Accounting and Financial Management for New Business Owners

The topic of accounting or bookkeeping can strike fear into the hearts of many new business owners. While “doing the books” might sound unpleasant for some, nothing can provide the clarity and understanding that comes with proper accounting for any new business.  Numbers simply don’t lie.

Making the accounting process a key strength in your business practice can be a valuable asset while trying to build and grow your company.

In our accounting and financial management guide, we’ve provided a guide for new business owners on how to understand the basics of the accounting and financial management processes.  We’ve also provided some helpful accounting and financial management resources as well.

Definition of Accounting

Simply put, accounting is just the process of documenting all the financial transactions in your small business, tracking the money coming into your business and the money going out.

Basics of Accounting

Accounting is the method that you’ll use to measure the financial status of your business, including profitability, which is the most important measure of any for-profit business.

The small business owner will need to look at each source of income and expense, money coming in and money going out, and then make decisions based on that information. Using readily available accounting software, such as Quickbooks Pro, the business owner can generate reports for investors, loan officers, or just to get an overall picture of how the business is doing financially for any given period of time. The 4 basic financial statements include:

• Income Statement (or Profit & Loss)
• Balance Sheet
• Cash Flow Statement
• Statement of Retained Earnings

Each of these financial statements uses a specific interval or period of time for measurement. An income statement, also known as a profit and loss statement, simply shows the profitability of a business. A balance sheet reflects a company’s total assets and total liabilities. A cash flow statement indicates the movement or the flow cash in and out of a business, and a statement of retained earnings shows the fluctuations or changes in a company’s retained earnings.

Setting Up Your Accounting System

When first setting up you system of accounting, you should first speak to an accountant or bookkeeper. It’s important to setup your accounting system properly right out of the gate to avoid costly mistakes and errors down the road when filing your taxes.

For your bookkeeping, you can hire an outside bookkeeper at a reasonable rate to do it for you. A more affordable option is accounting software that can maintain your ledger and bookkeeping for you. Using accounting software for your bookkeeping will require some data entry on your part, but will be a far more affordable option for small, start-up businesses that are on a tight budget.

If you use Quickbooks Pro for your bookkeeping, you can simply provide your CPA with either online access or the exported data file to prepare your taxes and financial statements at the end of the year.

We highly recommend using a certified public accountant (CPA) when filing your taxes. When you first start looking for an accountant, try to get a referral from a trusted advisor who has worked with them in the past. If you can’t get a referral, we recommend that you use one of the following 2 resource sites to assist you in your search:

• CPADirectory.com
• AccountantsWorld.com

Methods of Accounting

When first setting up your accounting system, you first have to decide which method of accounting that you’ll be using, either the cash method or the accrual method of accounting.

Cash Method (Cash Basis) – the cash method of accounting counts income when it’s actually received and counts expenses when their actually paid for, which is the most common method of accounting used by small businesses.

Accrual Method (Accrual Basis) – the accrual method of accounting counts income from a sale when it actually occurs (regardless of when you actually receive payment) and expenses are counted when you actually receive the expense item (instead of when you actually paid for it). The accrual method is commonly used for either large businesses or small businesses that utilize an “invoicing” system that commonly delivers a company’s product or service before being paid for it.

Choosing a Method

For businesses with less than $5 million in annual sales or businesses that maintain an inventory you can choose either method of accounting that is most suitable for your business. Businesses with sales in excess of $5 million or businesses that maintain inventory must use the accrual method of accounting.

The accrual method provides a more precise measure of a given company’s financial situation but does require additional effort to maintain accounts receivable and accounts payable. The cash method is far easier to maintain though and is the preferred method of accounting for most small companies.

Recording Financial Transactions

The the next step is to deciding on how you will record all of your financial transactions. You have 2 choices for recording transactions:

1. Hand-Recording Transactions – each transaction is handwritten in a ledger (ugh!).
2. Software – transactions are recorded with an accounting software program for generating reports and automating routine tasks.

By far the most popular method for bookkeeping and transaction record keeping is accounting software. Here are several of the most popular accounting software programs that we can recommend:

• QuickBooks Pro – most popular and most user-friendly of all the accounting software packages.
• PeachTree Accounting – entry-level product software providing a basic accounting system at a low price.
• Simply Accounting – not nearly as user-friendly as Quickbooks but has many of the same features and the trial version is free to use for 60 days.

Setting Up Your “Chart of Accounts”

After choosing a method for transactions, you also need to setup your “chart of accounts”, which is simply a list of all of your various accounts in your accounting system. Accounts would include income accounts, expense accounts, asset accounts, etc.

As we previously indicated, a certified accountant (CPA) can be incredibly helpful when first setting up your chart of accounts. In particular, QuickBooks Pro has a chart of accounts “wizard” that will customize the various accounts of your business.

Maintaining Your Accounting System

Once you’ve actually chosen your system and method of accounting, the next step is learning how to operate and maintain your accounting system. Learning the system will obviously depend on which system in particular that you’ve chosen. Properly maintaining your system of accounting can only be accomplished if you actually use it properly, which means entering each and every transaction, bill, check, charge and refund.

You’ll also need to reconcile your bank statement each and every month, which involves comparing each transaction from your bank statement(s) or accounts with your accounting system and make sure that they correspond properly. This process alone will force you to account for the proper “comings and goings” of the company’s money each and every month.

Recommended Resources:

We’ve listed some additional resources that may be helpful as well.

• Small Business Accounting – an online course from MyOwnBusiness.org.
• Building Your Small Business Accounting Team – from the Small Business Information guide site on About.com.
• SBA Free Online Courses on Finance & Accounting – free online courses in finance and accounting from the Small Business Administration.
• The Accounting Game: Basic Accounting – highly recommended book on the basics of accounting for small business owners.

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Tagged as: Accounting, bookkeeping, CPA, financial statements