Essential Principles of Business Accounting Every Entrepreneur Should Know
Discover key business accounting principles every entrepreneur should know, from bookkeeping basics to financial management for business success.
It's all too easy for an up-and-coming entrepreneur to place your entire focus on building your brand and business into something incredible. From coming up with products and services that make people excited to building a reliable team to surround you as you build something from the ground up, it's something that can be utterly exhilarating. However, amid this excitement, many nascent business owners will forgo the one thing that is not just a good idea to get right but absolutely vital if they want to avoid the tax man: their accounting processes. The problem is that accounting just isn't as "sexy" as the other tasks involved with entrepreneurship, but you'd better believe that failure to adhere to best practices and not keeping accurate records will result in catastrophic failure somewhere down the line when you suddenly find yourself being audited by the very people who don't mess around or give second chances. So, if you want to avoid a fate worse than death (at least when it comes to business), you ought to pay attention to the fundamental accounting principles we are going to cover throughout this post.
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When In Doubt, Hire Help
As we alluded to in the introduction, accounting isn't exactly something that many fledgling entrepreneurs will pay too much heed to as they run through the more exciting aspects of setting up a new company. This is a fair point, as most entrepreneurial types of people simply think differently from others, and while they might have analytical minds, it's not really in the same way that a chartered accountant might think. So, what is one to do when facing the situation of trying to build a brand that pays the bills while also balancing the books in a way that keeps the entire option in order? For most, this will involve hiring an accounting agency that provides them with all of the help they need to remain compliant and understand what's happening with their money. This kind of tax help for businesses can prove to be utterly indispensable as it will show you what is going on in financial terms in your business, where you're doing things well, and whether you are falling short. When you know where the money is and what it's doing, you can make better judgment calls that will ensure the longevity of your company and allow you to keep operating, even as you scale up.
Importance Of Accurate Financial Records
Keeping accurate records is critical for two main reasons:
- It allows you to see the flow of money
- It keeps the tax department happy
Let's go through each of those points in turn to get a more detailed interpretation of what they mean.
You Know What Is Happening With Your Money
Accurate records will give you an incredible picture of how your company is operating in terms of income, expenses, assets, and liabilities. When you have access to clever records, you can see patterns that affect the overall operation and come to a better conclusion when you need to make a move on something. It also enables you to forecast into the future and, therefore, develop a budget to help cover any personal shortfalls, or even better, prepare for an upcoming sales bonanza and avoid any bottlenecks that will cause you to lose money and damage your brand. While all of those points should be enough to keep your accounting in check, there is another, perhaps even more critical reason: to secure funding that can help to boost growth. Without accurate numbers on hand, you will scare away potential investors at worst or be unable to guarantee the correct amount based on your current value (because they can't correctly assess the value).
You Remain Tax Complaint
You not only want to maintain accurate records to remain compliant with tax regulations in order to avoid falling foul of the law but also to save money. If you aren't sure how much you're bringing in and what dedications to make, you could end up paying far more than you ought to.
Recognizing How Revenue And Expense Tracking Can Keep You Afloat
When it comes down to the brass tacks, your business will either thrive or die based on how much revenue it can bring in minus the expenses you need to pay. If you're constantly in the red because you haven't made any effort to track your money, your business can only sustain itself based on the cash runway it has at its disposal. This could be months or years, but eventually, the company will fold, and you will be out of pocket for whatever money you have put in, not to mention for everything else that outside investors might have paid. Fortunately, this is much easier than many people make it out to be, primarily if you use the right accounting software correctly.
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Cash Flow Management Will Keep Your Business Humming Along
You might have heard that cash flow is the lifeblood of any fledgling business, and while the term is bandied about a lot, it's true that without a steady flow of cash, you cannot pay your bills, including the salaries of your employees. Moreover, inadequate cash on hand could mean that you default on payment to your own suppliers, causing them to initiate legal action to recover their money and burn any bridges that you have built up over the course of developing your enterprise.
Understanding How Deductions Can Save You Money
Proper accounting will show up in the areas where you can actually save some money and reduce your overall tax burden. By making use of the many deductions afforded to you by Uncle Sam in relation to your business operations, you can reduce your tax bill and use the savings to reinvest to build even larger. Just be careful to follow any advice from your accounting team or those you've outsourced the task to. It's easy to keep adding business expenses to your tax form only to find later that they are ineligible as deductions, and you are now being investigated for fraud.
There are plenty of reasons why any up-and-coming business owner ought to pay close attention to their accounting techniques, with those mentioned here only being but a few. Not only will it ensure you remain on the right side of the tax man, but it will also help inform deacons and save money in the long run that you can put toward expanding operations.