Starting a business is a multi-step process, and some of the duties involved are more enjoyable than others. For many entrepreneurs, managing business finances is among the least pleasurable tasks involved with launching and operating a business – but it is also among the most critical. If you follow nothing else, follow the below two pieces of advice.
Tip #1: Use an Accrual Basis of Accounting
Great debate exists over whether it is wiser for most businesses to utilize cash, or traditional accounting, or what is known as “accrual” accounting. Cash accounting involves recording income and expenses in the same manner you would your personal finances or checkbook. When you write a check and the cash leaves your account, you record the expense. When you receive a payment, you record that payment as income. Pretty standard stuff, right?
Accrual accounting, on the other hand, involves the reporting of income and expenses right when there is an obligation to pay. If you make a sale, you report it as income immediately, even if you don’t receive payment until days or weeks later. The same goes for any expenses.
Among the arguments made for accrual accounting is that it gives you a more realistic picture of the state of your business. In cash accounting, you may receive a bunch of payments at one time, even though the sales were distributed over the course of several months. This accounting method may lead you to think your business is flourishing, when it may, in fact, not be. Accrual accounting allows you to get a clear picture of your real financial situation and eliminates a false sense of security while also giving you the opportunity to plan and think ahead.
Tip #2: Know When You Can DIY – and When You Can’t
Even if you are fiercely dedicated to every aspect of your startup, there are two areas in which you should always seek professional help: when establishing your initial legal structure and when you’re performing your annual tax preparations. The latter is particularly true once you have more than five people in your workforce – at which point it is wise to bring a CFO or finance director on board to manage payroll, handle reporting requirements and so on.
In virtually all other areas, taking a DIY approach is often a great way to immerse yourself into the business and learn more about managing day-to-day operations. When it comes to establishing the business structure and planning for tax season, however, it’s best to call in the big guns.
Harrison Rogers may not hold a high school diploma, but the young entrepreneur and owner of multiple successful businesses prides himself on taking the untraditional path. Nowadays, he stands firmly at the helm of three thriving businesses that are expanding nationwide, with plans for several more launches in 2017. For more on Harrison, visit HarrisonJRogers.com