Whether your company is big or small, all organizations need to understand the language of accounting to achieve success. From the routine day-to-day transactions to your long-term strategic plan, having accurate, decision-ready information is critical.
Let’s start with the basics. How much money do you have in the bank? What are your accounts receivable and what are your accounts payable? If you are running an early stage company, these areas are the first to master. Bank accounts should be monitored daily and reconciled monthly to ensure you know your cash position at all times. However, you cannot properly manage your business only using your bank statements. As you make sales, receivables from customers must be accurately tracked, aged and followed up on to ensure these vital cash inflows arrive in a timely manner. Likewise, as you incur expenses, payables to vendors must be accurately tracked and paid on time. Managing cash flow is difficult for most early stage companies, and having accurate information about receivables and payables is the foundation of cash flow success. For larger or more established organizations, these transactional tasks are likely routine and may be handled by a team of accountants. As the business grows, the focus shifts from simply tracking and managing the activity to properly analyzing cash, receivables and payables. This includes implementing strong internal control processes to ensure all cash activity is appropriately authorized, accounts are reconciled on time, and activities are monitored closely to detect errors or even fraudulent transactions.
With growth, whether in terms of revenue, capital raised or publicity, defining and managing key performance metrics becomes a necessity. For many early stage companies and entrepreneurs, the burn rate of the business is one of the most viewed factors. When investors provide funding, or entrepreneurs bootstrap their business, understanding how fast the business is consuming capital is a critical measure, and proper accounting techniques ensure the information is accurate. Investors also want to understand the return on their investment, and the other side of the burn rate equation is the customer traction and revenue generated by the business.
Managing cash flow is difficult for most early stage companies, and having accurate information about receivables and payables is the foundation of cash flow success. For larger or more established organizations, these transactional tasks are likely routine and may be handled by a team of accountants.
The next challenge is GAAP (generally accepted accounting principles) financial reporting. Bankers, investors and others in the business community will only take company financial reporting seriously if it complies with GAAP or another comprehensive basis of accounting. Before GAAP reporting becomes a necessity, business owners should work with qualified accountants (internal or external) to ensure their books are clean and in line with the expectations of the business and investor community. This also applies to more established, mature companies where stakeholders have an expectation of materially correct, GAAP financial reporting, most likely with some form of assurance from a CPA (review or audit). Again, internal controls and segregation of key accounting functions (especially within cash activities) is critical. Established companies will also have more key metrics to track and evaluate, including customer retention rates, liquidity measures, return on capital and other vital measures.
When startups reach critical mass (usually when funded) and other businesses reach a certain level of maturity, the accounting process must go beyond tracking and understanding historical activity, and evolve to include forward-looking strategic planning and forecasting. Business owners must understand their industry, the markets they serve and the competition in their space. Finance professionals should be hired or engaged to ensure that the long-term vision of the business owner or entrepreneur can be realized. Understanding the cost of capital, when to finance a business expansion, or when to pivot to a new market or product can be achieved through the mix of internal historical accounting coupled with an understanding of the market to generate the necessary projections of various courses of action. Many future projects are contingent upon obtaining additional capital from investors or financing from lenders and the accounting and finance team should be evaluating the cost-benefit of each choice to ensure management is making the best decision.
At all phases of the business life cycle, proper accounting will enable business owners and entrepreneurs to achieve greater success. Experienced internal or external accounting and finance professionals will provide any business with the expertise necessary to improve operations. Whether tracking routine transactions, evaluating business performance or strategic planning for the future, the Debits plus the Credits equal Success.
By Dustin Wehman and Maureen Barry, CliftonLarsonAllen
Learn more by visiting www.claconnect.com.