Accounting and recordkeeping are not necessarily that difficult or time-consuming for an emerging business. Most entrepreneurs – except those seeking venture funding – are free to adopt any accounting system that makes sense and is easy to use.
The corporate terminology may sound intimidating. But when you keep in mind that an “operating budget” is basically the same as a household budget with a few different line items; a “cash disbursement journal” may be as simple as a checkbook register; and a “financial statement” only requires minor reformatting of your budget… then it all begins to sound a lot more manageable.
The benefits of creating a workable system of accounting and recordkeeping are considerable. Budgeting gives you visibility into your cash flow – how much is coming in and how much is going out – each month. Managing cash flow is essential to keeping the doors open. Second, you can’t plan for growth unless you have a handle on income and expenses. And third, if you need to get a loan, your banker will want to see your books. Therefore, it’s a good idea to learn how to meet that expectation.
A budget that estimates and then tracks income and expenses is an essential tool. It allows you to plan your business strategy and tactical spending throughout the year. It also helps organize your records for tax reporting. Budgeting may be done by hand, or using any number of low-cost computer programs. Either way, it’s a good idea to keep budgets as simple as possible and only capture information you can actually use.
Traditional accounting practice calls for entering each transaction into a specific journal and then transferring the data into a general ledger. The technique, called double-entry bookkeeping, provides a built-in review process. That’s because the debit amounts always have to match the credits. However, learning how to account for every type of transaction can be time consuming – and off-the-shelf computer software does it automatically.
Financial statements – including a balance sheet, an income statement, and a cash flow report – appear in every corporate annual report. These statements are invaluable for analyzing a company’s value, understanding the sources of profits (or losses), and predicting cash flow. However, they may not all be necessary for every emerging business. Unless you need financing from a bank or equity investor, you can probably get by with a less formal process. This should include regular check-ups on your business net worth and budget status and, of course, keeping a careful eye on your checkbook balance.
Entrepreneurs have limited time and resources, and accounting can get complicated fast. Not all of the reports and statements this article covers will be needed for every business. And faster-growing businesses may want to hire a professional accountant to make sure everything is prepared properly – because innocent mistakes can prove costly at tax time.