How can I learn the basics of financial management?
I'm starting my own construction company and want to do the accounting myself.
Get the working capital your business needs from Entrepreneur Lending, powered by CAN Capital. Learn More »It's great to hear about your entrepreneurial spirit in starting a construction company. I would just caution you to really make sure that you have the work experience and the team in place to successfully move forward with this venture. Sometimes entrepreneurs jump into a venture, and after getting their hands dirty, realize they don't have all the tools in place to be successful.
As you point out, finance and accounting are crucial elements in all businesses. As basic as it may seem, a lot of entrepreneurs jump into a venture without thinking about how they will make money (i.e. be profitable) and to account for that money.
Your first step is to formally create a business plan. The business plan doesn't have to be 100 pages long but it should include:
1. A one-line pitch
2. A business summary
3. A management team
4. Services offered
5. Target market
7. Sales and marketing strategy
8. Financial model
10. Competitive advantage
I would strongly advise you to take your time with the business plan, as each element impacts the finance and accounting of your business in some way or another.
For instance, the drivers of the company's revenue growth may be certain marketing strategies that would need to known to quantify the growth in a financial model. In fact, building the financial modeling is the output of all of the underlying data--i.e. marketing, employees, competition, etc.
Once you have completed the majority of your business plan, then start to work on building a financial model. As I stated before, you will want to highlight all of the specific drivers of revenue growth in your model so that you will be able to measure your progress in reaching your milestones for each growth initiative.
Let's move to the expense side of running a business. As a side note, this happens to be an area that entrepreneurs usually underestimate and is the common cause for a cash crunch later on down the line.
Your first step is to list as many expenses that you can think of on a plain sheet of paper. Think long and hard on this and do some research because there may be expenses that are not coming to your mind at first. Also, speak with other entrepreneurs in the construction industry as they will likely fill in any gaps you might be missing on your list.
Once your expense list is complete, incorporate it in the financial model. Keep in mind that as you grow, your expenses will also likely increase so you will want to model operating expenses such as employee headcount, office space, administrative fees and anything else that goes into your business.
In addition, it is often helpful to incorporate some scenario analysis in your model (i.e. worst-case, base-case, expected scenario). For instance, if you were estimating the fuel costs for the company's construction vehicles on a yearly basis, a scenario analysis would entail modeling gas prices at current levels, higher levels and lower levels. It doesn't have to be exact as no one can predict the future but you should be thinking about different scenarios to better prepare yourself for the future.
Moving on to the accounting side of starting a business. Having a proper bookkeeping system is needed for both tax purposes and for understanding the key financial and business trends impacting your business.
For instance, most retail businesses should have detailed electronic customer/supplier data by product, region and date to better understand sales patterns, inventory builds and how to run an overall efficient business. It is possible that sales could decline in a specific region due to competition and you would want to know that information as soon as possible in order to reduce purchases and prevent an inventory build.
Being a startup business, you will likely want to implement a bookkeeping system that is as easy and user-friendly as possible. Since most of the business transactions are similar in nature and the business is local, a basic bookkeeping software is probably sufficient.
Outright is a free web-based bookkeeping application that is gaining popularity of late. They have released several new features such as integration with an invoicing application, Freshbooks. Quickbooks remains a staple in bookkeeping software for small businesses, but it is not free--a couple hundred bucks, depending on the edition.
Also, make sure that whichever bookkeeping software you choose to implement, you can easily reconcile/export data from your bank account and compare it to your actual books. A lot of businesses get lazy with this, but it is quite possible that several mistakes will be avoided by having this functionality and actually reconciling.
Finally, remember to keep supporting documentation, whether paper or electronic, for all gross receipts, purchases, expenses and payroll receipts.