5 Essential Accounting Skills for Entrepreneurs

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 that all entrepreneurs need to know.

Why Entrepreneurs Need to Understand Accounting

Managing costs, cash flow, 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.

Finance vs. Accounting: What’s the Difference?

Accounting Skills for Entrepreneurs:
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.

The balance sheet provides a snapshot of a company’s financial health at a particular point in time.

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 fuel to your company’s engine.
2. Understanding the Balance Sheet
   The balance sheet provides a snapshot of a company’s financial health at a particular point in time. It shows what the company owns (assets), what it owes (liabilities), and what’s left over for the owners (owner’s equity). Understanding the balance sheet is critical for entrepreneurs because it allows them to assess the overall health of their business and make informed decisions.
3. Managing Accounts Receivable
   Accounts receivable represents money that is owed to your business by customers who have purchased goods or services from you on credit. Managing accounts receivable is important because it directly impacts your cash flow. If customers are slow to pay, your cash flow will suffer. On the other hand, if you’re able to collect payments quickly, your cash flow will improve.
4. Managing Accounts Payable
   Accounts payable represents money that your business owes to suppliers and vendors for goods or services that have been purchased on credit. Managing accounts payable is important because it impacts your cash flow and your relationships with suppliers and vendors. If you’re slow to pay your bills, your cash flow will suffer and your suppliers may be less willing to extend credit in the future.
5. Understanding Financial Statements
   Financial statements provide a comprehensive view of a company’s financial performance over a specific period of time. The three primary financial statements are the income statement, the balance sheet, and the statement of cash flows. Understanding these statements is critical for entrepreneurs because they provide valuable information about the financial health of the business.