A b c d e f g, h i j k l m o p, q r s t u and v, w x y and z now I know my ABCs 26 letters from a to z.

Well now you are all grown up, have creative juices flowing in your veins and ready to make your mark as an entrepreneur, but until you are big enough to have a CFO looking over the reins of your business empire you need to know the basics of accounting.

Ok, stop screaming out “boring!”, rolling your eyes and getting up to run out of the room.

It is your responsibility as an entrepreneur to be able to manage all aspects of your business and that includes a very important part, the backbone of your enterprise, the financial side.

Here are a summary of the most important ABCs that you will need to know if you want to be a entrepreneur.

Accounting – methods and procedures for identifying, analyzing, recording and storing information about the activities of an entity

Accounting equation – assets = liabilities + equity

Accounts payable – short term operating liabilities of a business, amounts owed to suppliers

Accounts receivable – short term asset, amounts owed to business from sales of products and services on credit to its customers

Accrual basis accounting – recording the financial effects when they happen not when they are paid

Accrued expenses – liability account to record gradual accumulation of unpaid expenses that aren’t paid until the following period

Accumulated depreciation – total cumulative amount of depreciation expense that has been recorded since the fixed assets were acquired

Adjusting entries – at the end of a period, these important entries are recorded to complete the bookkeeping cycle

Adjusted trial balance – after all the end of the year procedures have been completed the accountant compiles a comprehensive listing of all accounts

Amortization - allocation of cost of an intangible asset over its expected useful life

Assets – are economic resources, anything tangible or intangible that is capable of being owned to produce value and can be converted into cash

Bad debts – the expense caused by a customer’s failure to pay the amount owed to the business from a credit sale

Balance sheet – this financial statement summarizes the assets, liabilities and owner’s equity of a business at a moment in time

Break-even – the annual sales revenue at which total margin covers its fixed costs and makes zero profit

Bottom line – Revenue minus total costs and expenses

Budgeting – business budgeting requires setting specific goals and creating detailed plans necessary to achieve them.

Business plan – a plan that defines your business, it outlines the business’s purpose and states the goals, strategies and management team, many experts believe it is critical to the success of a business

Capital account – money invested by owners minus money returned to them

Capital expenditures – outlays for fixed assets to expand or modernize equipment needed in the business (see fixed assets)

Capital stock – the ownership shares issued by a corporation for capital invested in the business by owners

Cash basis – recording transactions when cash is received and when expenses are paid

Cash collections – all cash received from sales and other income, deposited in bank and recorded on the books in the cash account

Cash flow – vital to a company, inflows of cash are sales and other income, outflows of cash are expenses paid by the business. inflows of cash minus outflows of cash equal net cash flow.

Chart of accounts – breaking down all financial data and recorded in the company’s books in account categories; assets, liabilities, equity, revenue, income, costs and expenses

Closing the books – bringing the accounting for the fiscal year end to a close

Common stock – the one class of capital stock that must be issued by a corporation

Corporation (C corp) – taxable entity, these corporations are subjected to income tax on their annual taxable income

Corporation (S corp) – pass through entity, these corporations do not pay income tax on their annual taxable income, instead the income or loss passes to their owners who pick up the income or loss on their individual tax returns

Creditors – businesses borrow money in the form of loans and buy things on credit from suppliers that have to be paid back at a later date

Credits – all business record keeping systems use debits and credits for making sure that both sides of the transaction is recorded. this is how credits affect accounts:

• assets- reduces
• liabilities – increases
• equity – increases
• sales -increases
• costs – decreases
• expenses – decreases

Current assets – these assets can be converted into cash during one operating cycle. includes, cash, accounts receivable, inventory, prepaid expense and short term marketable securities.

Current liabilities – debt to be paid in the short term, principally accounts payable, accrued expenses, income taxes payable and short term notes payable.

Debits – all business record keeping systems use debits and credits for making sure that both sides of all transaction is recorded. this is how debits affect accounts:

• assets – increases
• liabilities – decreases
• equity – decreases
• sales – decreases
• cost – increases
• expenses – increases

Depreciation – allocating a fixed asset’s cost over the estimated useful life to the business

Double entry accounting – means that both sides of a business transaction are recorded

Disbursements – payments for a wide variety of purchases or debts

Equity – money invested in the business

Expense – money spent or incurred in a business’s effort to generate revenue

Favorable variances – actual results are better than budgeted for

Financial statements – periodic financial communications from a business to those entitled to know about the financial performance of the business (examples are)

• balance sheet
• income statement
• statement of cash flows

Fixed assets – physical resources used by a business in conducting its operations

• land
• building
• machinery
• equipment
• furnishings
• tools
• vehicles

Fixed costs – expenses or costs that remain unchanged over the short run and do not vary with changes in sales volume

General ledger – actual accounts and balances in these accounts at a particular period of time

Gross margin – sales revenue minus cost of goods sold

Income statement – financial statement that summarizes sales revenue, costs, expenses for a period yielding an income or loss

Interest expense - interest on funds borrowed

Inventory – products to be sold by the business

Journal – a chronological record of transactions in order in which they occor

Liabilities – money owed for purchases and debt

Margin – sales revenue minus cost of goods sold minus variable expenses. profit before fixed expenses are deducted

Negative cash flow – changes in the company’s assets and liabilities cause its cash balance to decrease

Net income – sales revenue and other income less all expenses for the period resulting a surplus

Net loss - sales revenue and other income less all expenses for the period resulting in a loss

Operating costs – costs of operating the business to generate revenue

Opportunity costs - the amount of income given up when you follow a better course of action

Owner’s equity – ownership capital base of a business. (two sources)

• investment
• profit

P&L – see income statement

Period costs – costs that are not attached to particular products

Positive cash flow – changes in the company’s assets and liabilities cause its cash balance to increase

Prepaid expenses – expenses that have been paid in advance for future benefits

Product costs – costs attached directly or allocated to particular products

Quick assets – cash and other assets that can be converted to cash quickly

Replacement costs – estimated amount it would take today to purchase an asset that the business already owns

Retained earnings – annual profit increases this account, losses and distribution decreases this account

Sales revenue – sales of products or services to customers

Selling, general and administrative expenses – consist of a wide variety of costs of operating the business and making sales

Solvency - the ability of a business to pay its liabilities on time

Transactions – economic exchanges between a business and the parties with which the entity interacts and makes deals.

Unfavorable variances – actual results are worst than budgeted for

Variable costs – increase and decrease in proportion to changes in sales or production level

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You wake up one morning with an idea that you believe will be the “next big thing” then reality sets in and you realize money doesn’t grow on trees.

Every entrepreneur who has a vision to create a business is unique and the amount of risk that they can withstand is also unique.

At the concept stage most entrepreneurs try to limit their risk and expense by keeping their day job and letting their idea come to a simmer while working on it during evenings and weekends.

As the process moves forward all entrepreneurs are faced with the same question, how do I fund my idea?

Entrepreneurs usually don’t have rich parents and banks aren’t rushing to their door with a wheelbarrow filled with money so where do they turn to get their product to market?

Most startups don’t get funded by venture capital or angel investors. The money usually comes from their savings, equity on their home, if they are lucky enough to still have equity in their house, credit cards, family or friends.

Initial cash flow will be tight so entrepreneurs will need to fine tune their budget in order to stretch every dollar. That is where bootstrapping comes into play.

Bootstrapping means starting a company with little or no money. Everything is done as cheap as possible. You use your credit cards, you keep costs to a minimum, and you do as much as you possibly can by yourself without incurring any other expenses.

Advantages vs Disadvantages of Bootstrapping:

Advantages:

• no outside investors who might try too influence the direction of your company
• no one who can try to take over the company
• since you are funding the startup out of your savings and credit cards their are no foolish spending
• you’ll learn to become more versatile and resourceful since you will be doing everything that you possibly can
• you are extremely motivated because your own personal money is at risk

Disadvantages:

• you are working long hours since you are doing many tasks in an effort to reduce costs
• you are risking everything because you are funding the business
• all problems have to be solved by you since you don’t have a committed team working with you
• you have a competitive disadvantage because your competitors, who have funding, can out spend you to get control of a market

Bootstrapping is not for the faint of heart, but it can make an entrepreneur stronger and self-sufficient. When you bootstrap you are responsible for the success of your company and that will force you to think strategically as you move step by step to the finish line.

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But choosing the right legal structure for a new business might be the most critical decision a startup will ever have to make.

The legal structure that a startup selects will affect their ability to raise capital, their tax liability and their protection from lawsuits.

 A startup’s options are:

• Sole Proprietorship
• Partnership
• Corporation
• “S” Corporation
• Limited Liability “LLC”

Sole Proprietorship

• business owned by “1” person
• a “mom & pop” type of store
• not a legal entity and requires no paperwork
• legally the business and the owner are the same
• income or loss is reported on the personal income tax of the owner
• owner is personally liable for the debts of the business
• if the business is sued the owner is personally liable for judgements against the business

Partnership

• business owned by a least “2” people
• income or loss is split between the partners and must be reported on the personal income tax return of each partner
• each partner has unlimited liability for the debts of the business partnership
• if the business is sued the partners are personally liable for judgements against the business

Corporation

• exists separately from and independently of owners
• investors have limited liability
• shareholders are not responsible for the debts of the corporation
• files a separate tax return for the profit or loss of the business
• can enter into legal contracts, sue and be sued
• structure allows for the ability to raise capital by selling shares to investors

“S” Corporation

• generally same as regular corporation
• same limited liability as regular corporation
• shareholders are not liable for debts of the corporation
• S corporations are allowed to pass profits and losses to shareholders. As with partnerships, shareholders report income and losses on their personal tax returns at a lower tax rate

Limited Liability “LLC”

• limited liability protection to all owners
• owners are not personally liable for the actions or debts of the company
• this structure is similar to “S” Corporation because it is usually treated as a partnership for income tax purposes but has the benefit of limiting the liabilities of the owners

I have discussed only a brief description of the legal structures. I recommend that members of a startup should consult with a lawyer to understand in detail the advantages and disadvantages of each and to find out which one will work best for the startup.

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Patent? Trademark? Copyright? My brain is ready to explode!

Being an entrepreneur and coming up with a new idea to grow into a business is difficult enough but protecting that idea is even harder.

A lot of people confuse, patents, copyrights, and trademarks and even though there may be some similarities they were created to protect different intellectual properties.

Similarities are:

• all are registered with an agency of the federal government
• each of the 3 are referred as an intellectual property
• when someone uses any of the 3 without permission it is call infringement
• each of them give the owner exclusive rights

Difference are:

Patent 

• protects an invention (new and original)
• most common type of patent is a utility patent which protects the way an invention is put together
• the term of a new patent is 20 years from the date on which the application was filed
• by far the most expensive of the 3 intellectual properties
• granted by the United States Patent and Trademark Office

Trademark

• is a word, name, symbol or device which is used in trade with goods to distinguish it from others
• protects your brand, name of the company, logo, or a specific product
• the scope of protection is only within one’s field of business
• registration can last indefinitely
• registered by the United States Patent and Trademark Office

Copyright

• prevents other parties from copying a creative work and calling it their own
• a form of protection for original works including dramatic, musical, artistic, and literary
• protects the form of expression instead of the subject matter of the writing
• works created after 1978 are not subjected to renewal registration
• registered by the Copyright Office of the Library of Congress

My advise to entrepreneurs is simple, build a business out of an idea and leave intellectual property protection to an attorney who specializes in Patents, Trademarks and Copyrights. Doing this will prevent your brain from exploding.

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They rather work for a company where they are not happy, not fulfilled and where someone tells them what to do and how to do it.

Entrepreneurs like myself choose to create a business rather than working for someone else. While there is a potential for considerable wealth we must be willing to leave our comfort zone and come face to face with the following risks:

Market Risk – is there a sufficient demand for what you have to offer?
Competitive Risk – do your competitors have an advantage?
Technology and Operational Risk – can you execute everything needed to make and sell what you are offering?
Financial Risk – do you have a Plan B in case you run out of cash and need to secure outside funding?
People Risk – can you recruit, motivate and retain key team members?
Legal and Regulatory Risk – do you have specialists who can keep you out of trouble?

Not many people are willing to endure the risks of entrepreneurship. However, some of us are willing to venture down this bumpy highway for a chance to create our own destiny.

If being an entrepreneur means you are crazy then I am willing to stand up an say I am crazy.

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I have read articles on the theory of right brain or left brain dominance in which each side of the brain controls different types of thinking and I believe for a startup to be successful key members of the team must be a mixture of both.

“Left Brained” characteristics include analytical skills, logical and critical thinking.

“Right Brained” characteristics include creativity, intuitive and imaginative thinking.

Many entrepreneurs, who are right brained dominant, have a vision but lack the plan to make it happen. On the other hand, people who start a business are practical and have technical skills but lack the ability to see the “whole picture”. These people are left brained dominant.

Unfortunately both of the above have a high rate of failure because they do not fully utilize the natural abilities of both sides of the brain which are required for success.

I truly believe it is very important for every entrepreneur to understand the correlation between the right and left brain and how it relates to business.

Understanding this can be the difference between success and failure.

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