6 Accounting Terms Every Startup Founder Should Know
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An entrepreneur needs to have a mindset of being open to learning. Whether you’re the founder of a multibillionaire business or a startup founder, you should always look for opportunities to grow and level up.
If you’re new to running a business, one promising area to concentrate is on financial terms. After all, understanding the “language” of business finance is your responsibility as a business owner.
Accounting is the metaphorical house of cards at the soul of any company. If the balance sheets are not managed or matched correctly, there is a potential for the walls to crash down.
On the other hand, if the accounting framework is managed diligently, with a sharp eye on assets, liabilities, revenues, and expenses, the company has a far better chance of showing potential growth.
1. Cash Flow Report
Also known as the statement of cash flows, the cash flow report is a financial document outlining the amount of money flowing in and out of an organization. It shows how balance sheet accounts and income changes affect cash and cash equivalents.
These changes in the balance sheet help break down the analysis into operating, investing, and operational financing activities. This helps understand the business’s financial position at any point in time.
The question is…
How to calculate cash flow?
- Direct Method
The direct method involves adding up all cash payments. These cash payments include cash collected from the sales of goods and services and cash payments such as salaries and taxes.
The figures in this method are calculated by the beg and ending balances of various assets and liabilities.
The direct method for startups as it delivers a more accurate scene of a cash position in the business. It is also an excellent way to track the business’s ability to generate cash from operations.
- Indirect Method
The method involves calculating net income and adding non-cash depreciation costs. It is also used to adjust working capital items by subtracting current liabilities and increasing current assets on the balance sheet from one period to another.
The account automatically detects increases and decreases in assets and liabilities and accounts for them. This ensures to give an accurate cash flow statement.
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2. Balance Sheet
The Balance Sheet is a financial statement that lists each asset, liability, or equity account and the corresponding balance for the close of a selected period. It is an essential tool for startups, providing a picture of the company’s financial statements.
Startups can use the balance sheet to get an overview of their financial position and make informed decisions. The document also helps investors understand the true value of a business and can be used for tax purposes.
3. Profit & Loss Report
A profit and loss report is a financial statement that shows a company’s performance for a given period, typically a quarter or a year. The statement summarizes revenue, expenses, and other income or losses that a business has incurred over the period.
The records give information about a company’s sales, costs of goods sold, and other expenses. They also provide a look at a company’s business model, as well as how profitable the business is.
Startups can use this information to track their performance in terms of revenue growth and their bottom line.
4. Comparing Profit and Loss Statements
Comparing and analyzing P&L statements from different situations help entrepreneurs make better business decisions by keeping the vision of the future.
It also helps them identify revenues, operating costs, research and development (R&D), and other operating expenses changes year over year.
This way, they can track their finances and make the necessary adjustment to improve their financial position going forward.
Furthermore, comparing P&L statements from different companies in the same industry provides insight into what is going on in the market. This can help make strategic decisions and benchmark your performance against competitors.
5. Churn Rate
Also known as customer attrition, the churn rate is the rate at which customers stop doing business with a company for any given period.
It is a crucial metric for startups, as it helps them measure customer loyalty and determine if their product or service offerings meet customer needs it also helps to analyze the demand for the product in the market.
The higher the churn rate, the more likely customers will not be satisfied with a business’s product or service. This can lead to decreased profitability.
To reduce customer attrition, startups should improve customer satisfaction, increase customer loyalty, and provide better value for money and of course better customer care for queries.
6. Tax Return
A tax return is a document that is filed with the Internal Revenue Service (IRS) to report a company’s income and expenses for a given tax year. It is used to calculate the amount of taxes that the company owes for that tax year.
A business must file an accurate and timely tax return (March 31st in India). This will help the business to comply with its tax obligations and remain in good standing with the IRS.
Any business not filing a tax return may be subject to an audit, fines, or criminal charges.
So, as a business owner, it is important to be aware of the tax filing requirements and deadlines and to have an experienced CPA prepare your company’s tax return.
The terminology and phrasing used in finance and accounting are quite vast. Your energy and efforts are probably better spent in other areas of the business, and not hitting the books to learn every practice, procedure, and general underbelly of accounting.
That said, there are some essential terms you need to be aware of, and through this article, we have covered the primary yet crucial financial and accounting information.