How much accounting should a founder of a startup know?


7

I just started up a mobile game company, set up Quickbooks online, and now I'm trying to read up on accounting.

Right now I'm reading The Accounting Game. It's a great book and it makes really easy and fun to learn the basics of account.

My question is, after finishing up this book what should be the next step? How much accounting do I need to know?

Also, how much about bookkeeping do I need to know in order to keep good books and use Quickbooks online efficiently?

Finance Accounting

asked Nov 4 '11 at 17:19
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Edgar Miranda
230 points
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6 Answers


6

You need to know enough to direct your accountant on what to do and to understand your burn rate (e.g. cash in - cash out).

Most accountants will setup your business on the accrual basis which is different than on a cash basis. Accrual means that sales are booked when you make the sale -- not when you get the money.

Cash basis is just that -- when you get the cash is when you record the sale.

Some other things to keep in mind are:

  • The accounting equation: Assets (A) = Liabilities (L) + Stockholders’ Equity (SE) and Debits = Credits must always be true
  • Generally Accepted Accounting Principles (GAAP) is used to prepare public accounting information.
  • The main financial statements are: Income (or P&L), Retained Earnings, Cash Flows and Balance Sheet
  • The Chart of Accounts is how financial transactions are categorized. All transactions have a double entry or two sided effect.
  • Assets depreciate according to a schedule which decreases their value over time. That time is dependent on the asset
  • Some important company metrics include: Net Sales, Cost of Good Sold (COGS), Gross Margin, Net Income and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

I would recommend taking a basic accounting class. It will be useful to know the basics so you can speak accountant.

answered Nov 4 '11 at 22:08
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Jarie Bolander
11,421 points
  • I'm not a huge fan of taking classes (they tend to go too slow for me), do you recommend any books? – Edgar Miranda 8 years ago
  • @EdgarMiranda: I'm a fan of the Schaum's outlines. You can also look at Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2008). Introduction to management accounting (14th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. I think that's the book I used in graduate school. – Jarie Bolander 8 years ago
  • For a small business / start up. I would recommend Cash based accounting. It's simpler and keeps money in your pocket longer. – Ryan Doom 8 years ago

2

How much do you need to know? I have always taken the approach of tracking everything, and letting the accountant "make sense" of it all later. It's far better to have entered things incorrectly than to not have entered them at all. (Quickbooks is good like that... makes it easy).

Later, when you look for an accountant, make sure you find one that "speaks" English and is willing to explain things to you. After year one, you'll be a pro.

answered Nov 4 '11 at 21:12
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Sunil
1,072 points
  • So basically, use quickbooks to the best of my knowledge, and then periodically have a book keeper look over them? This is what I was thinking. – Edgar Miranda 8 years ago

1

As above, I think it is well worth understanding some basic accountancy. This will allow you to;

  1. Direct your accountant effectively and be able to understand and check what they are sending you and submitting on your behalf.
  2. Manage and project cashflow. This may well save your business one day.
  3. Understand important strategic information about where in your business your profit really comes from.
  4. Understand your legal, reporting and tax liabilities.

For people in the UK I recommend 'Finance on a Beermat' as a book that will tell you just enough to get started.

http://www.amazon.co.uk/Finance-Beermat-Chris-West/dp/1847940072/ref=sr_1_1?ie=UTF8&qid=1320858477&sr=8-1 I don't think you need to do your own book-keeping, but doing it will keep you acutely aware of what is going on in your business financially.

answered Nov 10 '11 at 03:54
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Yojimbo
326 points

1

Understanding the financial side of your business is critical: you simply will not make effective decisions with knowing how they ultimately affect the numbers. Having said that, you don't need to become an accountant or even learn much about it now.

Since you are pre-revenue, you're really operating on a cash-basis and few accounting issues will come into play, other than how to treat your seed capital. I recommend you keep it simple for now and focus on your product and market.

A better use of time, for now, would be to start looking around for an accountant or financial advisor to help you think through some of the issues you'll start to face, like cash-flow and revenue recognition.

You may want to check out Conjecta. It might be an interesting place to start. (In full disclosure, this is my startup.)

answered Nov 5 '11 at 01:06
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Dmiller Conj
156 points
  • I'm actually in the post revenue state :). – Edgar Miranda 8 years ago

1

I believe its good to know the stuff happening around your startup but inhumane to do everything yourself.

Just keep asking the basic accounting/ finance/ entrepreneur questions (like how much cash do we have/ how profit we made etc.) and delegate the rest to a specialist/ junior.

Concentrate on your core competency cuz the gains will be exponential compared to the energy you'll expend on learning accounting stuff which doe'snt even matter in the long run.

Hat tip - go talk to another entrepreneur about managing accounting stuff and I guess you'll get the accounting/ finance knowledge to pass by. Dont get stuck like with any other thing under the sky.

Cheers!!
Indian CA

answered Nov 5 '11 at 02:33
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Ashish
21 points

0

I wouldn't spend too much time learning accounting. Because it's not something that can be learned quickly. There are a lot of angles to accounting, like cash vs accrual accounting, tax vs financial accounting, etc. What I would do is hire an accountant who works with businesses of your size. Then ask him/her to walk you though one month of your activities and how they impact the basic financial statements: cash flow statement, income statement and balance sheet. Tell him/her you want to understand how to read financials, but don't need to understand how they are prepared step by step.

If the accountant is smart enough to understand what you are asking, then he/she will explain things to you and going forward you may be able to do that yourself.

I want to add that you may want to understand financial statements and financial analysis, not necessarily accounting. Financial analysis will tell you what's happening with your business, while accounting is debits and credits and that's a process to get to the end result, which is financial statements:

Accounting >> Financial Statements >> Analysis of Financial Statements

You may need to know step 2 and 3 above, but don't necessarily have to know step 1 in detail.

Also, just FYI, most probably you will have financial statements on a cash basis, unless you are a large company.

Finally, there is a lot of material online about accounting and financial analysis. And it's free. Just google :)

answered Nov 9 '11 at 10:07
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Vasiliy
323 points

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