Startups are rarely kicked off by accountants. Most of the time it is a technocrat with a background in IT or engineering, a fashion designer, a food technologist or a healthcare expert who ventures to create a business. Naturally, accounting is not their strong point and accounting is best left to experts, preferably accounting outsourcing services. However, if you own and operate your business you should at least know something about managerial accounting principles. Accounting and finance are inextricably linked with business planning, sales, product development, HR and marketing, and knowledge helps you make the right decisions.
Managerial accounting
As a founder of a business venture, you may not want to know how to create a balance sheet and profit and loss account but you do need to understand managerial accounting that will help you in making informed, calculated decisions. You know how to quantify the value of opportunities and stay in financial control. It is not just routine accounting like expenses, income and profits. The basics of managerial accounting would require you to have some knowledge about financial planning and analysis. This will help you track growth, income, profits, expenses, productivity and optimize cash flows. One of the biggest issues startups face is cash flow management in the initial phases when expenses are high and inflow can be a trickle. Delegate physical accounting to accounting outsourcing services by all means but make sure you engage one that also teaches you a little bit about accounting.
It is about numbers and data
Revenues and business growth are about numbers and managerial accounting plays a key role. Today it is reliance on data and key performance metrics that give you vital information based on which you can take decisions to achieve the right numbers. So, while you outsource accounting, make sure you build a strong data backbone right from the start and this includes a smart CRM tool. Get some knowledge about financials and you can integrate it with marketing, purchases and customer service to derive better key performance indicators leading to capability to take decisions that can stop runaway expenses or find an opportunity and push through. It helps to have a strong financial accounting system in place and know about managing not just expenses but also profits. This is because high profits can lead to extravagance. You learn to be careful and consider the future too in your economics plan.
Economics, customers
You should drill down to specific economics of your product at the unit level and analyze your earnings, expenses, cost, and market spends. This is part of managerial accounting that you will become good at as you practice. Look at it from your profit angle and look at it from the customer angle. Customers will decide to buy a product if it falls within their budget referenced to quality. Could you do something to improve quality and reduce cost too without overly affecting profits? Along the way, you will learn about customer motivation and what triggers their buying decisions. You should have software that will help you measure conversion rates, revenues per customer, number of prospective customers and actual customers and repeat buys. With this in hand, you can go on to play what-if with assumptions and even try them out to validate such assumptions. You learn so much that it could have a positive effect on how you deal with customers as well as your team and vendors too.
The roots
Accounting may be difficult to grasp for technocrat startup entrepreneurs. However, this is not quite difficult to get a handle on. Your accounting outsourcing services provider will delegate someone to tutor you on the basics if you like. Apart from the above, which is a must to know for founders, at the very least, you will have to grasp the following:
- Your spending each month and itemized spending list so you know how much money goes where and why and what purpose it serves.
- Your income per month, both gross and net, after taking expenses into consideration, unit sales, unit realization, and percentage growth.
- Your cash flow and whether it is showing growth in proportion to expenses. You make payment to vendors, to employees and for other things. You receive payments but is it a steady flow or are there outstanding that last for a few months and more? How much interest are you paying for your cash credit or loans?
- How to interpret a profit and loss statement. Your accounting service provider should ideally provide one such statement at the end of each month along with a balance sheet so you know accounts are reconciled and there are no gaps or errors. For instance, unpaid taxes may be overlooked but at some point, they will represent a huge burden.
- Learn about depreciation if you invest in capital assets as part of your business operation. Your accountant should be happy to give you the basics.
- Taxation is important. Taxes must be paid but knowing about how taxes work and how you can claim deductions or setoff will help you reduce the tax burden and that is so much money in your pocket instead of the coffers of government.
- Income management is another thing to know. You earn but keeping it all in the bank is not a wise thing. Plan to invest or grow money.
You may be happy with the way things are but expansion is always necessary for growth. How would you plan for and allocate resources or find funding and project growth as well as loan repayments? Some knowledge of managerial accounting goes a long way in helping you plan for growth.
It is not absolutely for a founder to be an expert accountant but some knowledge of managerial accounting helps a lot while the routine stuff is handled by accounting outsourcing services. Be in control of your business and your finances with knowledge.
