Starting a new business is a challenging endeavor that requires immense dedication, sacrifice, and plenty of resources, in addition to a bit of luck, to get off the ground. A critical aspect of building a successful startup is having a good understanding of accounting and its workings, something that is often overlooked by small business owners in the tech startup space. While web-based marketing and technology are crucial to a business’s success, they are not the only components to consider.
Accounting, too, plays a vital role in ensuring a startup’s success. Neglecting it can lead to a slew of financial problems and setbacks down the line. This is why it is important to seek the guidance of professionals who can offer advice and help you get started on the right foot. The experts at Devonshire Green Accountants London can assist you with all your accounting needs and offer valuable insights and solutions to ensure that your startup thrives from the very beginning.
As the owner of a tech startup, you need to be knowledgeable about accounting, even if you work with an accounting firm or invoice factoring services. For starters, everyone who runs a business of any kind should know, at least, know the following accounting terms.
Accounting
As redundant as this may sound, there is no better place to start with the definition of accounting itself. Accounting refers to the process of tracking a business’s income and expenses. A good accounting firm or department will keep close track of every aspect of a business’s finances, but it will primarily focus on accounts payable and accounts receivable.
Accounts Payable
Accounts payable refers to a business’s expenses. According to New Century Financial (www.newcenturyfinancial.com), it is a record of how much money a business owes to other parties. This can include unpaid utility bills, bills for equipment and supplies or purchases that a business made on credit.
Accounts Receivable
Accounts receivable refers to money that your business expects to receive. A sustainable business will have more accounts receivable than accounts payable. This of course means that you will have more money coming in than going out.
Gross Margin
The gross margin is a percent of total sales revenue that a business gets to keep after subtracting what is spent on basic business operations. The higher a gross margin is, the more money that a business keeps on each dollar that is made in sales. For example, a gross margin of 25 percent means that a business keeps $0.25 of every dollar that is made.
Fixed Costs
Fixed costs are expenses that will never change no matter how successful a business may be. These expenses are easiest to plan for, so calculating them is usually the first part of preparing any budget. Some examples of fixed costs include rent, salaries for employees and utilities.
Variable Costs
Variable costs are expenses that change over time. They should be factored into a budget just like the fixed costs, but they are, by definition, harder to predict and plan for. Your variable costs will depend on what kind of business you run and what kinds of products and services you offer.
Equity and Debt
Equity and debt are terms that sound obvious, but many young entrepreneurs are completely in the dark about what they mean. Equity refers to the amount of money obtained from investors in exchange for a stake in a business’s ownership, while debt refers to money borrowed from financial institutions that needs to be paid back over time. Both equity and debt are important for running any business.
Leverage
Leverage in the business world refers to the amount of debt that can be used to finance a business. A business that is “highly leveraged” has a lot of debt and is therefore high-risk and unattractive to potential investors. The key to having good leverage in the business world is to have a good balance of equity and debt.
