As a current or aspiring entrepreneur, it’s easy to get caught up in the more exciting aspects of launching a business: Choosing a name, designing a brand, developing your product or service, and just generally getting stuff done.
While each of these is important and deserving of your time and focus, entrepreneurs must wear many hats. This means dedicating at least a portion of your time to some of the arguably less glamorous aspects of running a business—like finance and accounting.
Being able to move money around to purchase supplies, pay creditors, and attract investors is often just as important as developing and executing your business plan, especially in the early stages of your business. Simply put, if you’re an entrepreneur, or thinking about starting a business, you should consider the financial implications of your idea and the practical aspects of your business model.
Here's why all business owners should understand at least the basic concepts of accounting, and some of the most important accounting skills that all entrepreneurs need to know.
Why Entrepreneurs Need to Understand Accounting
Managing costs, cashflow, invoices, vendors, and payroll probably isn’t what you imagined when you decided to launch your own business. But they are critical components of running any successful company, especially in the early stages when you’re both steering the ship and running the show.
For many organizations, accounting influences nearly every facet of business management. Whether you’re applying for a business loan or grant, managing payroll and employee benefits, paying expenses like rent and utilities, invoicing vendors, seeking investors, or projecting growth, accounting will form the basis of everything you do.
If you don’t have the budget to hire an accountant, you’ll need to be your own. Even if you do have an accountant, you should understand enough about the subject to have meaningful conversations with potential partners, investors, employees, and others.
Related: Finance vs. Accounting: What's the Difference?
Accounting Skills for Entrepreneurs
1. Managing Cash Flow
The time-tested saying, “Cash is king” really is true. For many businesses, especially new ones, where credit lines are limited and financing is difficult, cash proves to be one of the most critical assets. It serves as the fuel to your company’s engine. Without it, you can’t pay suppliers and will find it difficult to build inventory, reach customers, and grow the business.
Understanding and projecting cash flow allows companies to plan for the future and ensure that there’s always enough money in the bank to keep the business running (and hopefully growing). Paying attention to cash inflows and outflows allows entrepreneurs to plan accordingly, prevent any unnecessary cash shortages, and use excess cash productively to grow the business.
2. Maintaining a Balance Sheet
The balance sheet provides a snapshot of a company’s financial health at a particular point in time. It allows those interested in the business to quickly see what resources are available and how those resources were financed, and shows both the assets and liabilities—or what you have right now and what you owe others.
Entrepreneurs can use the balance sheet to help keep the business in check. While sales may be increasing exponentially, keeping an eye on the liabilities side of the balance sheet is important to the long-term success of the business. Even though investors care about growth potential, they also care about how much the company owns versus how much it owes. The balance sheet gives investors, and potential buyers, a solid understanding of where the company currently stands.
Related: Financial Statement Analysis: The Basics for Non-Accountants
3. Identifying a Path to Profitability
Profitability is defined as how much money is left from each dollar of sales after all expenses have been subtracted. This may seem obvious for those interested in starting a business, but it can sometimes fade into the background during the early stages of a company.
It’s often necessary to take a loss early to reach a target market, accumulate customers, increase visibility, or launch successfully, but this cannot be a long-term strategy. Entrepreneurs must have a path to profitability to attract investors and succeed over time.
4. Communicating About Money
Solid communication skills are essential to nearly every aspect of running a business, but they’re particularly important when dealing with finance and accounting. As an entrepreneur, you must be comfortable and able to clearly discuss the hard numbers of your business—with employees, vendors, and investors or other stakeholders.
Clear communication, especially in relation to terms of payment and scope of work, allows you to ensure that all parties are properly aligned, protecting you and your business from assumptions or miscommunication.
Similarly, developing your organizational skills and putting in place clear protocols for everything related to payment can help protect your business from the same kinds of misunderstandings and miscommunications. This is especially important when working with multiple invoices, purchase orders, vendors, and tax accounts.
5. Forecasting the Future of Your Business
For most entrepreneurs, growth is a key motivation. Some are happy acting as a one-person business, but want to maximize their revenue streams. Others may want to grow their team by adding employees. And others still may want to scale dramatically.
In order to grow responsibly and successfully, an entrepreneur must be capable of making predictions about the future of their business—regardless of their specific growth goals. Accurate predictions about future revenues, future operating costs, future resource needs, and future profit levels are necessary to attract investors, secure funding, hire employees, and take on additional clients or customers.
Without accurate predictions, it's all too possible to grow either too fast or not fast enough—both of which can be detrimental to the success of your business.
Building the Skills You Need for Success
Whether you're considering starting your own business or have already taken the leap, strengthening your accounting skills can enable you to reach your entrepreneurial goals. Taking an online course—such as one focused on financial accounting or entrepreneurship essentials—is one option to help you learn the skills that you need for success.
Do you want to take your career to the next level? Download our free Guide to Advancing Your Career with Essential Business Skills to learn how enhancing your business knowledge can help you make an impact on your organization and be competitive in the job market.
This post was updated on August 23, 2019. It was originally published on November 9, 2017.
