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Starting a new venture can be a challenging and exciting endeavour. One of the essential aspects of running a startup is having a solid grasp of financial management and accounting principles. Without this knowledge, making informed business decisions can be very complicated. In this article, experlu sharing 10 basic accounting lessons that every startup should know.
1. Identify the method of accounting
You need to choose the basis of accounting that you should follow in your company.
- Cash Method: Expenditure and income are booked/recognised at the time when they are paid or received.
- Accrual Method: Expenditure and income are booked/recognised when the transaction occurs, regardless of whether cash is received for the specific transaction.
Practically speaking, more than 95% of businesses adopt the accrual method of accounting since it accurately depicts the company’s annual profit or loss.
2. Separate personal and business expenses
Just as it is crucial to keep your personal and business life separate, it’s no doubt the same with your company and personal expenses. It isn’t easy to monitor your startup’s cash flow if you cannot view it separately. Create a different bank account for your company if you haven’t done it already.
To streamline your financial management, consider using tools like an invoice generator for small business, which can help you track your income and expenses more efficiently.
3. Set future goals
If you want to grow your startup into a billion-dollar enterprise one day, you should set clear short and long-term objectives for your company. Without setting measurable weekly, monthly, and quarterly goals, you will inevitably lose your way and be unable to accomplish anything significant.
When you use financial forecasting, you can predict your startup’s growth for the upcoming quarter or even the following two or three years, which can help you achieve business goals.
4. Set up a system for invoicing and payments
Setting up a system for billing and payments can help you manage your cash flow, keep track of your earnings, and ensure that your clients pay you on time. It will also assist you in making more accurate predictions and better control over your finances.
5. Use accounting software
By selecting the appropriate accounting software for your company, you can automate many of the financial operations involved in running a business, get real-time financial data, and maintain compliance with tax laws and regulations.
This can reduce the risk of error and save time. It also allows for easy tracking of financial performance, like revenue, cash flow and expenses.
6. Understand cash flow
Cash flow is known as the movement of money in and out of your company. Startups must understand their cash flow to ensure they have enough funds to meet expenses.
By tracking your expenses and income, managing your accounts receivable and forecasting your cash flow, you can ensure you have enough money to invest in expanding your business.
7. Seek professional advice
Starting a business can be complicated, so in cases where you are having difficulties, it’s important to seek professional advice from accountants for tech startups. They can guide you on financial planning, tax laws, and other critical business decisions.
8. Understand the importance of financial statements
Financial statements like cash flow statements, balance sheets, and income statements provide a snapshot of a firm’s financial health. Startups should be able to comprehend and evaluate these statements to make informed business decisions about how to expand their business and manage their finances.
9. Utilise financial ratios to evaluate financial performance
Financial ratios like profit margin, activity, and liquidity ratios provide valuable insights into a startup’s financial well-being, highlighting areas that require attention or improvement. These ratios are also essential to predict growth, track capital, and tackle competitive challenges.
10. Stay compliant with tax laws
Taxes can be a massive cost for startups, so it’s essential to understand the tax laws that apply to your company and to plan ahead for tax season. This implies keeping accurate records, staying informed about tax rules and regulations changes, and seeking professional guidance to ensure compliance and avoid penalties.
Final thoughts
Understanding these accounting lessons will help you to make smart financial decisions for your startup. With this knowledge, startups can reduce expenses, stick to its budget, and identify areas for improvement. It’s important to remember that a startup’s journey is not always simple, and it’s essential to seek professional assistance when necessary.
