The Pathway to after founding a Start-Up

Unlike single-entry bookkeeping, double-entry bookkeeping records an entry from a single transaction in two accounts in the form of debit and credit respectively. The amount entered as debit should match the amount entered as credit for the particular transaction. Single-entry bookkeeping is opted by smaller firms dealing with lower transaction volumes.

In cash-based accounting, a transaction is recorded only when the money for that transaction has been received or paid. For example, if goods or service has been provided by a firm to its client, it is recorded only once the client has made the payment. Similarly, even if an item has been delivered by a supplier, it is not accounted for unless the company pays the supplier. On the other hand, in the accrual method, a transaction is recorded as soon as an exchange of goods or services is made regardless of if a payment is made or not.

This is a financial statement that provides a picture of the company’s financial health at a particular point in time. Financial information such as a balance sheet, cash flow statement and income statement together help give an understanding of a company’s financial current performance and status. A balance sheet is a detailed document that carries information on what a company owns and owes and keeps track of the shareholder’s investment in the company.

Balance sheet-

The balance sheet is a tool to evaluate an organization’s actual value also referred to as “book value”. This helps understand the financial health of the organization at a particular point in time called as reporting date by taking into account a firm’s assets, liabilities and shares. Balance sheets serve two distinct functions depending on who is analyzing them. They are used by external parties to assess a company's financial health. Also, they are used internally to help managers make strategic decisions about how to allocate available capital for the best results.

Profit and Loss Statement-

This financial statement records your total revenue and expenses over a defined financial period such as a quarter or a fiscal year. This gives an insight into if or not a company is in a financial position to further increase profits by either increasing incomes or by cutting expenses. It summarises if you have been spending more than you have been earning or vice versa. This information can help you assess the financial status of your company which is highly useful. This statement is produced usually in both cash and accrual format.

Cash flow statement-

A cash flow statement (also known as the statement of cash flows) is a financial statement that shows the money flowing in and out of the business over a specified time period. It is important to regularly monitor your cash flow to ensure you have sufficient liquidity to pay bills, invest in assets, and satisfy your operating needs.

Budgeting serves several purposes such as accounting for the money being spent, and how and where. This information helps to understand unnecessary expenses that can be avoided, hence saving more money and having better control over spending behaviour. Both particularly objectives and long-term financial objectives such as paying off debt, saving up a certain amount of money, and building emergency funds can be achieved by overall better financial decisions that can be made when a proper budget is in place.

Helping You Hit Financial Goals

Once you have a budget in place, you know where and how you are going to spend. It brings more discipline and direction, and control over the spending thus making it easier to actually achieve financial objectives in mind. Simply having goals does not suffice, you need a plan and process to get there. In terms of a financial goal, a budget would act as this plan.

Estimating Realistic Earning Levels

To estimate your earnings made out of your sales, you can use historical data of the income earned and divide it by the months of operations as much as data available.

If you do not possess this information, you can estimate using industry trends and business seasonality. Accounting for the mean ageing of accounts receivable would also give a better picture. This will help you understand your income pattern and be prepared.

Finding Break-Even Point

When you have a budget and estimate of costs, you will have an understanding of the earnings you have to make to first cover all your costs and then start making a profit. The point at which the costs equal the earnings is the break-even point. Depending on when you want to meet break-even as per your plans, you can design your pricing model. This will also help you navigate through seasonality or sluggish period. You can plan out how to leverage a good sales period and achieve a certain level of revenue to compensate for the off-season.

Keeping Expenses In Check-

Having a budget and keeping track of the spending can help you spot where you end up spending a lot and cut down on those. It helps to optimize the overall expenses.

Building Emergency Funds-

Unanticipated expenses can put you off track and become a major crisis. Having an emergency fund with sufficient savings to tackle such unexpected expenses that occur will help your start-up stay afloat and overcome such a crisis situation. If you lack an emergency fund, you might be unable to sail over such a situation and could even force you out of business if you can’t find a quick solution. A budget will aid in building an emergency fund that can help you avoid such a situation.