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Accounting for startups: What do entrepreneurs need to know?

Money Matters

Accounting for startups: What do entrepreneurs need to know?

Entrepreneurs are people with big ideas.

They have passion, determination and creativity.

But they might not always have the accounting or business knowledge required to give that great idea legs.

And even if they do, there may still be areas where their knowledge can be improved to the benefit of their profit margins.

Sound familiar?

A sound understanding of accounting and business principles can speed up growth, or even help to nail down those crucial funding rounds.

So, what do entrepreneurs need to know about accounting?

In this article, we take a look at some of the ways accountants can help you, and how their work with entrepreneurs can differ from that with more established businesses.

The insights and comments in this article are provided by the fantastic Marelize Bott, an MAAT AATQB accountant, whose firm, Add-Worth, specialises in helping entrepreneurs plan for a successful future.

Here’s what we cover:

Making data-driven decisions

Key performance indicators for entrepreneurs

Accountants, startups and funding

There are two main types of entrepreneur, says Marelize.

The first is happy to “plod along”, making use of their accountant just like any other businessperson.

In this case, the main accounting event will be the end-of-year compliance with HMRC and Companies House requirements, and they may not even touch base with their accountant outside of this.

“A more entrepreneurial, go-getter type of person will want to know his figures on a monthly basis,” adds Marelize.

“This is because it’s the figures that drive them and are what really lets them reach their goals. And these entrepreneurs are very goal-driven.”

The basis for this kind of insight is goes beyond good bookkeeping, she continues, but also uses the data to both set and measure against goals, known as key performance indicators (KPIs).

This is where accountants set themselves apart from number-crunchers and can take on an invaluable partner-like advisory role for entrepreneurs.

After all, most accountants have worked with hundreds of businesses and have vast amounts of experience they can share.

Marelize says: “With an entrepreneurial, driven person, we take the figures and we analyse them. We create forecasts. We measure the KPIs.”

All of this data is visible via reports or dashboards in modern cloud accounting software.

“There’s so many automated accounting products out there,” adds Marelize. “They can output these amazing figures at the click of a mouse.

“Obviously, you’ve got to understand what it’s about. As an accountant, I’ve got to be able to advise my clients how to read these figures.

“This saves time for entrepreneurs.”

It’s crucial for professionals across a business to identify and monitor KPIs that can ultimately define and showcase the success of their organisation.

“The most common ones are your gross profit, your conversion rates and your net profits,” explains Marelize.

“And some businesses will want to know their debtors days and creditors days alongside other things. It depends on the business type.

“And when it comes to people who do a lot of online marketing, such as entrepreneurs in those early days, you want to see how much you spend on this and what rates of investment you’re getting back on that.”

Let’s take a look at some of these KPIs:

  • Revenue: This is the first fundamental measure. Sales revenue refers to the income from all customer purchases. Returns or undelivered services are subtracted from this income to get the final sales revenue result.
  • Gross profit: There a variety of ways of working this out but the simplest route is to take the total sales from products or services, then deduct your direct costs.
  • Gross profit margin: This shows you how a product, or groups of products, is performing in your business and measures your overall business productivity. To calculate this, take gross profit and divide it by revenue. You will then have a figure you can express as a percentage (e.g. 68%).
  • Net profit: If you take your gross profit, as determined above, and remove your overheads (also known as fixed costs), then you can determine the amount of money you’ve actually made. Deductions should include things like loan interest and taxes.
  • Net profit margin: Your net profit margin is the percentage of net profit generated by your company’s revenue. To work it out, take your net profit figure and divide it by your revenue. you will end up with a number you then express as a percentage (e.g. 47%).
  • Debtor days: This is a measure of the average number of days customers take to pay. Obviously, a healthy cash flow means this figure is as low as possible, within the context of the terms you’ve arranged. Businesses that regularly exceed their terms present a real risk to your business, and this should be addressed.
  • Creditor days: This is a measure of the average number of days your business takes to pay suppliers. Again, it’s a crucial factor in determining your day-to-day cash flow situation and it can be useful to dig down into individual supplier accounts to see to whom you owe money.
  • Conversion rate: This tells you how good you are at converting prospective customers into actual customers and is commonly expressed as a percentage figure. A marketing asset has an 80% conversion rate if it makes 80% of those receiving it respond.
  • Customer acquisition cost: Similar to the conversion rate, this measures the cost of winning a new customer—and therefore whether your marketing budget is providing effective. It’s calculated by dividing the cost of a marketing campaign by the number of new customers it attracted to your business.
  • Net promoter score (NPS): This is a basic score of how likely somebody is to recommend your business. The score is determined by asking customers that question, and asking them to reply using a scale of zero to 10. Aggregated scores of nine or 10 are good because they’re people like and might be actively promoting your business.

Perhaps one of the key ongoing metrics for entrepreneurs, adds Marelize, is whether a business is fit to be sold.

She adds: “If you start a business, the ultimate aim is that you are able to sell it.

“And for the serial entrepreneurs who have got the vision and drive, they will get a business going quickly and then sell it within two or three years.

“But I would say for any business that starts out, even if you want to keep it for many years, at the end of that time it must be something that you’re able to sell on.”

For Marelize in her role as an accountant, a lot of professional satisfaction comes from being there early on.

She says: “Entrepreneurs start at the bottom, and I take my clients and grow with them.

“I think the beauty is that the accountant always has to be those few steps ahead of them to lead them.

“And as you lead them, you grow as well.”

There’s real value in having an accountant involved with your business in this way. If you don’t, achieving funding can be even more challenging.

“Having the accountant to back you up definitely gives you an advantage,” says Marelize. “The funder or lender will know there’s some professional advice that’s gone into this.

“They get the peace of mind that the entrepreneur could be a good prospect.”

The best entrepreneurs realise their accountants don’t just offer an invaluable, practical service, but are something of a teammate when it comes to helping them achieve their goals by providing that level of financial insight.

Marelize adds: “There’s a saying that, ‘without vision the people perish.’ If you don’t have a vision and you don’t have a forecast, you’re not going to get anywhere.

“And I find the entrepreneurs who invest the time in doing this are the ones that actually reach their goals, because they’ve got the figure to look at and they know that’s what they want to go for.

“They’re able to actually go for it. They have this unwavering faith, they put in their extraordinary effort and they reach their goals.”

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