What Entrepreneurs Need To Know About Accounting in 2021

by Josh Biggs in Tips on 6th February 2021

In the book Shoe Dog, Phil Knight details how he built Nike into a global powerhouse. Interestingly, one of the keys to his success in the early years was that he worked full-time as a certified public accountant to pay the bills!

However, the knowledge he gained from understanding the language of business accounting was invaluable. Running a fast-growing company requires tremendous discipline.

Most aspiring entrepreneurs have a somewhat allergic reaction to accounting issues. If you want to succeed in business and create a new Nike, you probably didn’t base that ambition on a love of managing expenses and accounts receivable. Entrepreneurs are idea-people, aren’t they?                                                                                                                                

Why should their creativity be wasted on mundane accounting issues, especially when today’s startup business models often require less startup capital than traditional small business models?

Business success depends on planning and tight management of budgets, balancing the books, and revising financial strategies as needed. Effective financial management leads to the intended outcome of the business’s initial investment. 

It is a return on that investment in the form of profits for company owners and stakeholders. Business is based on the movement of money, and accounting is the language of that movement. Therefore, a company’s success depends mostly on good accounting.

So, in light of this, what should entrepreneurs consider in accounting?

What Do Entrepreneurs Need to Know?

Master Record Keeping

One of the key skills you will need as an entrepreneur is record keeping. You need to set up protocols to keep every receipt, a record of every transaction, and a record every time you bring in or take out inventory. 

You might want to consider using tools such as a computer or tablet, where you can record notes on a word processing tool or numbers on a spreadsheet. 

If you consider using an accounting software package, you will use journal entries to keep track of each debit and credit. 

If you use these, you can maintain consistency and accuracy and make notes on losses as to why you might need to write off expenses. It will help you when it is time to do taxes or prepare documents for investors. 

Learn To Create Income Statements

Your income statement is the total of all your profits and losses over some time. Specifically, your profit and loss statement should include your income, expenses, profits, and losses. That is, every dollar that comes in through your accounts, your business expenses, sales profits, and any losses-perhaps due to shrinkage, breakage, or promotional giveaways-will be recorded.

You will need to keep records that reflect the items’ nature on your income statement (journal entries). For example, you may realize income from non-business transactions. You may realize income from investments, interest on accounts, or as a result of a court settlement. 

Usually, when you record the source and value of that income, you can determine how that money should be taxed.

Determine Profits

Once you master the profit and loss statement, you can determine how profitable your business is. You can then compare your expenses to your profits and make a profit. This number will be vital when looking for investors or additional bank loans.

As you may see, when collecting data for the Income Statement, you should keep a record of your total expenses and losses in addition to your total revenues. It would help if you distinguished between operating and non-operating income. 

It means any one-time gains from things like asset sales or other investments are not necessarily reflective of your business over the long term and should be considered when assessing the actual state of the operation.

Dive Into Predictive Accounting & Financial Estimates

It would help if you had some way to prepare for the future. However, in the first year(s) of your business, you probably won’t have any basis for those decisions. It is where your detailed records, journal entries, etc., will come in handy. 

For example, if you have a record of past business activity during the summer, you should know what staff should have salaries and how to manage inventory. 

For instance, if you own a sports shop, you will know not to stock as many snow skis and be prepared for a possible slump when everyone in town goes to the beach in July.

When you can refer back to your past numbers and create a narrative about the past, you should be better prepared for the future. For example, last July, your business may have stalled. 

According to the numbers, you should be careful about payroll or inventory costs during that time. However, if your report reminds you that significant construction work was being done on the road before your sales operation, you will soften the purely financial data. An improved road may bring in more business this year.

Set Profit Goals

After operating for a while, you should be able to predict your numbers with greater accuracy. You should be able to determine which products are making more sales and which ones are languishing on your shelves. 

More generally, you will probably have a solid foundation to work within your market and be able to meet its demands even more effectively. In this way, you can begin to set reasonable sales and profit goals.

Accounting Tips For An Entrepreneur  

Use Particular Software

Many software packages are widely available on the market today. While there is little substitute for a true financial professional, you can let the software store and process your data for personal analysis. 

Ensure you keep backups of all your records, so you both keep your data in case a system problem arises and when you hire an accountant. You can also integrate your accounting software with an AP solution like GetYooz, and further automate the process. 

The most critical thing is to make sure there is one system for everything. You don’t want to keep some data here and some data there. Collecting that data when you are ready to be a professional is usually a challenging process.

According to a Fortune Business Insights report, the accounting software market will see more growth in the coming years. There is strong demand worldwide for software platforms for spreadsheet management and a better understanding of tax administration. 

During the forecast between 2019 and 2024, the market will grow at a CAGR of 8.5%. North America will be at the forefront. The adoption of modern technology in the Asia-Pacific region will also fuel the growth of accounting software companies.

The most popular accounting software:

  • “Sage Intacct” offers you accounting solutions such as cash management, accounts payables and receivables, and spend management. 
  • “Xero” makes it easy for you to track and edit transactions, monitor billing and invoicing, and even process payroll. 
  • “FreeAgent” allows you to send and track invoices, manage expenses, and use a built-in stopwatch to keep time records. 
  • “Gusto” comes with capabilities for automated payroll management to ensure the elimination of human errors. 

Separate Your Business And Personal Account

It is essential advice that may seem like common sense. However, many business owners are getting into the habit of blurring the lines between their personal and business accounts. 

It can happen when you start using your business vehicle for personal use and then rely on business accounts when it is not appropriate. 

When you keep your accounts and expenses separate, it will be much easier to estimate both in real terms. It will also help you understand faster when a business fails. 

Pay Yourself

You work hard, so don’t forget to pay yourself. However, try to pay yourself as little as possible. It may seem silly until you pay yourself a big bonus at the end of the year or the end of the quarter. 

It is one way to avoid paying as much payroll tax as possible. However, you will still have to account for the bonus on your income tax, but your business will avoid those extra costs. You can also consider a bonus structure for your best employees.

Outsource Accounting Function Or Hire A Bookkeeper

Small businesses are now outsourcing accounting functions and reaping its many benefits. Outsourcing usually allows companies to focus more on their limited resources, increasing profitability. It also saves them labor costs such as salaries, taxation, wages, benefits, and training. 

It often leads to an increase in the number of outsourced accounting service providers. It is one of the fastest-growing areas in the accounting industry. Every year, businesses experience a sense of satisfaction with their outsourced accounting work’s quality and results. 

Experts predict a hybrid approach that will combine accounting technology and financial advisor input shortly. It is due to discovering new analytics solutions that allow accountants to focus more on deciphering data for deeper insights. 

Unlike other accounting processes, decision making will always be in the hands of professionals and experts. 

The flip side of the outsourcing coin is hiring an in-house accountant. Let’s first learn the difference between the two terms. 

Although they are often used interchangeably, the two professions make different contributions to the business.

  • Bookkeepers do the day-to-day work and should bring the reporting to a high level of detail and accuracy. They can also tell you of issues that may affect you soon, such as cash flow problems or late paying bills.
  • Accountants will review the invoices created, often quarterly. They will make any minor adjustments necessary. They will use the necessary information in the accounts to file your tax returns and other official reports. Also, they should provide high-level consulting services.

Bookkeepers help you with your day-to-day business operations and help keep your account books in order.  Learn more about why people hire a full charge bookkeeper and make an informed decision on what would work better for your business. 

Leverage The Cloud

The more you learn, the more you should earn. However, with your accounting software, this is amplified when you use real-time data. If you rely on “desktop” accounting software, you are looking at obsolete data. 

To get real-time data, you should switch your accounting software to the cloud. You can then access richer, more accurate data on any device.

With the evolution of technology now you can easily get your hands on a QuickBooks inventory management software that is affordable and works in the cloud.

The cloud is becoming a popular place for accounting services. With cloud-based accounting systems, companies and firms can have access to their system at any time. 

About 67% of accountants now believe that cloud technology can make their roles easier. According to a Sage survey, 53% of those surveyed chose cloud-based solutions for project management and communication with clients. 

It can be attributed to the growing demand for advanced technology solutions in a variety of industries. Among them is the accounting industry, making a big leap toward more efficient and comprehensive financial reporting and analytics.

Focus On Data Analytics

As technology makes specific accounting tasks more straightforward, the accounting industry shifts its focus to data analysis. 

Analyzing the numbers helps businesses gain valuable information to identify process improvements, improve efficiency, and better manage risk.

While analytics as a part of accounting services is nothing new, it has become more powerful, presenting financial metrics in a new light for better understanding. 

Just as big data plays a critical role in many sectors, it fills the same significant role in the accounting industry and supports companies and firms through advanced valuation techniques. 

Accountants and financial experts work behind the scenes. Using big data, accountants and experts transform key internal data sets into safe, vigorous, and essential data analysis. 

Use Dashboard Magic

A key benefit of a cloud-based accounting system is automated dashboards that can be tailored to your business.

For starters, you should have a consolidated view of critical operational metrics relevant to your business. For example, if inventory is essential, be sure to track the amounts and timing of purchases. It can be extremely helpful in avoiding problems with your cash flow.

Further, you can use a dashboard to zero in on where customers are making a profit. That way, you can make sure you don’t run the risk of losing them. Also, you may find that some customers are always generating red ink and will probably continue to do so. 

In that case, the best approach is perhaps just to let them go. You can multiply the number of customers by the frequency of transactions and then by the average price per transaction. 

You can find the raw numbers by dividing the number of accounts by the revenue and then the number of accounts by the number of customers. Real-time accounting systems should give you this data on your average bill and how often the purchases are made. 

Once you figure out the numbers, you can set some goals and apply tactics to improve them. What you can measure, you can usually manage.

Think Holistically

Financial metrics and ratios are certainly critical to any successful business. However, there is still a lot you can do with a cloud-based accounting system. 

That is because the data is centralized. You are able to connect it to other systems like CRM, payroll, and distribution. 

You should get a much better overall picture of your business – the good, the bad, and the ugly.

It can get a little complicated. However, this is where you can get your money’s worth with a qualified CPA. It can be more than just a bean counter, and instead, help you create financial management systems.

To Sum Up

In addition to being necessary for a company’s immediate financial recovery, accounting practices are an important strategic tool for entrepreneurs. They allow small business managers to make forecasts and projections for the future in real-time. 

It leads to smart budgeting in the present and strict adherence to that budget, avoiding the trap of unnecessary debt accruals that can sink a fledgling company.

Also, accounting competence allows entrepreneurs to evaluate a company’s performance and judge which aspects are working well and worth the investment. These functions need improvement or are merely unnecessary or unprofitable.

Accounting is arguably more important to the aspiring entrepreneur than to the traditional manager, given the many roles entrepreneurs will be responsible for as their business grows.

Entrepreneurs will need accounting expertise on a large scale and accounting practices specific to each function in a business. 

Due to the rapid change and scalable movement of startups, an entrepreneur can use accounting principles to grow their business at every stage of planning, testing, feedback, and editing.

Categories: Tips