When you dreamed of becoming an entrepreneur, you probably didn't fantasize much about accounting. You had other adventures in mind. But here you are, spreadsheets open, eyes red and bleary, trying to remember the distinction between FIFO and LIFO inventory management.
Well, don't rush through the process. Accounting might not rank among the most glorious parts of the startup process. But it counts as one of the most crucial.
Engaging outside help or finding a software tool to help you with the accounting process is an option. But it is important to leverage a basic understanding of certain CFO skills, as well.
The Value of Accounting
Don't think of accounting as a mere number-crunching chore. Rather, consider it a roadmap to success.
The information you gain through detailed accounting lets you understand where your business stands at any given moment. At the same time, it gives you clues as to how to reach your most prosperous future.
Specifically, accounting lets you know the resources you have available. It also shows you how these are currently deployed. That information, in turn, will give you insights about how to best proceed.
The Small Business Accounting Problem
Hopefully you see how accounting represents a key activity for moving your small business forward. But do you feel confident in your ability?
One survey indicated that almost a quarter of small business owners (21%) rated their own familiarity at accounting and finance as either "not knowledgeable" or "somewhat knowledgeable." Only 40% said they were "very knowledgeable" or better about these key business activities.
Almost a quarter of small business owners (21%) rated their own familiarity at accounting and finance as either "not knowledgeable" or "somewhat knowledgeable."
No wonder so many companies turn to outside help with their accounting needs. The same survey indicated that about seven out of 10 firms outsourced their tax preparation services. Meanwhile nearly half did the same with payroll and auditing functions.
Accounting Is Complicated
There's a reason people spend years perfecting the accounting process. Professional accountants exist in the first place because the practice itself is complicated. Like law or engineering, the disciple is just too complicated for most amateurs to practice on a high level.
Outsourcing Accounting Tasks Can Be Costly or Unreliable
There are challenges associated with outsourcing your accounting functions as well. Dedicated accounting services can be too expensive for many startups. At the same time, it's difficult to trust such sensitive information with a stranger. Of course, most accountants are honest and principled people. But many entrepreneurs hold back when it comes to relying on an outsider for such critical advice.
Accounting Basics Every Business Owner Should Learn
As you consider your accounting options, take a brief refresher in the basics. If you plan to tackle the accounting functions on your own, you'll need to start somewhere. Mastering the fundamentals will give you a good bedrock on which to begin building.
Even if you're looking to outsource part or all of the accounting tasks, you should still review the underlying principles. These will help you have intelligent conversations on the subject. They'll also improve your ability to oversee the process.
With that in mind, here are a few terms that should be in your vocabulary:
- Cash-basis accounting
- Accrual accounting
- Balance Sheet
- P/L Statement
- Cash Flow Statement
Tips to Master Basic Accounting Practices
Here are a few tips as you look to expand your accounting horizons:
Keep Meticulous Records
Documents like P/L statements and balance sheets don’t just appear from thin air. They require good data to create. This comes about as a result of good record keeping. Make sure you compile and store the information you need to maximize your accounting abilities.
Computers were made to help with numbers. It's no surprise, then, that they have become central to much accounting activity. One data set found that nearly two-thirds of small business owners (64.4%) use accounting software.
You should take advantage of this tool as well. Find the best accounting software for your needs and deploy it to upgrade your finance department.
Don't Wait Until the Last Moment
As a small business owner, you're constantly stretched thin. It's hard to find enough time in the day for every task that demands your attention. It's tempting to put off accounting chores until certain deadlines, like tax season.
However, this creates problems. First off, you impose an unnecessary time crunch by waiting until the last minute. In addition, you spend the interim period in the dark. Because you don't regularly update your accounting, you don't have all the information you need to make optimal decisions.
Open the Right Bank Accounts
You need a good financial structure in place. This will help you gather the data you need. It will also add to your overall financial efficiency, letting you get the most out of your money.
Start by finding the right business bank account. The optimal financial institution will give you tools that plug directly into your accounting process. This should include 24/7 online access, easy-to-use record keeping, and, if possible, additional accounting features.
Becoming Your Own Best Financial Advisor
Yes, accounting can be complicated and time consuming. But there are ways to limit these burdens.
You started your business because you dreamed of becoming a CEO. But, with the right preparation and support, you can add enough CFO skills to maximize your chances of success.
Start by mastering the basic skills. Enhance this foundation by leveraging technology, such as finding the right accounting software. Finally, build the proper support structure, complete with strong record keeping and a good relationship with a responsive banking institution.
With these steps, you can overcome the challenge that accounting poses. Maybe you started your business because you dreamed of becoming a CEO. But, with the right preparation and support, you can add enough CFO skills to maximize your chances of success.