You’ll come up against some pretty insurmountable odds when starting a new business. In fact, lending tree estimates that after five years, 50% of businesses have failed. Pretty bad odds. However, for those that succeed, the rewards can be pretty special.
One aspect of business that new owners and startups usually struggle with is accounting. This is especially the case if there are complex lease arrangements or interest expenses to calculate. Here are some tips to succeed.
Lean On Your Accounting Strengths
Some business owners are better inclined to draw up and keep track of their accounts than others. For example, if you’re good with figures and numbers it might come as second nature to you.
If any kind of math makes you feel slightly sick then it’s clear accounting isn’t for you. Also, for someone good with numbers, accounting will be easier…meaning it’ll take less time. Time is of course incredibly important to new business owners.
So, if you feel like you’ve got the right skills to take hold of your accounting and save yourself some money…great, these tips might help. If not, it might be time to reach out for some help in the form of accountancy software or an accountant in general.
Learn How To Calculate Interest Expense
As a new business you might have incurred some initial debt in the form of a business loan. You’ll probably have to pay interest on this loan. Interest expense is the cost incurred. It’s important that you learn to calculate this expense because it’s likely that the loan will be with you for a few years.
The interest is a cost to the business and you need to properly account for it. It’s also important to get it right if you were ever going to evaluate your business. You do this using EBITDA. The EBITDA calculation is one way that companies are financially evaluated.
This calculation looks at a company’s earnings with four expenses added back in: taxes, depreciation, amortization, and interest expense. To calculate the interest expense, multiply the principal borrowed by the interest rate and the time period. The time period will change each time you file (providing you file yearly), so make sure you account for this change too.
If you were wondering, EBITDA predictably stands for earnings before interest, tax, depreciation (and) amortization.
Get Help With Lease Accounting
New businesses often lease machinery, equipment, and other high cost items.. Alternatively, you might be a business that leases items to other businesses. If you fall under one of these two criteria you’ll have to make sure you account for these leases.
It can be time consuming, which is why a lot of business owners who utilize leases often use accounting software. Complex accounting is often made easier with software. If you’re only leasing one or two items it might be less complex.
Just make sure you’re accounting in a way that’s compliant for ASC 842 which is the most recent accounting standard to subscribe to. You also need to keep tabs on these standards because they can often change, meaning the way you account might slightly deviate too.
Force Yourself Into Good Practice
If you’re going to complete the accounting yourself, you should endeavor to get yourself into a really good position for accounting. This means ensuring that you record all business income and expenditure as well as making sure you keep up to date with accounting standard changings.
The main standards are ASC and GAAP. However, depending on where you live there may be other standards to adhere to. You need to think about how you’re going to bookkeep. A lot of accountants use double entry. It can be tricky to get your head around but it’s pretty easy.
Also, it’s pretty standard, especially if you own a company and you’re not just accounting for general activities. If you start well, with good bookkeeping practices right off the bat, there’s more chance you’ll submit accurate accounts which is of course, always the aim.
Make sure you back your entries up. Store them on a secure cloud. Don’t use pen and paper accounting because the books are easy to mislay. They’re also susceptible to accidents like fire and flooding. If you lose them, trying to work backwards can be an absolute nightmare.
You will learn more on how to improve the efficiency of your accounting firm when you read our article about it here. good luck!