Irrespective of the industry you are venturing into, finance will always play a major role in managing your startup.
Right from obtaining seed funds to managing your daily accounts, it is important to focus on the right accounting practices since day one.
As most startups have limited funds to manage their operations, efficient financial accounting becomes all the more important.
If you follow the right steps in accounting and keep your financial records organized, you can ensure a smooth start in the industry you are venturing into.
Why Is Accounting Important For Startups?
Understanding The Financial Position Of The Businesses
When a business is new and growing, it is important to understand where it stands on a regular basis for making the right decisions.
Accounting allows you to ascertain the financial position of your business at any point in time, prompting you to improve its performance over time.
Keeping A Track Of Debts And Receivables
Efficient accounting helps you chart out financial statements for managing your debts and receivables. As you set up a new business, you cannot afford to miss out on even the smallest details regarding the money you owe and the funds you are owed. This helps you ascertain the financial health of your startup.
Tool For Financial Assistance
There is always scope for growth when it comes to running a startup venture. Financial statements are often used by startups to communicate with investors, banks, creditors, suppliers, leasing companies, and other relevant entities for obtaining financial assistance.
If you maintain your financial records well and are able to communicate the position of your business, your chances of getting the desired financial help increase.
Effective Internal Communication
Along with communicating with external entities, accounting helps new and growing organizations communicate with their internal teams.
Financial statements help you communicate the core strengths and weaknesses of your business with your employees on a periodic basis, providing them with a clear sense of direction for growth and prosperity.
With immense competition across industries, it is important for new businesses to stay ahead of the curve to get the desired traction.
Financial accounting information allows you to compare the standing of your business with that of your competitors.
Accounting Practices For Improved Decision Making
When you are running a startup, every business decision you make matters and has an impact on the functioning of your organization.
Here are some of the most important accounting practices that help you make important business decisions for your startup:
Preparing A Cash Flow Statement
As the name suggests, a cash flow statement is a financial record of the cash inflows and outflows pertaining to your business.
When you prepare a cash flow statement, you compare the funds coming into your treasury through ongoing operations with the cash outflows draining your treasury on a regular basis.
An organized cash flow statement allows you to make calculated investment decisions and dictates the opportunities that you should tap into.
Tracking All Business Transactions
From the moment you carry out your very first business transaction, financial accounting helps you keep a record of the same for future references.
It allows you to analyze all your transactions by classifying them into specific groups and focusing on specific accounts.
An activity as simple as recording your sales to income accounts and outflows to expense accounts helps you analyze a large chunk of your business transactions. Always make sure that you maintain all your accounting records well from the day you start your business operations.
Making Adequate Journal Entries
Making the right journal entries allows you to create a chronological record of all your business transactions.
Whether your startup is receiving money or incurring expenses, a journal helps you go through the entire financial journey of your business transactions carried out over a specific period of time.
As journaling allows you to add information about your business transactions from multiple sources onto a centralized record, it provides you with a comprehensive look at your financial undertakings. Also, every journal entry shows you the impact a business transaction has on your organization.
Posting Transactions To Ledger Accounts
Once you have made your journal entries, posting transactions to relevant ledger accounts helps you organize and summarize transactions belonging to specific accounts.
A ledger account provides you with an accurate depiction of the financial position of your business and helps you analyze liabilities, capital, income, and expenditure. Also, it is the ledger that allows you to prepare the final accounts for your startup.
Bank Statement Reconciliation
Although it seems trivial, bank statement reconciliation plays an important role in financial accounting. It allows you to compare the internal financial records of your business with the records provided by your bank.
When you reconcile your bank statements, you can identify faulty and fraudulent transactions and make amends before it is too late.
Especially while running a startup, it allows you to manage your cash flow and detect inefficiencies in your business transactions.
Preparing Final Accounts
This is arguably the most important accounting practice, especially while managing a new business. Here, you are required to prepare two major financial statements – profit and loss statement and balance sheet.
The profit and loss statement helps you keep a record of all the revenue earned and expenses incurred by your business over a specific period of time.
This helps you ascertain the profitability of your business and make important decisions to increase your ROI in the years to come.
On the other hand, the balance sheet helps you create a record of your business capital, assets, and liabilities.
Balance sheets are most important when you approach investors for financial assistance. They help the concerned party analyze the financial position and stability of your business.
The Final Word
These were some of the most important ways in which startups can use accounting for making the right business decisions.
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One of the keys to making your new business thrive in the market is to manage your financial accounts as effectively as possible. Stay updated with our latest bookkeeping and accounting articles at SugerMint.