What do I know about accounting before starting a business? Here is a detailed guide about the aspects you should cover

After keying in “how to start a business” in Google, more than 11 billion search results will come out. Within each “Start a Business Checklist”, “Plan Your Finances” or “Learn about Accounting” is always an essential part. In this series, you will find a detailed guide of what you should know about accounting before starting a business.

1. Estimate your financials

Even though uncertainty is a given in the business world, entrepreneurs should still make the necessary projections before starting your own company and this will give you a rough idea about how your business may perform and what the things are to be expected.

Here are the key estimates you should calculate before getting everything started:

Sales estimation

Expenditure estimation

Start-up capital estimation

Break-even analysis: when you will start to make a profit

There should be rationales or basis provided for each estimation, i.e. why are you making these assumptions. After becoming more familiar with the business that you are engaged in, changes can be made to these rationales and more accurate estimates then can be projected. 2. Understand the Financial Statements No doubt, you can always hire an accountant to help you do the bookkeeping and you no longer need to worry about whether to debit or credit the next invoice amount. However, entrepreneurs should still keep a basic understanding of the financial figures so as to have a better idea how the current business status is and where company is heading towards. Among different types of financial statements, you will need to understand what each report represents and the key financials that should be highlighted from each report:

1. Income Statement: which reports profit or loss from operations over a period of time.

Net Income, which is often referred as the bottom line of the company, is derived after all expenses have been deducted from the revenue.

The concepts of Net Income should be differentiated with Gross Profit and Earnings Before Interest and Taxes (EBIT)

Gross Profit = Sales – Cost of Sales



EBIT = Gross Profit – Operating Expense (but exclude tax expense)



2. Balance Sheet: which reports the financial position of the company at a point in time.

In Balance Sheet, we will always find Assets = Liabilities + Shareholder’s Equity, which I used in the first post to explain whether you should buy or rent a house.

The key financials that the owner should take care of depend on the industry where the business is engaged in. For example, fixed asset may be emphasized more in a manufacturing company as compared to a financial consulting agency.

3. Cash Flow Statement: which reports sources and uses of cash

Whereby Net cash flow = Cash in – Cash out, Cash in is the financing of the business and Cash out includes investing activities (such as purchase or sale of equipment) and business operations.

Keeping a close track of the cash flow is critical to the business operation. Maintaining a good liquidity in the business will safeguard the survival of your company. That is also why many advisers suggest paying bills and inventory using credit instead of cash.

3. Design the accounting tasks Many of the accounting tasks follow regular pattern. Before starting a business, entrepreneurs should come out a plan and design the accounting tasks based on weekly, monthly and yearly patterns. This will help the business become more organized and systematic. The specific accounting tasks will depend on the business that your company is engaged in. Weekly Tasks: Tasks performed on a weekly basis mostly are closely related to the daily operation of the company. For example, for retail companies, there should be a weekly update upon the inventory level and sales amount (daily sales report should also be in place). Other than industry-specific practices, bank account reconciliation and cash account updates (if cash is involved in operation) should also be completed on a weekly basis. Monthly and Quarterly Tasks: On the business operation side, such tasks including performance review as well as KPI check and updates will review the company’s performance in this period of time. This will be compared with the previous business projections to see if they are reasonable. Adjustments can then be made to the financial planning for future periods if necessary. On the finance side, AR Ageing and AP Ageing may need to be performed to keep a track of the accruals. Financial figures are to be updated on pre-formatted reports to standardize the financial documentation. On HR and internal management side, expense and remuneration reports also need to be updated so as to update these other expenses on a timely manner Yearly Tasks: Most statutory requirements are to be satisfied on a yearly basis, such as finalizing and submitting yearly financial reports and completing tax payments. However, there might also be some requirements that need to be fulfilled on quarterly or even monthly basis. Specific requirements depend on the industries as well as the regulations in different regions. Forecasting and budgeting is also performed on a yearly basis. As mentioned previously, the projection probably will not be the same as the actual figures considering there are many uncertain factors present. After analyzing the reasons for the deviation, you may find great business insights and get a better understanding of the industry and the business. In this series, there are also other articles discussing about the how accounting helps with business operations in specific industries, such as F&B business and online business. Feel free to check them out!

Why is accounting important for the startup of a business? As Warren Buffett said, “Accounting is the language of business”. A good understanding of accounting knowledge will help you better analyze your business performance and make more realizable plans for your company’s financials.

Why is financial planning important for entrepreneurs? Financial planning will allow you to manage the money in a more diligent manner. It will also help you in the decision makings and thus you will be able to stay on track with both your short term and long term goals.

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