Finance and & Accounts Management for Startups

23 Jan 2013

accountingA topic like accounting can be confusing, especially to a new business owner. This gets even more confusing once the business looks at moving to the next growth level. Multiple activities from budgeting to the more complex assurance management become part of business as usual. However, this is the only way through which an entrepreneur can track the inflow and outflow of money.  This document looks at the importance of budgeting and describes the key accounting statements that are essential for all businesses

Budgeting

Businesses need money to be able to pay for their operational activities.  Without funds, companies will fail to meet consumer demand, expand their business or invest in new technology.  Irrespective of size and the kind of product or service on offer, budgeting is an important aspect to the success of a company.

Budgeting in essence informs as to where revenue is coming from and the expenses being incurred. It also helps to forecast the expected business position i.e. the levels or profit or loss for a pre defined period of time.

In essence budgeting informs an entrepreneur of the income, expenditure, liabilities and potential cash flow problems. For entrepreneurs looking at internal accruals over a period of time to pay for a new project or technology, having a well defined budgeting structure in place will enable them to keep a close track on how the business is performing against pre defined parameters.

Accounting

Income statement (Profit & Loss A/C)

The income statement is a historical record of the trading of a business over a specific period, normally one year).  It shows the profit or loss made by the business which is the difference between the firm’s total income and its total costs.

The income statement serves several important purposes:

  • Allows shareholders/owners to see how the business has performed and whether it has made an acceptable profit/returns
  • Helps to determine whether the profit earned by the business is sustainable
  • Enables comparison with other similar businesses and competitors and the industry as a whole
  • Allows investors to see whether the business is able to generate sufficient profits to remain viable in conjunction with the cash flow statement
  • Enables the directors of a company to satisfy their legal requirements to report on the financial report of the business

Balance Sheet

A balance sheet is a statement of the total assets and liabilities of an organization at a particular date, usually the last date of an accounting period. A balance sheet does not necessary "value" a company, since assets and liabilities are shown at "historical cost" and some intangible assets like brands, quality of management and market leadership are not included.

The balance sheet is split into two parts:

  • A statement of fixed assets, current assets and the liabilities also referred to as Net Assets
  • A statement showing how the Net Assets have been financed, through share capital and retained profits.

Balance sheet is an important statement of the financial affairs of an organization.

Cash Flow

A cash flow statement is a financial report that describes the sources of a company's cash and how that cash was spent over a specified time period. It does not include non-cash items such as depreciation. This makes it useful for determining the short-term viability of a company, particularly its ability to pay bills. Because the management of cash flow is so crucial for businesses and small businesses in particular, most analysts recommend that an entrepreneur study a cash flow statement at least every quarter.

The cash flow statement is similar to the income statement in that it records a company's performance over a specified period of time. The difference between the two is that the income statement also takes into account some non-cash accounting items such as depreciation. The cash flow statement strips away all of this and shows exactly how much actual money the company has generated. Cash flow statements show how companies have performed in managing inflows and outflows of cash. It provides a sharper picture of a company's ability to pay creditors, and finance growth.

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