Decision 1: The first major decision is whether to use cash or accrual accounting. Cash accounting records transactions when money exchanges hands. Accrual accounting records transactions when they happen. Accrual accounting, which we recommend at Bob's, gives a clearer picture of a company's true profitability.
Decision 2: Choosing the right accounting software is the next important decision. There are several options, but Quickbooks is often the most cost-effective for small businesses. Consider the software's user-friendliness and the familiarity of bookkeepers with it. Most small businesses don't need specialized accounting software. Most small businesses don't need expensive accounting software.
After selecting the software, founders can delve into understanding key financial statements.
- Balance Sheet: Shows a business's financial position at a specific point, detailing assets, liabilities, and equity. It provides an overview of what you own (assets), who you owe (liabilities) and the difference (equity).
- Income Statement: Records revenues and expenses, which varies depending on the chosen accounting method. If operating on an accrual basis, revenue will be recorded when the service is provided. Expenses will be recorded when the service is consumed.
- Cash Flow Statement: Tracks the flow of cash in and out of the business, differing from the income statement under accrual accounting. The cash flow statement will mirror the income statement when operating on a cash basis. But, on an accrual basis, it acts as a cash-basis view of your business.
Decision 3: Handling accounts payable and receivable is another crucial decision. Understanding the cash conversion cycle is important. For payables, tools like Bill.com are recommended. For receivables, using the chosen accounting system for invoicing helps manage payments.
Final Thoughts: Founders must understand accounting basics to make informed decisions and ensure financial stability. The three early decisions outlined are critical starting points.
Contact us for more information!
