From the outside, it might appear that accounting and finance are complex tasks in need of simplification. However, most entrepreneurs don’t have the luxury of having a full-time accountant on their team.
Where others might see a problem, an entrepreneur will see an opportunity. With that in mind, here is a crash course in accounting for entrepreneurs, this will give you some insight on what to look for when working on your next big idea.
What to Know.
In lieu of getting a degree in accounting, there are a few things you will need to know before getting started. These include how an accountant can help an entrepreneur and how to do it yourself as well as when to know when you will need help – after all, knowing what it is that you don’t know will help you to grow as an entrepreneur.
When it comes to the first item knowing what an accountant does, and in the context of an start up company, the following are often considered the most important tasks:
- Putting together financial projections;
- Assisting with decisions pertaining to the allocation of resources and measuring performance against the plan.
In the case of early-stage companies, the work can often be done by an entrepreneur with a basic understanding of financial modeling. If you still don’t have enough resources to outsources someone, and want to do it yourself, you should check out this WallStreet Prep guide on financial modeling.
Not only can this be helpful as it forces an entrepreneur to better understand their model, the added knowledge can lead to operational insights as it will hone a founder’s sense of what is most important to make their ‘numbers’. As you can see the key is not just to know the formulas but to also understand the impact different activities have on costs and profitability.
Predictions.
One of the most important tasks that an accountant plays in an early-stage company is to help put together the financial projections which will serve as the basis for the business model. This includes putting together a comprehensive set of financial projections which are used for internal discussions as well as for presentation to investors.
The fact is that this document is often an iterative process and as such will expand and the understanding of the business model and the market dynamics improve. As such, it often makes sense to start with an understanding of customer acquisition will work in a case.
Why customer acquisition? There are multiple reasons including the fact that without customers there will never be a ‘business’. Another reason is that focusing on customer acquisition will help you, and your investors, have a better understanding of what activities generate interest and ultimately drive conversion.
Once the customer acquisition model starts to take shape you will not only have started to define the revenue streams for your business, but you will be on your way to defining the costs tied to these activities.
From there you can focus on the components which go into your ‘cost of service’ (also known as the cost of goods sold) – these are the items or activities which are needed to deliver what it is that you are doing.
As you can see, this process will start to bring some clarity to your initial vision for the business and in doing so, you have the basis to begin stress testing the model against feedback from investors or changes in the market.
Decisions, Decisions, Decisions.
For entrepreneurs, there is no shortage of decisions which could make or break their venture. While relying on small business accounting services can help, there are times when you won’t have the luxury of relying on outside help; however, this doesn’t mean that you will need to go it alone.
Going back forecasting, you should already have a good idea of how different activities impact growth but the trick when deciding is to be able to identify the subtle differences in the plan and what goes on in the real world.
With that in mind you will want to be able to assess the impact of decisions such as capital investments (e.g. offices and equipment) when to pay suppliers or seek financing (e.g. cash management), or even determining the return on marketing activities (e.g. management reporting). The important thing to remember is that you will need a solid tracking and reporting function.
This brings us to the final piece of the puzzle – measuring performance. You see accounting is more than just filling out tax forms and for entrepreneurs, the real power is in determining how things are going. In doing so you can determine when is the right time to pivot or to even accelerate investments.
There you have it, you might not be an ‘accountant’ when things are done but you will have a better understanding of how accountants help entrepreneurs and their businesses.
