What You Should Know About Accounting?
By Serge Beauchemin
If there is one thing that is essential for every entrepreneur, whether you’re self-employed or the head of a large business, it’s accounting. There is a saying that nothing in this world is certain except death and taxes. Guess what you need to know to prepare your taxes?
Many people are disheartened by numbers, but it’s often because they don’t understand their benefits. Accounting is not just a necessary evil to prepare your taxes, it is also a very powerful tool for an entrepreneur. By using it properly, it will become vital for your business decisions.
What’s it for?
Accounting is a very broad and complex discipline that entrepreneurs need to consider when establishing strategies.
First, for forecasting. Basically, when you try to see the future of your business, what do you do? You estimate future revenues, future costs and the resources that will have to be put in place to meet potential demand. Without the numbers, it is very difficult to organize this vision. Quantifying projects makes it possible to design concrete objectives on which to act.
This makes it possible to commit. Can you hire a new employee? Is it really worth buying this piece of equipment? If you don’t know what’s coming, hiring someone or acquiring machinery could create unsurmountable stress for your business. Good financial forecasts will help you make your decisions.
Lastly, numbers help you measure progress. Have you prepared estimates? Good. Have you achieved your objectives? If not, you’ve got the information you need to determine where the problem is. Otherwise, you’re fumbling around blindly.
Three basic concepts
You have to have a good grasp of three concepts, as a minimum, to be able to take advantage of these strategic benefits.
– Cash flow is one your main planning tools. Basically, this statement details funds coming in and flowing out, without considering taxes or financial accounting. The objective is to know how your funds are moving, which means the data have to be updated regularly. When you master your cash flows, you can ensure that your business will continue to operate, and you’ll know when you have a surplus to implement a new project to support growth. By monitoring this statement over time, you can predict cash flows, which will let you know if you can hire and invest or whether you should get a loan or look for investors.
– Your balance sheet lists what the business owns (assets) and owes (liabilities) and what is left (equity) at a specific date. In other words, it highlights the organization’s strong and weak points, from a financial perspective. It’s like a health checkup. With regularly updated reports, you can better understand how your business is progressing and wait for the right time to give the go-ahead for certain projects.
– The income statement. Lastly, you want to be profitable some day, so that the company is sustainable. To properly monitor the changes in revenues and expenses, you need to review the income statement. This statement presents the revenues generated (not necessarily received) and expenses incurred (not necessarily paid) over a specific period and not at a given date. The difference between revenues and expenses gives you earnings before interest, taxes, depreciation and amortization (EBTDA) that you hear about so much. Basically, EBITDA is a business’s gross economic performance indicator, without considering its financial structure or tax considerations. Among others, it is used to assess a business’s value. It is multiplied by a factor that varies depending on the industry. It is used to determine the business’s economic value creation and its ability to repay its debt.
Getting a handle on the basics of accounting helps you refine your strategic abilities. You’ll see what’s coming and can prepare and avoid the worst. A company is the product of a vision and passion. We all want to change the world, but a company that is constantly in the red, despite the best intentions, will never reach its full potential. Think about it!