Role of Accounting in a Start Up Business

Posted by Pierre de la Fortune on August 09, 2015 @ 12:01 a.m.

Written by K.A. Francis

Accounting is the pulse of a business. Cash flow, expenses, income and budgeting are required functions for all companies, regardless of industry or size. Sole proprietorships, multinational corporations and all businesses in between must know where they stand financially. Cash flow is the lifeblood of any business; and for success, specific tools to track its financial health must be in place. Without these accounting tools, a business can never know where it stands or how healthy or unhealthy it is.

Accounting Functions

A successful business knows its debts to others and those debts owed to it. Accounting functions such as posting to general ledgers for accounts payable and accounts receivable allow the business to keep track of its debts to others and to know who owes it for goods produced and services rendered. Monthly statements such as a balance sheet and income statement show the general health of the business with regard to sales. A cash flow statement will determine how much cash is coming in and how much is going out. All of these procedures and statements help paint a picture of a business's general profitability.

Importance

The importance of proper accounting methods cannot be stressed enough. All businesses must know where they stand financially in order to survive. For example, if a business needs new equipment, its owner should possess a variety of factual information: how old the current equipment is; if the equipment has been depreciated and by how much; if anything is still owed on the equipment and if so, how much and to whom; and if the business can afford to purchase new equipment with cash or if financing will be required. All of these questions are easy to answer when an effective accounting system is in place.

Business Financial Health

A company is only as healthy as its bottom line. And a business will not know its bottom line unless, at a minimum, it keeps track of its income and expenses. A company with a high income-to-debt ratio, not including start-up loans or financing, might have expenditure issues that need to be addressed. Only an accounting system can locate these issues. For example, if a company has been overcharged for equipment or office supplies, unless these expenses are included in the accounting system, the business could lose money and never realize it.

Need for Additional Financing

If a company decides an expansion loan is needed, potential investors will require one to three years' worth of financials along with a business plan. Without an accounting system in place, a business would be hard pressed to produce the required financials, and would be at a disadvantage with respect to offering financial projections or a clear picture of how the loan would be used.

Considerations

Accounting is a skill set that many business owners lack. If an owner does not feel comfortable handling his own accounting affairs, he can use outside accounting or bookkeeping services. For a small business, a bookkeeper can keep the financial affairs in order. For larger companies or corporations, either an in-house accounting staff or an accounting firm will be needed. Whichever approach is chosen, proper checks, balances and internal controls need to be in place. For example, accounts receivable and accounts payable should be handled separately--either by more than one person or on different days; and all financial recordings should be carefully reviewed.

For more info please visit: http://smallbusiness.chron.com/role-accounting-start-up-business-44.html

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