Accounting for Startups

Latest post from Evan Vitale –

There is no better feeling like bringing home a newborn baby for the first time, the first and most common thing you will probably do is to check if your baby is healthy and well. You may perform several tests like checking their breathing patterns and heart rate, and then compare it to the typical rate for newborn babies. As time goes on and your child ages, you’ll learn new methods for checking your child’s health and condition. This can include their mental, physical and emotional health and development.

This can be compared to when you just started a business, your accounting needs will grow as your business grows and become more and more complicated. Brian Hamilton, the chairman of financial information company Sageworks has mentioned that one of the most common mistakes new entrepreneurs make is that they feel that they don’t need an accountant or that accountants aren’t necessary until their business has grown to mature a bit more.

Bran Hamilton has stated “Most businesses are very simple, and the vast majority of them are sole proprietorships.” This results in the mindset that their primary focus should be to increase revenue and gain new clients. “In most cases, you don’t need an accountant on day one. If I’m going to start, for example, a landscaping company, I’m not going to count money until I make money.”

There are a variety of available accounting systems, including Xero, Peachtree and QuickBooks, all of which can assist the new business owners in handling accounting related affairs such as recording sales and expenses and their growth over time. Developers of tax-preparing software like Intuit ensure that sole proprietors submit their Form 1040 along with a Schedule C attached.

At some point, the questions get asked “If you’re running a fairly simple business, why do you need an accountant on the first day?” You might need an accountant for advice, because you usually need advice once you get going. Accountants handle more than just your business’s financial information, they can provide strategic advice regarding how best to run your business from a financial point of view. Also, if you decide to obtain a loan or purchase property to expand your business, accountants can provide invaluable advice.

However, it is important to understand that an accountant is needed most during different stages of the business cycle, and can also depend on the type of business. The most common strategy for new business owners is to start a business and run straight for new clients and sources of revenue.

Brian Hamilton says, “A lot of the time, entrepreneurs and others seem to have a kind of checklist in their head about what ‘real’ businesses do and have. They think that all businesses ‘need’ an accountant, a lawyer, a business plan, to be incorporated. All they’re doing is setting big obstacles to getting the first customer.” The best approach in simple terms is to gain new clients and then look for an accountant.

To determine how well a business is performing, private-company owners will consistently check a few key financial metrics. The most common being sales as that is what determines the revenue of a business. For most, tracking sales is simple and shouldn’t require extensive analysis unless your business is offering credit to customers or is project-based. Just by recording your business costs and revenue from all sources it will allow you to keep track of your profit.

In order to determine your profitability, there are two key factors to keep an eye on.

Gross margin: This is a company’s revenue minus total costs directly involved in producing the product or delivering the service, divided by revenue. This shows what percentage of sales is left over after direct costs, and it’s an important measure of efficiency. Examining this can guide you on when you need to adjust prices or volume in order to keep more of what you sell.

Net margin: This is a company’s net profit measured against sales and takes into account all expenses related to the business (such as bank fees and other general overhead). This margin tells you how much of every dollar in sales your firm is keeping after all expenses are paid.

Other metrics become more important to understand and track as the business grows. The best time to start tracking such metrics depends entirely on which stage the company is in, and the type of company. However, when it comes to new companies and are developing the ideas behind their company, the key metric they track is sales.


from Evan Vitale


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