategies.
11. Financial Ratios
Learn how to calculate and interpret financial ratios like liquidity ratios, profitability ratios, and leverage ratios to assess the financial health of the business.
12. Bank Reconciliation
Know how to reconcile bank statements with your accounting records to ensure accuracy and detect discrepancies.
13. Internal Controls
Implement internal controls in your accounting practices to safeguard assets, prevent fraud, and ensure the integrity of financial transactions.
14. Audits and Financial Reporting
Familiarize yourself with the requirements for financial audits and reporting, especially if your business is subject to regulatory or investor scrutiny.
15. Accounting Software
Consider using accounting software to streamline record-keeping and financial management tasks.
16. Professional Help
Recognize when to seek assistance from outsourced CFOs, accountants, bookkeepers, or financial advisors for complex accounting matters or strategic financial planning.
17. Financial Literacy
Continuously improve your financial literacy by reading books, taking courses, and staying informed about changes in accounting practices, standards and regulations.
18. Financial Planning
Develop a financial plan that aligns with your business goals and helps you make informed decisions about investments, expansion, and resource allocation.
19. Cash vs. Profit
Understand that profitability (net income) does not always equal positive cash flow, and vice versa. Managing both is crucial.
20. Ethical Considerations
Adhere to ethical accounting practices and maintain the highest level of integrity in financial reporting and decision-making.
Conclusion
While entrepreneurs don’t need to become professional accountants, having a solid foundation in accounting principles and practices will enable them to make informed financial decisions, communicate effectively with financial professionals, and ensure the financial health and success of their business.
If the task of dealing with these financial considerations seems daunting, there are resources to help you. Contact Preferred CFO today and learn how your company can benefit from using expert outsourced financial services.
Free Financial Review with a CFO
Would you like a personalized answer to your financial question? Schedule a short, no-obligation consultation with a CFO by clicking the button below.
About the Author
Todd Kemp
CFO
Todd Kemp is a high-level CFO with significant experience in private-equity-sponsored as well as publicly traded corporations in the manufacturing, distribution, and B2B services industries. Todd is also experienced in merger & acquisition valuations and due diligence, as well as managing financial teams of varying sizes.
You may also be interested in...
What Is a Fractional CFO and What Does a Fractional CFO Do?
What exactly is a fractional CFO? A fractional CFO is an experienced CFO consultant who provides services for organizations in a part-time, retainer, or contract arrangement. There are multiple benefits of a fractional CFO, and these offer a company the experience and...
What is GAAP and Why is it Needed?
Generally Accepted Accounting Priciples (GAAP) Financial reporting is an important part of business that communicates the financial performance and results of a company. It records and presents information about the company’s financial position, revenues, expenses,...
Simplifying the Financial Year-End Closing Process
The end of the fiscal year can be highly stressful for financial officers and corporate executives. The year-end closing procedure is time-consuming and sometimes brings unpleasant surprises. Particularly in times of economic downturn and short staffing, year-end...
Does My Business Need a Financial Advisor?
The wise business owner will “know what they don’t know,” and will seek the appropriate experts such as financial advisors to fill those gaps.
3 Reasons you Need a Financial Forecast
If Your Company Doesn't Have a Financial Forecast, You're Wasting Time and Money Every company has goals. Where do you want your organization to be 5 years from now? 10 years? Most even have a general idea of the benchmarks you need to hit to get there—"By increasing...
Know the Significance of Payback Period
Whether implementing a new software system, adding office space, acquiring another company, or any other substantial investment, companies want to know how long it will take to recoup the money they spend on major purchases. The way to determine this is by calculating...
10 Steps to Prepare for Raising Capital
Finding funding for your business is a process that takes a lot of time and effort, especially during the startup phase. Many entrepreneurs fail in their first attempts at fundraising because they are poorly prepared. Others get themselves into trouble by choosing the...
How Can a Fractional CFO Help You Save Money?
In these days of economic challenges and changes, many companies struggle with uncertainty about the future, seeking tools and resources to best position their businesses for financial success. Often it can be beneficial to bring in a financial advisor who has...
What is a Capitalization (Cap) Table and Why Does it Matter?
What is a Cap Table? Capitalization tables, commonly called “cap tables,” are highly useful spreadsheets maintained by companies that have multiple owners or investors. Cap tables are especially important for private companies at startup and in the early stages of the...
Benefits of Finance & Accounting Staff Augmentation
Many companies experience times when they find their accounting departments short on staff or short on expertise. Sometimes emergencies and financial needs arise that are beyond the capability of their financial personnel to address. This is particularly true in times...
Qualities of an Effective Profit & Loss Report
A Profit and Loss (P&L) Report, also called a Profit and Loss Statement, is a key financial document that details a company’s income and expenses over a specific period of time. This time period is typically a month, a quarter or a year. Depending on company needs...
What Is a Quality of Earnings Report?
When a business sale, acquisition, or major investment is contemplated, one important step in the due diligence process is the generation of a Quality of Earnings report, sometimes abbreviated as QOE. Even though a company may have strong financial statements, those...
My brother recommended I might like this web site. He was totally right. This post actually made my day. You cann’t imagine just how much time I had spent for this information! Thanks!