Without knowing your business’ finances – you don’t. And still: How to record financial transactions effectively might not be the most glowing element that entrepreneurs are super passionate about. With the next innovative idea in your head and a myriad of things ongoing in your daily operations, there are many pressing things to focus on. However, letting your accounting fall by the sideways is a risky decision. Accurate accounting and using the insights it provides can simply make the difference for your company to sustain or not.
Why it is more than a good idea to be passionate about your business’ finances
There are many reasons – and as a passionate advocate of a company’s finance function, I could go on and on about them – but let’s focus on the most important ones:
Managing your cash. Running out of cash is amongst the top three reasons why small businesses and start-ups fail. Knowing the dynamics of your cash in- and outflows is essential to project your need for available cash as to be able to pay your expenses. This is obviously super important at any time. In times of crisis, however, where your revenues drop, your customers can’t pay or your expenses accelerate to unforeseen heights, effective cash management will be the make or break of your business’ survival.
Taking decisions based on insights. As an entrepreneur you know your business. Of course you do; you built it, right? This might tempt you to assume you can trust your instincts on what is the right move or that your experience always helps you to take the right decision. These beliefs will fail you sooner or later if you don’t complement your undoubted entrepreneurial knowledge with financial facts and what they tell you. If your business grows and becomes more complex or if a crisis arises where your intuition might be clouded by stress and anxiety, you will want a reliable basis for taking critical decisions. By the way, banks and investors are usually also fans of data-based decisions. So if you are planning to have discussions with either one this is another good reason to have a solid foundation for your business’ financials.
Knowing how successful you really are – and building on it. Having structured insights into your financial data will help you to define where to improve and which areas have potential to make a difference for your business’ success. Combining these with external (industry) benchmarks will enable you to design a comprehensive set of financial KPIs that you will want to measure diligently. You will be able to answer questions that are important to sustain the financial health of your business: How profitable are your products or services (Gross Profit)? Are there differences between customers or distribution channels? How long does it take you to collect your receivables (DSO)? How much liquidity do you have available to make investments (Working Capital)? Is the ratio between your operating expense and your revenues (OPEX ratio) healthy?
Navigating your plan. A solid plan and achievable (yet ambitious) goals – not only for your revenues – is built best if you have data to start with. Your own financial data and the history of it will help you to project your budget. What profitability can you target? What income levels do you want to achieve? How much revenue do you project for this and how much expenses does it allow? What are your biggest cost drivers and what savings can you realistically achieve? Having a budget – and sticking to it – is your map to navigate your business. And if reality takes a different turn you have a transparent base for taking decisions and making adaptations.
Being compliant & don’t overpay tax. Last in this list but not least. You are usually obliged to maintain a certain documentation of your business transactions based on local regulations and depending on the size and structure of your business,. Ensuring an appropriate accounting and a compliant payroll will not only help you to avoid fines and legal consequences but will also make sure you are being taxed correctly. This will prevent you of paying more than you have to.
How do you get started?
Before you run, reflect on your needs and your capabilities.There is no “one-fits-all” approach for setting up an effective accounting process and this article will not give you a comprehensive answer to all questions or teach you everything about accounting in a few bullet points. It is rather meant to point towards some key considerations. So, before you start, there are a number of questions to ask yourself.
What do I want to get out of it? Whether you will go for a simple accounting system to track your start-up expenses or more advanced solutions to produce a full Balance Sheet, Income and Cash-Flow Statement up to managing your Accounts Payable, Accounts Receivable and Payroll processes depends on what you decided is most critical for your business. If you are not clear about that, go back to section one of this article and write down what you want to monitor, measure and project.
What level of detail do I need? The statutory and tax related requirements set the frame for the minimum level of records you need to keep. For everything above this minimum level, you will want to balance between your need to generate valuable insights (what do you want to get out of it?) and the complexity and workload to record the transactions.
Who will do the work? Be realistic about the fact that accounting and generating financial insights will take time. The size and structure of your business as well as the level of detail you decide to apply will determine the volume of transactions to be processed. Make a projection; is it 1.000 transactions hitting your bank account and credit cards monthly or 10.000? If you decide you will be the one to do the bookkeeping yourself, make sure you reflect whether your accounting understanding is up to the task, whether you will have the time to do it or if your time is better spent elsewhere in managing your business. Alternatives can be to assign bookkeeping to a capable, trained and trusted employee or hire an external accountant.
What steps you need to take
Whether you go for an in-house solution or an external service provider you need to make sure that the following key components are serving the priorities and principles you defined based on the previous two sections of this article.
Select Tools & Technology. The technology you select will make a big difference in how much time you have to spend on processing transactions and the quality of the outcome you get in return. Again, reflect on your needs and assess what functionalities you need – e.g. do you need to track inventory? Do you want to process your payroll via your accounting system? Data security (back-ups, data privacy), available updates and customer service is another area to consider. Lastly, a very important question: How does the accounting software allow to scale with your business? Be mindful that data migration at a later stage can be complex and costly. Best: check detailed reviews and comparisons of tools (there are various out there) before you make a decision, and be aware that freeware usually comes with a hidden cost of data security, support and limited functionalities.
Define the data structure. A Chart Of Accounts is the heart of your financial data structure, a frame that ensures consistency in how you record your transactions. Set up a chart of accounts which reflects your business structure and allows you to record your transactions under their relevant categories, like liabilities, assets, equity, revenues and expenditures. Be consistent in the structure both in defining account numbers and hierarchies so that it allows you to easily find the information you need and expand/collapse the level of detail, if needed. Perform regular reviews of your chart of accounts.
Chose the Accounting Method. There are two accounting methods that you can apply: Cash Base and Accrual Base accounting. In Cash Base Accounting you record your revenue and expenses based on the point in time they are received and paid. In Accrual Base accounting revenues are recorded at the point in time when they are earned and expenses when they are “consumed” – independently from when the cash is transferred. The latter Accounting method is the more complex one, but provides you with more valuable and consistent information. It is especially recommended when you have inventory to account for and assets that are being depreciated. Depending on the size and structure of your business, audit requirements and local regulations, you might be obliged to use Accrual Base accounting.
Review regularly and learn what the data tells you. Once you started to record your transactions make sure you close the periods and do regular reviews of your Balance Sheet, Cash Flow and your defined set of KPIs. Even if you decided to not do the accounting yourself make sure you have a solid level of understanding of the key accounting principles so that you learn how to read what the data tells you. Take a course or work through some basic literature on Finance for non-Finance – it will pay off. And then review with curiosity and embrace what the data tells you – especially if it contradicts what you were expecting.
A final call for action: Link Finance as close to your business as possible
If this article leaves you with more questions than answers, it has met its intention to make you curious and to trigger reflections on why and how to get started or to improve current processes. Financial stress about your entrepreneurial existence might never fully dissolve, but you can approach it with more clarity and conscious anticipation, with more curiosity than aversion. Try to see your financials as your co-piloting function to navigate your business successfully rather than a disconnected task that somehow needs to be taken care of. Link Finance as close to your business as possible and it will become an integral part of your entrepreneurial decision-making.
 KPI: Key Performance Indicators
 Gross Profit is the profit of your products or services after deducting the cost associated to the production of the goods or providing the service. To calculate the gross profit you deduct the cost of goods sold (COGS) or cost of services from your revenues.
 DSO: Days Sales Outstanding, an element of the Cash Conversion Cycle
 Working capital is a measure of a company’s liquidity, operational efficiency and its short-term financial health. If a company has substantial positive working capital, then it should have the potential to invest and grow. It is calculated as the difference between current assets, such as cash, accounts receivables and inventory and the current liabilities, such as accounts payables. (https://www.investopedia.com/terms/w/workingcapital.asp)