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Starting a business often requires entrepreneurs to understand and complete a variety of business functions. An important business function when starting a small business is accounting. Although many entrepreneurs may be fearful of dredging through endless stacks of financial documents, accounting often provides entrepreneurs with the clearest picture of their business’ success. Entrepreneurs must also keep copious amounts of records regarding the small business startup for tax and legal purposes.

Facts

Many small businesses started as a hobby or side business use cash basis accounting. This accounting method records and recognizes transactions when cash changes hands. It provides entrepreneurs with a simple method for maintaining accounting information. As companies grow and expand, they may need to change to the accrual accounting method. Accrual accounting is the most widely used method in business; it records and recognizes transactions as they occur, regardless of cash changing hands.

Forecast Financial Estimates

Entrepreneurs may need to provide banks, lenders or investors with a financial forecast relating to the new small business venture. This information is essential for obtaining outside financing for business startup costs. Entrepreneurs usually write a business plan, which includes an economic forecast, expected startup and monthly expenditures, and pro forma financial statements. This accounting information is heavily relied upon by lenders or investors to ensure the entrepreneur has an accurate and reliable picture of financial expectations.

Budget Expenses

An important accounting function for starting a small business is the creation of a budget. Budgets outline the expenditures needed for various aspects of the business. Entrepreneurs may budget capital for hiring employees, advertising strategies, inventoried purchases and other types of business expenditures. Sticking to a budget helps entrepreneurs avoid wasting capital on non-essential business items. Budgets can also create a historical record of how the small business spent capital for producing consumer goods or services.

Determine Profitability

Accounting is the predominant way a company determines its profitability. Although a small business may be able to generate high amounts of sales revenue, failing to generate enough profits may doom the business to failure. Entrepreneurs need to understand how well they are using assets to generate services and the costs of inventory compared with the company’s profit margin. Banks, lenders or investors may also require the small business to release financial information to ensure that these individuals will be repaid in a timely manner.

Expert Insight

Small businesses may seek advice from public accounting or an individual public accountant (CPA). Professional accountants usually offer copious amounts of education, experience or expertise when helping the entrepreneur is set up their small business accounting operations. These individuals may also offer lower rates to small businesses to help defer start-up costs. Entrepreneurs may also need professional help when filing business tax returns and ensuring that all business issues are accounted for at year end.

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