Basic Accounting Fundamentals for Startups
Revenue and Expenses
Revenue: The income your business earns from selling products or providing services. It is often
referred to as sales or turnover. Understanding revenue helps you gauge how well your business is
performing.
Expenses: These are the costs you incur to run your business, like rent, utilities, wages, and
materials. Managing expenses is crucial for maintaining profitability.
Profit and Loss Statement (P&L)
A P&L statement summarizes your revenues, costs, and expenses over a specific period (monthly,
quarterly, annually). It shows the net profit or loss, helping you understand if your business is
profitable. It is also known as an income statement.
Balance Sheet
The balance sheet provides a snapshot of your business's financial position at a specific point in
time. It lists:
- Assets: What your business owns (e.g., cash, inventory, equipment).
- Liabilities: What your business owes (e.g., loans, accounts payable).
- Equity: The owner's share in the business (calculated as Assets - Liabilities). It represents the
residual interest in the assets after deducting liabilities.
Cash Flow Statement
This statement tracks the flow of cash in and out of your business over a period. It is divided into:
- Operating Activities: Cash generated or spent on the day-to-day running of your business.
- Investing Activities: Cash used for buying or selling assets like equipment or property.
- Financing Activities: Cash flows related to borrowing, repaying loans, or investing funds.
Understanding cash flow is critical for ensuring your business can meet its obligations.
Accounts Receivable and Payable
Accounts Receivable (AR): This is the money owed to your business by customers who have
purchased your goods or services on credit. Managing AR efficiently helps maintain cash flow.
Accounts Payable (AP): This is the money your business owes to suppliers or creditors. Keeping
track of AP is essential to avoid late fees and maintain good relationships with suppliers.
Break-even Point
The break-even point is when your total revenue equals your total costs, meaning you are not
making a profit, but you are also not losing money. Knowing this helps you set sales targets and
pricing strategies to ensure profitability.
Budgeting and Forecasting
Budgeting: Creating a financial plan that outlines your expected revenues and expenses over a
certain period. A budget helps you control costs and allocate resources effectively.
Forecasting: Predicting future financial outcomes based on historical data and market trends.
Forecasting helps in planning for growth and anticipating financial challenges.
Tax Basics
Every business has tax obligations, which might include:
- Income Tax: Taxes on your business's profits.
- GST/VAT: Sales taxes on goods and services sold.
- Payroll Taxes: Taxes on wages paid to employees.
Understanding your tax obligations and complying with tax laws is crucial to avoid penalties.
Record-Keeping
Keeping accurate and organized financial records is essential for:
- Tracking income and expenses.
- Preparing for tax filings.
- Providing information for decision-making.
- Maintaining transparency for potential investors or lenders.
Financial Ratios
Financial ratios are tools to evaluate your business's financial health. Some important ones include:
- Gross Margin Ratio: (Revenue - Cost of Goods Sold) / Revenue. It measures the percentage of
revenue that exceeds the cost of production.
- Current Ratio: Current Assets / Current Liabilities. It assesses your business's ability to pay
short-term obligations.
- Debt-to-Equity Ratio: Total Liabilities / Shareholder's Equity. It indicates the proportion of financing
that comes from debt versus equity.
