3 accounting tools every entrepreneur must know

Source: Staff HBX Business Blog https://goo.gl/ufffd3

If you are an entrepreneur, or even just thinking about starting a business, you should spend some time considering the financial implications of your idea and the practical aspects of your business model. Being able to move money around to purchase supplies, pay creditors and attract investors is oftentimes just as important as developing your idea. These three accounting concepts are a “must-know” for all entrepreneurs.

Cash Flow

The time-tested saying of “Cash is King” is really true—especially for entrepreneurs. 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 meet payroll or pay suppliers and will find it more 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 is 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

The balance sheet is a snapshot of the financial health of a business 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. An easy way to think of the balance sheet is to think of it as a way to view the health of the business because it 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 the where the company stands today. 

Profitability 

Profitability is how much 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. Often times, it’s necessary to take a loss early on 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.