Accounting can often be an unfamiliar domain for startups. New entrepreneurs usually do not have any idea of what accounting entails and can look lost whenever they have to plan their accounting functions. Some entrepreneurs even prefer to stick to the basics to avoid getting into the complexity of the numbers game.
However, just like fundraising, strategizing and marketing are crucial to small business success, accounting too forms a vital pillar on which the existence and success of small business rests. Without it, a startup can’t survive or grow. Entrepreneurs must, therefore, have a clear understanding of what small business accounting involves. The following article answers this all-too-important question in detail.
What Does Small Business Accounting Involve?
The primary purpose of accounting, whether it is small business accounting or large business accounting, is to keep a record of ongoing financial transactions. These transactions include all types of monetary exchanges, including salary payments, bill payments, operational spending, equipment purchases, donations, receipts from customers and more. The result is the creation of a company’s financial history that can be used in a variety of ways, such as to forecast sales or to attract investments.
Small business accounting functions can be divided into two primary forms: managerial accounting and financial accounting. While both types of accounting functions rely on the same data stream, their main difference lies in their time orientation and focus.
Managerial accounting is used for future planning and focuses on internal strategy making. Accountants look at the past financial information as well as the current available data, to make assumptions about trends and predict what these trends could mean for the company’s future. The assumptions can be about operational costs, sales expectations, department performance, product pricing, etc. The findings are then shared with decision makers who plan and strategize to shape a secure and profitable future for the company.
Financial accounting is the complete opposite of managerial accounting. It involves looking at the past financial information to determine the current value of a company. Investors then use the findings to decide if the company is worth investing in; banks and lenders use the findings to decide whether it’s safe to lend money to the company; and government agencies use the findings to calculate tax bills and possible tax deductions.
So, while managerial accounting records are intended for internal sharing, financial accounting records are intended for external sharing. Thus, companies must be very careful when generating financial accounting records as these records need to be precise and conform to the generally accepting standards to avoid legal issues.
This begs another important startup question:
Do you need to hire two separate accountants to handle your managerial and financial accounting functions?
While there are specialized accountants out there; as a startup, you don’t really need to have two separate accountants on board to handle your managerial and financial accounting functions. It does not make financial sense to do so. Plus, your current business operations aren’t evolved enough to merit two separate appointments at this stage. As such, hiring a general accountant should be the way to go. However, as your startup grows and matures, you would then want to hire a separate specialized accountant for your managerial accounting functions and a separate specialized accountant for your financial accounting functions.
This brings us to the end of the article; we hope you find the read helpful.
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For further reading: Your Top QuickBooks Hosting Questions Answered Here!