Accounting 101: How it works
Starting a business is overwhelming. There are so many hats to wear and not enough hours in the day. If you’re one of the lucky ones, you start with a small team to collaborate with. If you’re one of the majority of small business owners, you’re flying solo wearing the hat of all department heads, C-suite executives, employees, and more.
While you don’t have to know it ALL, you do have to know enough about each sector of the business to survive. If you really want a chance at success, you should also know how the departments intertwine with one another — for the rest of it, don’t be afraid to wing it, everyone else is winging it too.
There are 4 technical aspects to understanding how accounting works.
Recordkeeping
Financial statement preparation
Taxes, Taxes, Taxes
Forecasting
Recordkeeping/Bookkeeping
In order to fully understand the technical aspects, you must first understand the relationship accounting has to the past, present, and future of your business. Recordkeeping or bookkeeping is all about recording the events of the past. This is helpful in learning lessons for the future, and predicting what may happen in the future, but the insights you get from bookkeeping are just that, lessons. You can’t go back in time and change the events that have happened, you just have to simply record them in a way that tells an accurate story of your past business dealings. Though mundane, good record keeping is the foundation to all things accounting to follow.
Financial Statement Preparation
Remember that part about not needing to know it ALL? How to read and interpret your financial statements is one of those things worth taking the time to learn. How to prepare them can be outsourced, but having them and knowing how to interpret them is crucial for the wellbeing of your business. Getting a business loan? They’ll ask for financial statements. Applying for credit terms with a new vendor? financial statements. Filing taxes? financial statements. You get it, they’re important! Take the time to do a deep dive into what a balance sheet, income statement, and statement of cash flows mean for your business. A quick google search will return tons of great options, but LinkedIn learning and Youtube have a lot of really short and sweet videos on the topic.
Taxes, Taxes, Taxes
Look, I’m not going to sugarcoat this, taxes are a necessary and painful part of business. They’re also one of the most confusing. Tax laws are constantly changing and there is so much gray area that fuels the spread of misinformation. One thing remains constant though, you’ll need your financial statements to file your taxes, and you’ll need bookkeeping to generate financial statements. You’ve got federal income tax, state income tax, sales tax, tax exemptions, tax deadlines, etc. It’s a lot, but you’ll know you’ve hired a good tax professional when they pay for themselves in tax savings.
Forecasting
Depending on your situation, forecasting is either a luxury or a necessity. If you have ample cash flow and no investors, forecasting is a luxury in the early stages of a business. If cash flow is lean, and you are answering to investors, they’re going to want proof of return on their investment. Use your financial statements, current trends, and knowledge of future events to forecast cash needs for your business, estimate your tax bill, or pitch your soon-to-be success story to investors.
— Stay tuned for more Accounting 101 tips, tricks, and learning opportunities
