Starting from Scratch: Accounting Basics for Startup Businesses

January 10, 2015

When you’re first starting out, it can be overwhelming. You’re told you need to get your business structure in order, get inventory, make sure you’re trademarked, and then you have to sell and get customers. At the same time, you have to track important metrics or risk going out of business within the first year. How do you manage it all? Here’s how.


Open A Bank Account, Pronto


Open a business bank account. Every business needs one before it can accept payments on behalf of the company. Not doing this carries significant personal liability. If there’s ever a problem, and you never know what kind of complaints a customer or prospect might file against you with a regulator, you could be personally liable for damages.


In other words, a court may allow the so-called injured party to come after your personal assets, since you were using your personal bank account for transactions. If you’re incorporated, the court may use this as a reason to pierce the corporate veil and come after your personal assets. It’s just not worth it. Keeping a separate business bank account also establishes that you’re a serious business owner and prevents commingling of funds.


Get Invoice Templates Set Up


You’re in business to make money, so don’t forget about your invoices. Most businesses make the mistake of creating these on the fly when and as they need them, instead of doing that, grab a few free invoice templates from a reputable company like Hloom. You can customize them to your liking, and you’ll cut down on the amount of time spent creating invoicing, which will translate into more money in your bank account (more clients served).


Make A Budget Or Outsource Your Bookkeeping


This is probably one area where you want to outsource your finances. You can use a homebrew budgeting and expense-tracking system, but we don’t recommend it. FreshBooks has already solved this problem and, if you don’t want to use that option, there are plenty of low-cost bookkeeping services out there that will manage the bookkeeping and your taxes for you.


This is critical, and not something you want to mess around with. Make sure your books are in order, and that you’re paying all payroll taxes on time.


A bookkeeping service can also keep track of all of your expenses like meals and entertainment, advertising expenses, business travel expenses, vehicle maintenance or mileage, and receipts for gifts, and home office expenses.


Tracking Gross And Net Margin


Tracking gross and net margins is important. The gross margin is the total sales revenue of your company minus the total cost of your products or services sold. This number is then divided by the total sales revenue and expressed as a percentage. The higher the percentage, the better, because it means you’re retaining more money per dollar of sale.


Net margins are the other half of this equation. A net margin is the ratio of net profits to your revenues. This is usually expressed as “net margins = net profit/revenue”.


Net margins show profitability, but a low net profit margin doesn’t necessarily mean that you’re unprofitable as a company. Large retailers often have thin net margins, while some tech companies, like Apple, have higher margins.


Current Ratio And Quick Ratio


These metrics are typically measured together and tell you how liquid your company is – how much money you have on-hand to meet current and unexpected liabilities. Current ratio is the measure of current assets divided by current liabilities.


This ratio tells you whether all of your assets that can be converted to cash right now or within a year can be used to satisfy all of your liabilities in under a year.


A ratio of less than one means you may end up running short on money, while a ratio of more than one means you probably have a good surplus.


A quick ratio takes all of the cash in your business, along with the accounts receivable, and divides it by the current liabilities. It’s not perfect, but it’s one more way to gauge how you’re doing, financially.


Account Payable and Receivable Days


These metrics measure how quickly you’re bringing in cash and paying it out. The accounts payable days is calculated by taking the amount you owe (your liabilities) and dividing it by the cost of goods sold, multiplied by 365 days. A higher number is better, all other things being equal. You want to retain cash in your business for as long as possible and only pay out when you need to.


Accounts Receivable Days is calculated by dividing this account value by total sales and then multiplying by 365. Lower numbers are generally better, but again this depends on the industry. Some industries “bill” customers and allow invoices to sit for 30 days. But, you want a low number because it means you’re collecting cash quickly and retaining is for working capital and other economically useful purposes.


Don’t Forget To Get New Customers


Lastly, remember that your business is about generating cash flow. You need to be constantly focused on getting new customers, marketing them your products and services, maintaining client relationships, and keeping your sales force focused on bringing home that almighty dollar.


About the author: Linda Hill is a small business owner of several years. When she has some spare time, she likes to sit down and share her insights with others on the web. You can read her interesting articles on a variety of top blogs and websites today.


If you would like to post your own article on BusinessVibes Blog or share your brilliant stories & ideas with millions of global business professionals, just simply contact us.

Business & Finance Articles on Business 2 Community

(276)