Learning some basic accounting principles will not only help startup founders manage their projects effectively, but also help them make informed decisions that will help the company grow and be successful in the long term. It also helps you get down.
Finance and accounting can seem daunting to those without a finance background, but as an early-stage startup founder, you don’t have to go deep into finance. Initially the project is relatively simple. In other words, you can make informed financial decisions and communicate effectively by simply understanding certain basic accounting concepts and consulting a professional on the topic you need help with. increase.
Later, as the company grows and the financial complexities that come with it, you should be able to hire a specialist (CFO) to handle that part of the business.
Until you get to this stage, here are three key accounting concepts to help you feel confident when you spend time in front of the spreadsheet that organizes your project finances.
1. Accrual accounting
Accrual accounting is a method of recognizing income and expenses when earned or incurred, rather than when cash is received or paid.
For example, if you provided a service to a customer in January, but were paid two months later in March, and were required to cover the costs associated with the service in April, accrual accounting would require all revenue and Estimate the cost. His January expenses for which the actual value was generated.
This is important. Payment dates can skew the overall picture of a company’s financial health and performance. Continuing with the example above, it would appear that more revenue was generated in March and more cost was incurred in April, considering all the transactions in that month. If your business has multiple projects, this can lead to a lot of confusion and can make your business’ finances look more precarious than it really is.
Accrual accounting helps distinguish when and what activities were able to create the most value for the company. The payment date does not distort the understanding of the financial position of the business.
2. Cash flow
Cash flow is simply said to be the opposite concept. It is the movement of cash in and out of a company, which can be positive or negative. Therefore, the date of the transaction matters, not the period during which the service was provided.
Positive cash flow means the company receives more cash than it spends, negative cash flow means the opposite. Knowing a company’s cash flow position is very important as it determines the company’s ability to meet its financial obligations.
In other words, accrual accounting ensures that you understand whether a company is profitable and how it creates value, whereas cash flow accounting ensures that you have enough cash to cover your expenses. To cover periods of negative cash flow and ensure that the business can operate without problems or strained relationships with partners and suppliers, or from investors).
3. Financial statements
Three commonly used financial statements include balance sheet, income statement, and cash flow statement, which provide a snapshot of a company’s financial position at a particular point in time. Depending on where your business is registered, your company may be required by law to make these statements. Generally speaking, this is done by a professional tax accountant.
A tax accountant’s primary concern is keeping your business compliant with tax laws and regulations and minimizing your company’s tax liability. In other words, optimizing things to tax as little as possible.
For this reason, it is quite possible that a professionally prepared financial statement will look slightly different than the documents you use to manage your business’s finances.The two types of documents serve two different purposes, Don’t worry.