Ch.3- How Can a Startup Company Manage Its Finances Effectively?

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It’s believed that every entrepreneur will encounter financial problems when making his or her own business plan. How much does it cost to prepare for various expenses and costs? Although it is impossible to accurately estimate the funds needed in the future, it is possible to reasonably estimate the relevant figures. This article will use the four major financial statements (Balance Sheet, Cash Flow Statement, Statement of Stockholders Equity,
Statement of Comprehensive Income)
to help you manage your finances effectively.

First of all, we must understand the accounting and the four major financial statements (Balance Sheet, Cash Flow Statement, Statement of Stockholders Equity, Statement of
Comprehensive Income)
, their meanings, and the impact of the cash basis and accrual basis. Accounting is a management tool and management system; the main purpose is to
provide information to help decision-making. In the course of its processing, if we use different basis, then it may have different impacts on the decision of the financial users.

Here’s the example:

Cash BasisAccrual Basis
Recognize income when cash is received, recognize expense when cash is paid.

E.g. The salary of employees in October 2007 was paid in November 2007, according to the cash basis, it was recognized in November.

It should be identified and recorded at the time of the transaction (not recognized when cash is received or paid).

E.g. The salary of employees in October, 107, paid in November 2007, according to the accrual basis, it should be recognized in October.

If you are a company owner, you must compare the use of funds. Whether the company currently has idle funds or needs to raise funds from shareholders, using different basis mentioned above will exert different impacts. For the company owner who uses the cash basis, it is impossible to grasp immediately how much amount should be paid in the future. On the contrary, if you use the accrual basis, you can not totally grasp how much account receivable you have.

The preparation of the general financial statements shall be based on the accrual basis. The costs and expenses and the income generated shall be expressed in the same period, which is the principle in accounting, in order to express the financial status and financial performance of the company.

The following is a summary of the Balance Sheet, Cash Flow Statement, Statement of Stockholders Equity, Statement of Comprehensive Income and a list of the four simple sheets for reference.

● Balance Sheet
The balance sheet is a quantitative list of all assets, liabilities and shareholders’ equity at the end of the fiscal year, expressing the company’s financial position on a particular day.

1. Assets:
It refers to the resources generated by past events, which are controlled by the enterprise and are expected to bring in economic benefits. So-called future economic benefits may be an increase in cash inflows or a decrease in outflows.
2. Liabilities:
It refers to the current obligation arising from past events, and it is expected that the liquidation of the obligation will result in the outflow of resources for economic benefits.
3. Equity:
It refers to the residual interest, that is the balance of the assets of the enterprise after deducting the liabilities.

Based on the operation cycle (usually one year), assets and liabilities will be divided into current assets or non-current assets (liabilities), assets and liabilities are current assets (liabilities) during the operation cycle; during the period other than the operation cycle, they are classified as non-current assets (liabilities).

● Statement of Comprehensive Income
The statement of comprehensive income expresses the financial performance of the company during the reporting period (a certain period) and presents all the revenue and loss of the reporting period. Income includes income and benefits. Expenses include expenses and losses.

Operating activitiesNon-operating activities
Operating income refers to the income of the company selling products and providing labor services. Operating costs refer to the expenses incurred in selling products.

E.g. Product income or salary
Non-operating income and loss refer to the business that occurs in the operation, but it is not the income and loss associated with the sale of goods and the provision of labor services.

E.g. Additional investment profit and expenses

● Statement of Stockholders Equity
The statement of stockholders equity expresses the changes in the share capital, additional paid-in capital, retained earnings (loss) and other interests of the company during the reporting period (a certain period).

● Cash Flow Statement
The cash flow statement is the inflow and outflow of cash and cash equivalents, which summarizes operating, investing and financing activities of the company during the reporting period (a certain period).


1. Cash flows from operating activities:
Most of the cash inflows and outflows of major operating activities, that is, transactions from the net profit of the current period.
2. Cash flows from investing activities:
Cash payment for investment assets, such as: purchase of fixed assets, sale of fixed assets, etc.
3. Cash flows from financing activities:
For the company to obtain long-term funds, therefore generate the relevant cash receipts and payments, such as: borrowing, cash appreciation, distribute dividends, etc.

In the beginning of the company’s establishment, due to the limited labor and scale, some companies will entrust the professional accounting institutions (such as accounting firms) to handle the accounting business. Although it can effectively alleviate the doubts related to finance in the company’s growth process, for the long-term development, the company is growing in size, and there are further public offerings or IPO planners. Early appointment of full-time accountants and the provision of visa services with reputable accounting firms can provide more for the company’s operations and future planning, in-depth advice and timely feedback.

The use of financial statements is quite extensive. In addition to letting investors know the financial status of the invested company and its financial performance, it is more important for company managers to understand the details. For example, given the amount of accounts receivable is too large, if it is past due, the company manager shall review the management of the unrecovered funds. If these receivables cannot be recovered without timely control, the financial statements shall be required in addition to affecting the company’s capital turnover. The loss of the account is not recoverable and the cost of the investment cannot be recovered; even when some companies have paid the sales commission and caused multiple losses. Therefore, the company’s financial statements are of great significance to management. If you can understand the company’s financial statements, you will surely be able to effectively manage and improve the company’s financial status and performance.

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