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What is a Business Plan?

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Definition:  A business plan is a detailed written steps and goals defined to guide a business’ course of action from its initial stages. A business plan provides a complete description and projection of the company as well as its core strategies and expected results.

• What Does Business Plan Mean?

The creation of a new organization or a new business requires coherent actions in order to achieve the desired outcomes. Following a business plan allows to link actions and resources to objectives and measurable goals. This plan can be used internally like a roadmap for the owner but also can be a requirement when looking for funding or partners.

A business plan is generally a precise, short document that commonly contains the following sections: executive summary, business description with its products or services, marketing plan, operational plan and financial plan with its forecasted financial statements for the first years of operation, often five to ten years. The initial business plan is later substituted by annual or bi-annual strategic plans.

Mark Tilson is a young professional that wants to start a new business. He has the idea of providing an innovative maintenance service to medium-size manufacturing companies but he needs funds to implement it. Mr. Tilson therefore decided to write a business plan to present the idea to some potential capital partners. He though that the ideas were already clear but soon realized that more analysis and pre-launching work was required.

How many employees the company will have? How the company will market its services? How much money the initial investment requires? How much profit the company is expected to generate at the end of the fifth year of operation? These and other questions must be answered and coherently written in the business plan. Finally, Mr. Tilson improved his ideas, presented the plan and found the required partner.

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Accounting Business Plan Template

Written by Dave Lavinsky

Accounting Business Plan

Over the past 20+ years, we have helped over 500 entrepreneurs and business owners create business plans to start and grow their accounting firms. 

In this article, you will learn some background information on why business planning is important. Then, you will learn how to write an accounting business plan step-by-step so you can create your plan today.

Download our Ultimate Business Plan Template here >

What Is an Accounting Business Plan?

A business plan provides a snapshot of your accounting business as it stands today, and lays out your growth plan for the next five years. It explains your business goals and your strategies for reaching them. It also includes market research to support your plans.

Why You Need a Business Plan for Your Accounting Firm

If you’re looking to start an accounting firm or grow your existing accounting business, you need a business plan. A business plan will help you raise funding, if needed, and plan out the growth of your accounting business to improve your chances of success. Your accounting business plan is a living document that should be updated annually as your company grows and changes.

Sources of Funding for Accounting Firms

With regards to funding, the main sources of funding for an accounting firm are personal savings, credit cards, bank loans, and angel investors. When it comes to bank loans, banks will want to review your business plan and gain confidence that you will be able to repay your loan and interest. To acquire this confidence, the loan officer will not only want to ensure that your financials are reasonable, but they will also want to see a professional plan. Such a plan will give them the confidence that you can successfully and professionally operate a business. Personal savings and bank loans are the most common funding paths for accounting firms.

Finish Your Business Plan Today!

How to write a business plan for an accounting firm.

If you want to start an accounting business or expand your current one, you need a business plan. The guide below details the necessary information for how to write each essential component of your accounting business plan.

Executive Summary

Your executive summary provides an introduction to your business plan, but it is normally the last section you write because it provides a summary of each key section of your plan.

The goal of your executive summary is to quickly engage the reader. Explain to them the kind of accounting business you are running and the status. For example, are you a startup, do you have an accounting business that you would like to grow, or are you operating an established accounting business you would like to sell? 

Next, provide an overview of each of the subsequent sections of your plan. 

• Give a brief overv iew of the accounting industry. 
• Discuss the type of accounting business you are operating. 
• Detail your direct competitors. Give an overview of your target customers. 
• Provide a snapshot of your marketing strategy. Identify the key members of your team. 
• Offer an overview of your financial plan.

Company Overview

In your company overview, you will detail the type of accounting business you are operating.

For example, you might specialize in one of the following types of accounting firms:

• Full Service Accounting Firm: Offers a wide range of accounting services. 
• Bookkeeping Firm: Typically serves small business clients by maintaining their company finances. 
• Tax Firm: Offers tax accounting services for businesses and individuals. 
• Audit Firm: Offers auditing services for companies, organizations, and individuals. 

In addition to explaining the type of accounting business you will operate, the company overview needs to provide background on the business.

Include answers to questions such as:

• When and why did you start the business?
• What milestones have you achieved to date? Milestones could include the number of clients served, or the amount of revenue earned. 
• Your legal business structure. Are you incorporated as an S-Corp? An LLC? A sole proprietorship? Explain your legal structure here.

Industry Analysis

In your industry or market analysis, you need to provide an overview of the accounting industry.

While this may seem unnecessary, it serves multiple purposes.

First, researching the accounting industry educates you. It helps you understand the market in which you are operating. 

Secondly, market research can improve your marketing strategy, particularly if your analysis identifies market trends.

The third reason is to prove to readers that you are an expert in your industry. By conducting the research and presenting it in your plan, you achieve just that.

The following questions should be answered in the industry analysis section of your accounting business plan:

• How big is the accounting industry (in dollars)?
• Is the market declining or increasing?
• Who are the key competitors in the market?
• Who are the key suppliers in the market?
• What trends are affecting the industry?
• What is the industry’s growth forecast over the next 5 – 10 years?
• What is the relevant market size? That is, how big is the potential target market for your accounting business? You can extrapolate such a figure by assessing the size of the market in the entire country and then applying that figure to your local population.

Customer Analysis

The customer analysis section of your accounting business plan must detail the customers you serve and/or expect to serve.

The following are examples of customer segments: individuals, organizations, government entities, and corporations.

As you can imagine, the customer segment(s) you choose will have a great impact on the type of accounting business you operate. Clearly, individuals would respond to different marketing promotions than corporations, for example.

Try to break out your target customers in terms of their demographic and psychographic profiles. With regards to demographics, including a discussion of the ages, genders, locations, and income levels of the potential customers you seek to serve.

Psychographic profiles explain the wants and needs of your target customers. The more you can recognize and define these needs, the better you will do in attracting and retaining your customers.

Don’t you wish there was a faster, easier way to finish your business plan?

With Growthink’s Ultimate Business Plan Template you can finish your plan in just 8 hours or less!

Competitive Analysis

Your competitive analysis should identify the indirect and direct competitors your business faces and then focus on the latter.

Direct competitors are othe r accounting firms. 

Indirect competitors are other options that customers have to purchase from that aren’t directly competing with your product or service. This includes CPAs, other accounting service providers, or bookkeeping firms. You need to mention such competition as well.

For each such competitor, provide an overview of their business and document their strengths and weaknesses. Unless you once worked at your competitors’ businesses, it will be impossible to know everything about them. But you should be able to find out key things about them such as

• What types of customers do they serve?
• What type of accounting business are they?
• What is their pricing (premium, low, etc.)?
• What are they good at?
• What are their weaknesses?

With regards to the last two questions, think about your answers from the customers’ perspective. And don’t be afraid to ask your competitors’ customers what they like most and least about them.

The final part of your competitive analysis section is to document your areas of competitive advantage. For example:

• Will you provide options for multiple customer segments?
• Will you offer products or services that your competition doesn’t?
• Will you provide better customer service?
• Will you offer better pricing?

Think about ways you will outperform your competition and document them in this section of your plan.  

Marketing Plan

Traditionally, a marketing plan includes the four P’s: Product, Price, Place, and Promotion. For a accounting business plan, your marketing strategy should include the following:

Product : In the product section, you should reiterate the type o f accounting company that you documented in your company overview. Then, detail the specific products or services you will be offering. For example, will you provide auditing services, tax accounting, bookkeeping, or risk accounting services?

Price : Document the prices you will offer and how they compare to your competitors. Essentially in the product and price sub-sections of yo ur plan, yo u are presenting the products and/or services you offer and their prices.

Place : Place refers to the site of your accounting company. Document where your company is situated and mention how the site will impact your success. For example, is your accounting business located in a busy retail district, a business district, a standalone office, or purely online? Discuss how your site might be the ideal location for your customers.

Promotions : The final part of your accounting marketing plan is where you will document how you will drive potential customers to your location(s). The following are some promotional methods you might consider:

• Advertise in local papers, radio stations and/or magazines
• Reach out to websites 
• Distribute flyers
• Engage in email marketing
• Advertise on social media platforms
• Improve the SEO (search engine optimization) on your website for targeted keywords

Operations Plan

While the earlier sections of your business plan explained your goals, your operations plan describes how you will meet them. Your operations plan should have two distinct sections as follows.

Everyday short-term processes include all of the tasks involved in running your accounting business, including answering calls, scheduling meetings with clients, billing and collecting payments, etc. 

Long-term goals are the milestones you hope to achieve. These could include the dates when you expect to book your Xth client, or when you hope to reach $X in revenue. It could also be when you expect to expand your accounting business to a new city.  

Management Team

To demonstrate your accounting business’ potential to succeed, a strong management team is essential. Highlight your key players’ backgrounds, emphasizing those skills and experiences that prove their ability to grow a company. 

Ideally, you and/or your team members have direct experience in managing accounting businesses. If so, highlight this experience and expertise. But also highlight any experience that you think will help your business succeed.

If your team is lacking, consider assembling an advisory board. An advisory board would include 2 to 8 individuals who would act as mentors to your business. They would help answer questions and provide strategic guidance. If needed, look for advisory board members with experience in managing an accounting business or bookkeeping firm.   

Financial Plan

Your financial plan should include your 5-year financial statement broken out both monthly or quarterly for the first year and then annually. Your financial statements include your income statement, balance s heet, and cash flow statements.

Income Statement

An income statement is more commonly called a Profit and Loss statement or P&L. It shows your revenue and then subtracts your costs to show whether you turned a profit or not.

In developing your income statement, you need to devise assumptions. For example, will you see 5 clients per day, and/or offer discounts for referrals ? And will sales grow by 2% or 10% per year? As you can imagine, your choice of assumptions will greatly impact the financial forecasts for your business. As much as possible, conduct research to try to root your assumptions in reality.

Balance Sheets

Balance sheets show your assets and liabilities. While balance sheets can include much information, try to simplify them to the key items you need to know about. For instance, if you spend $50,000 on building out your accounting business, this will not give you immediate profits. Rather it is an asset that will hopefully help you generate profits for years to come. Likewise, if a lender writes you a check for $50,000, you don’t need to pay it back immediately. Rather, that is a liability you will pay back over time.

Cash Flow Statement

Your cash flow statement will help determine how much money you need to start or grow your business, and ensure you never run out of money. What most entrepreneurs and business owners don’t realize is that you can turn a profit but run out of money and go bankrupt. 

When creating your Income Statement and Balance Sheets be sure to include several of the key costs needed in starting or growing a accounting business:

• Cost of equipment and office supplies
• Payroll or salaries paid to staff
• Business insurance
• Other start-up expenses (if you’re a new business) like legal expenses, permits, computer software, and equipment

Attach your full financial projections in the appendix of your plan along with any supporting documents that make your plan more compelling. For example, you might include your office location lease or a list of your most prominent clients.    Summary Writing a business plan for your accounting business is a worthwhile endeavor. If you follow the accounting business plan example above, by the time you are done, you will truly be an expert. You will understand the accounting industry, your competition, and your customers. You will develop a marketing strategy and will understand what it takes to launch and grow a successful accounting business.  

Accounting Business Plan Template FAQs

What is the easiest way to complete my accounting business plan.

Growthink's Ultimate Business Plan Template allows you to quickly and easily write your accounting business plan.

How Do You Start an Accounting Business?

Starting an accounting business is easy with these 14 steps:

• Choose the Name for Your Accounting Business
• Create Your Accounting Business Plan
• Choose the Legal Structure for Your Accounting Business
• Secure Startup Funding for Your Accounting Business (If Needed)
• Secure a Location for Your Business
• Register Your Accounting Business with the IRS
• Open a Business Bank Account
• Get a Business Credit Card
• Get the Required Business Licenses and Permits
• Get Business Insurance for Your Accounting Business
• Buy or Lease the Right Accounting Business Equipment
• Develop Your Accounting Business Marketing Materials
• Purchase and Setup the Software Needed to Run Your Accounting Business
• Open for Business

Don’t you wish there was a faster, easier way to finish your Accounting business plan?

  OR, Let Us Develop Your Plan For You Since 1999, Growthink has developed business plans for thousands of companies who have gone on to achieve tremendous success.   Click here to see how a Growthink business plan writer can create your business plan for you.   Other Helpful Business Plan Articles & Templates

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What is a business plan?

1. write an executive summary, 2. describe your company, 3. state your business goals, 4. describe your products and services, 5. do your market research, 6. outline your marketing and sales plan, 7. perform a business financial analysis, 8. make financial projections, 9. summarize how your company operates, 10. add any additional information to an appendix, business plan tips and resources.

A business plan outlines your business’s financial goals and explains how you’ll achieve them over the next three to five years. Here’s a step-by-step guide to writing a business plan that will offer a strong, detailed road map for your business.

ZenBusiness

A business plan is a document that explains what your business does, how it makes money and who its customers are. Internally, writing a business plan should help you clarify your vision and organize your operations. Externally, you can share it with potential lenders and investors to show them you’re on the right track.

Business plans are living documents; it’s OK for them to change over time. Startups may update their business plans often as they figure out who their customers are and what products and services fit them best. Mature companies might only revisit their business plan every few years. Regardless of your business’s age, brush up this document before you apply for a business loan .

» Need help writing? Learn about the best business plan software .

This is your elevator pitch. It should include a mission statement, a brief description of the products or services your business offers and a broad summary of your financial growth plans.

Though the executive summary is the first thing your investors will read, it can be easier to write it last. That way, you can highlight information you’ve identified while writing other sections that go into more detail.

» MORE: How to write an executive summary in 6 steps

Next up is your company description. This should contain basic information like:

Your business’s registered name.

Address of your business location .

Names of key people in the business. Make sure to highlight unique skills or technical expertise among members of your team.

Your company description should also define your business structure — such as a sole proprietorship, partnership or corporation — and include the percent ownership that each owner has and the extent of each owner’s involvement in the company.

Lastly, write a little about the history of your company and the nature of your business now. This prepares the reader to learn about your goals in the next section.

» MORE: How to write a company overview for a business plan

The third part of a business plan is an objective statement. This section spells out what you’d like to accomplish, both in the near term and over the coming years.

If you’re looking for a business loan or outside investment, you can use this section to explain how the financing will help your business grow and how you plan to achieve those growth targets. The key is to provide a clear explanation of the opportunity your business presents to the lender.

For example, if your business is launching a second product line, you might explain how the loan will help your company launch that new product and how much you think sales will increase over the next three years as a result.

» MORE: How to write a successful business plan for a loan

In this section, go into detail about the products or services you offer or plan to offer.

You should include the following:

An explanation of how your product or service works.

The pricing model for your product or service.

The typical customers you serve.

Your supply chain and order fulfillment strategy.

You can also discuss current or pending trademarks and patents associated with your product or service.

Lenders and investors will want to know what sets your product apart from your competition. In your market analysis section , explain who your competitors are. Discuss what they do well, and point out what you can do better. If you’re serving a different or underserved market, explain that.

Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business.

Include details about your sales and distribution strategies, including the costs involved in selling each product .

» MORE: R e a d our complete guide to small business marketing

If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.

Accounting software may be able to generate these reports for you. It may also help you calculate metrics such as:

Net profit margin: the percentage of revenue you keep as net income.

Current ratio: the measurement of your liquidity and ability to repay debts.

Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year.

This is a great place to include charts and graphs that make it easy for those reading your plan to understand the financial health of your business.

This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.

Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan.

Accuracy is key, so carefully analyze your past financial statements before giving projections. Your goals may be aggressive, but they should also be realistic.

NerdWallet’s picks for setting up your business finances:

The best business checking accounts .

The best business credit cards .

The best accounting software .

Before the end of your business plan, summarize how your business is structured and outline each team’s responsibilities. This will help your readers understand who performs each of the functions you’ve described above — making and selling your products or services — and how much each of those functions cost.

If any of your employees have exceptional skills, you may want to include their resumes to help explain the competitive advantage they give you.

Finally, attach any supporting information or additional materials that you couldn’t fit in elsewhere. That might include:

Licenses and permits.

Equipment leases.

Bank statements.

Details of your personal and business credit history, if you’re seeking financing.

If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.

How much do you need?

with Fundera by NerdWallet

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

Here are some tips to write a detailed, convincing business plan:

Avoid over-optimism: If you’re applying for a business bank loan or professional investment, someone will be reading your business plan closely. Providing unreasonable sales estimates can hurt your chances of approval.

Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.

Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. The U.S. Small Business Administration’s Small Business Development Centers , which provide free business consulting and help with business plan development, can also be a resource.

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What is Accounting and Why it Matters For Your Business

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March 4, 2022

This article is Tax Professional approved

When you start a business, you’ve suddenly got all kinds of new responsibilities. One of the most important? Business accounting.

But what exactly is accounting? What value does it provide your business? And how much time is it going to require?

The good news is that with the right people, tools, and resources, accounting doesn’t have to be a black hole for your time.

I am the text that will be copied.

In this post, we’ll cover the basics of accounting, from budgets to other accounting functions. But if you want to jump straight to the how-to, you can download our free guide to small business accounting .

A simple definition of accounting

Accounting is how your business records, organizes, and understands its financial information.

You can think of accounting as a big machine that you put raw financial information into—records of all your business transactions, taxes, projections, etc.—that then tells you a story about the financial state of your business.

Accounting is how you get a clear picture of your financial position. It tells you whether or not you’re making a profit, what your cash flow is, what the current value of your company’s assets and liabilities is, and which parts of your business are actually making money.

Accounting vs. bookkeeping

Accounting and bookkeeping are both part of the same process: keeping your financial records in order. However, bookkeeping is more concerned with recording everyday financial transactions and operations, while accounting puts that financial data to good use through analysis, strategy, and tax planning.

The accounting cycle

Accounting begins with recording transactions. Business transactions—any activity or event that involves your business’s money—need to be put into your company’s general ledger . Recording business transactions this way is part of bookkeeping.

Bookkeeping is the first step of what accountants call the “ accounting cycle ”: a process designed to take in transaction data and spit out accurate and consistent financial reports.

The accounting cycle has six major steps:

• Analyze and record transactions. Collect any invoices, bank or credit statements, and receipts from business transactions.
• Post journal entries to the ledger. It’s time to take those documents and start making journal entries for your transactions. Journal entries include three components of a transaction: when it happened, what it was for, and how much it was. Some businesses use single-entry accounting where only the expense or revenue is entered. But more common is double-entry accounting, which records each transaction in two accounts: where money is coming from and where it’s going.
• Prepare an unadjusted trial balance. At the end of a reporting period, list all of your business’s accounts and figure out their balances.
• Prepare adjusting entries at the end of the period. When you need to update entries you’ve already made, you prepare adjusting entries. For example, if a client is late on paying an invoice and you offer a 5% discount to help them pay, you would enter the discount as an adjusting entry, as opposed to changing the entry you’ve already made.
• Prepare an adjusted trial balance . After entering in adjusting entries, you’re left with an adjusted trial balance. This information is now ready to be turned into financial statements.
• Prepare financial statements. Finally, all the information you’ve collected is converted into your financial statements. This final step includes summarizing all your financial information into succinct reports for easy review.

Accounting software takes your accounting information and automates most of these rules and processes, so we’re going to skip over the gritty details of the accounting cycle and talk about the end product: financial statements.

Suggested reading: A Beginner’s Guide to The Accounting Cycle

Financial statements

Financial statements are reports that summarize how your business is doing financially.

There are three main types of financial statements: the balance sheet , income statement , and cash flow statement . Together, they tell you where your business’s money is and how it got there.

Let’s say you’re a self-employed surfing instructor who bills clients for surfing lessons. Financial statements can tell you what your most profitable months are, how much money you’ve spent on supplies, and what the total value of your business is.

Accounting software can help you generate financial statements easily, or you can have a bookkeeper do it for you.

Suggested reading: The ROI of Hiring a Bookkeeper

Generally accepted accounting principles (GAAP)

Every company is different, but in order to make accurate financial comparisons between companies, we need a common language to describe each of them. That’s what generally accepted accounting principles (GAAP) are: a series of standards and procedures that accountants at all companies must adhere to when preparing financial statements.

A non-governmental body called the Financial Accounting Standards Board sets the GAAP. While there are no laws enforcing these standards, most lenders and business partners in the United States will require that you adhere to GAAP. If you’re in Canada, you’ll use a different system called International Financial Reporting Standards, or IFRS .

Cash vs. Accrual

You can do your business accounting on a cash or accrual basis. The difference between the two comes down to timing.

Cash basis is the most basic accounting. On a cash basis, you only record transactions when money changes hands. If you receive an invoice on the 10th but don’t pay it until the 15th, the transaction is recorded on the 15th.

With accrual basis, you record transactions twice: when they occur and when they’re paid. For the invoice above, you record the expense on the 10th and the payment on the 15th as two separate transactions.

The method you use depends on what you need from your business finances. Cash basis is simpler and easier to stay on top of, while accrual offers greater insights for more detail-oriented business owners.

Most small businesses have more basic accounting needs, which means cash basis is often the right fit.

Suggested reading: Cash Basis Accounting vs. Accrual Accounting

The different types of accounting

Financial accounting.

Every year, your company will generate financial statements that people outside of your company—people like investors, lenders, government agencies, auditors, potential buyers, etc.—can use to learn more about your business’s financial health and profitability.

Preparing the company’s annual financial statements this way is called financial accounting. If you’re looking to hire a financial accountant, start with looking into how much an accountant costs .

Managerial accounting

Managerial accounting (or management accounting) is similar to financial accounting, with two important exceptions:

• The statements produced by managerial accounting are for internal use only.
• They’re generated much more frequently—often on a quarterly or monthly basis.

If your business ever grows to the point where you need to hire an accountant full-time, most of their time will be taken up by managerial accounting. You’ll be paying them to produce reports that provide regular updates on the company’s financial health and help you interpret those reports.

This is somewhat similar to the work a financial analyst might do, although a financial analyst will also look at past and current trends in the larger economy, not just your business, to inform their recommendations.

Tax accounting

Tax accounting is designed to make sure that you don’t pay more income tax than you are legally required to by the IRS. An example of this is when your accountant provides you with recommendations for how to get the most out of your tax return.

Tax accounting is regulated by the Internal Revenue Service (IRS), and the IRS legally requires that your tax accounting adhere to the Internal Revenue Code (IRC).

Cost accounting

Whenever you’re trying to figure out how to increase your margin or deciding if raising prices is a good idea, you’re doing cost accounting.

Cost accounting involves analyzing all of the costs associated with producing an output (whether it be a physical product or service) in order to make better decisions about pricing, spending, and inventory.

Cost accounting is often a prerequisite of managerial accounting because managers use cost accounting reports to make better business decisions. It also feeds into financial accounting since costing data is often required when compiling a balance sheet.

Credit accounting

Credit accounting involves analyzing all of a company’s unpaid bills and liabilities to make sure that a company’s cash isn’t constantly tied up in paying for them.

Credit accounting can be one of the most difficult kinds of accounting to do well, in part because it’s a difficult subject to be critical about. Talking about debts can be a sensitive, but necessary, conversation.

Why accounting matters for your small business

Accounting helps you plan for growth.

Every great journey begins with a roadmap. When you’re planning your company’s growth, it’s essential to set goals. What should your profits look like one year from now? How about in five years?

Keeping up with your accounting helps you stay on top of your business finances. That information is essential to assess how quickly your business is developing and guide future decision making. Without accurate reporting, you won’t have the full financial picture.

Has your cost of goods sold increased? Are margins thinner? Are your growth goals reasonable? Without financial statements, you won’t have an objective answer.

Accounting is essential for securing a loan

Up-to-date financial statements are essential if you want to fund your small business with a loan.

For instance, suppose you want to apply for a Small Business Association (SBA) loan through one of the big banks. You’ll need to provide, on average, three years of financial statements, plus a one-year cash flow projection . It’s virtually impossible to deliver any of these if you don’t have an accounting system in place.

Suggested reading: What to Prepare When Applying for a Business Loan

You need accounting to attract investors or sell your business

You may not be planning to court investors or sell your business right now, but it’s a good idea to leave your options open. And the best way to do that is to put a proper accounting system in place now.

Potential investors, stakeholders, or buyers will expect accounting records vetted by a CPA (Certified Public Accountant) that prove your business is profitable and on track for growth.

Accounting helps you get paid

When a customer owes you money, it appears as Accounts Receivable (AR) on your balance sheet , which is generated automatically by your accounting software or manually by you or your accountant.

The balance sheet tells you how much of your AR you’ve already pocketed during the month and how much is still outstanding.

By referring to your balance sheet, you can track how effectively you’re collecting payment. Then you can put in place processes—like harder payment deadlines or better follow-up with clients—to make sure you get your hands on the money you’ve earned when you need it.

Accounting helps you stay on top of your debts

If your business owes debts to a variety of sources, like credit cards, loans, and accounts payable, you’ll have to jump into multiple accounts to check what you’re left owing.

The balance sheet shows everything you owe in one place. It also shows all your bank account balances so you can reference both at the same time. It’s the perfect report to review to make sure you have the cash available to tend to your debts and plan future payments.

Accounting keeps you out of jail (or at least saves you from fines)

As your business grows, it can be difficult to keep track of all your tax information reporting obligations. What’s more, if there are mistakes in your financial reports, you run the risk of misreporting your income. Either mistake could land you in hot water with the IRS and other regulators.

Solid accounting gives you complete, accurate financial records , which reduces your risk of breaking tax laws and the chance of an audit . And, when you have an accountant filing your taxes for you, you can be sure they’ll be done accurately and on time.

Accounting helps you pay the right amount of taxes (and not a dollar more)

If you don’t pay your tax bill in full, the IRS will fine you . But they won’t give you a gold star for paying too much.

You can tell you’re paying too much in taxes if your business consistently receives large tax refunds.

Remember: a tax refund isn’t free cash from the IRS. It’s money you’ve overpaid the government that you could’ve used to invest in your business instead.

Refunds are often the result of miscalculated quarterly estimated tax payments . To calculate quarterly estimated tax payments accurately, you need to predict your income. It’s almost impossible to do so without reliable financial records produced through accurate accounting.

Suggested reading: The Top 19 Self-Employment Tax Deductions

What an accountant does

An accountant does more than just year-end tax preparation. A skilled CPA will save you time by communicating your company’s financial state to you in clear language, while anticipating your financial needs.

Accounting professionals like CPAs or tax advisors can also provide you with knowledge and insight that are simply inaccessible to non-accountants. These experts can offer guidance on tax deductions you didn’t know you qualified for, tax rules you didn’t know you were breaking, and best practices picked up while working for other companies in your industry.

If those are tips your business can benefit from right now, it might be time to hire an accountant .

Suggested reading: How to Find an Accountant

Accounting solutions

Small business accounting software has made big advancements as more people take the entrepreneurial path.

The self-service software you use is now almost equal to the accounting software used in firms all over the world. There are now a wide array of options available—which one is best for you depends on your business’s accounting needs.

Freshbooks offers integrated invoicing that makes it simple to manage your accounts receivable and your accounting in one place. Automated bank reconciliation will import all transactions from your business bank accounts, but you will have to review and categorize each one. Their time-tracking functionality also makes it easy for freelancers who bill by the hour. Freshbooks is a good fit for someone generating a lot of invoices with a low number of transactions.

Intuit makes both Quickbooks and a payroll processor, and allows you to bundle both for one monthly cost. The payroll service automates payroll taxes, checks, and all year-end forms, but the accounting platform is mostly manual. While the tool is powerful and can help a skilled user navigate multiple aspects of running a business, it takes a good amount of know-how to get the most out of it.

If you prefer a completely hands-off approach to bookkeeping and accounting, Bench might be right for you. Connect your business bank accounts to have transactions automatically imported, categorized, and reviewed by your personal bookkeeper.

Communication is quick and reliable—the Bench platform allows you to send messages straight to your bookkeeper or set up a call to go over any financial questions that might come up. Our premium package even includes tax filing, which makes all accounting tasks completely automated. Learn more about how Bench can help .

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Module 16: Accounting and Finance

What is accounting, learning outcomes.

• Explain the role of accounting as a form of business communication
• Identify the users and uses of financial accounting
• Identify the users and uses of managerial accounting

Why Do We Need Financial Information?

Each business needs financial information to be able to answer questions such as the following:

• How much cash does the business need to pay its bills and employees?
• Is the business profitable, earning more income than it pays in expenses, or is it losing money and possibly in danger of closing?
• How much of a particular product or mixture of products should the business produce and sell?
• What is the cost of making the goods or providing the service?
• What are the business’s daily, monthly, and annual expenses?
• Do customers owe money to the business, and are they paying on time?
• How much money does the business owe to vendors (suppliers), banks, or other investors?

The video below gives a brief overview of many of the topics in this section. Before you review the video, consider these questions:

• What is accounting?
• What is business?
• Who are the three people that want to know the story of your business?
• What language of accounting does the government use?
• What language of accounting do investors use?
• What language of accounting do internal users employ?

You can view the transcript for “Accountant Jobs – What is Accounting ?” (opens in new window).

Accounting Is the Language of Business

Every business organization that has economic resources, such as money, machinery, and buildings, uses accounting information. For this reason, accounting is called the language of business. Accounting also serves as the language providing financial information about not-for-profit organizations such as governments, churches, charities, fraternities, and hospitals. However, in this module we will focus on accounting for business firms.

The accounting process provides financial data for a broad range of individuals whose objectives in studying the data vary widely. Bank officials, for example, may study a company’s financial statements to evaluate the company’s ability to repay a loan. Prospective investors may compare accounting data from several companies to decide which company represents the best investment. Accounting also supplies management with significant financial data useful for decision making.

Definition of Accounting

As the video explained, accounting is “the language of business.” The American Accounting Association defines accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information.”

This information is primarily financial—stated in money terms. Accounting, then, is a measurement and communication process used to report on the activities of profit-seeking business organizations. As a measurement and communication process for business, accounting supplies information that permits informed judgments and decisions by users of the data.

Internal and External Users

Users of accounting information are separated into two groups, internal and external. Internal users are the people within a business organization who use accounting information. For example, the human resource department needs to have information about how profitable the business is in order to set salaries and benefits. Likewise, production managers need to know if the business is doing well enough to afford to replace worn-out machinery or pay overtime to production workers.

External users are people outside the business entity that use accounting information. These external users include potential investors, the Internal Revenue Service, banks and finance companies, as well as local taxing authorities. Accounting information is valuable to both groups when it comes time to evaluate the financial consequences of various alternatives. Accountants reduce uncertainty by using professional judgment to quantify the future financial impact of taking action or delaying action. In short, although accounting information plays a significant role in reducing uncertainty within an organization, it also provides financial data for persons outside the company.

Financial accounting information appears in financial statements that are intended primarily for external use (although management also uses them for certain internal decisions). Stockholders and creditors are two of the outside parties who need financial accounting information. These outside parties decide on matters pertaining to the entire company, such as whether to increase or decrease their investment in a company or to extend credit to a company. Consequently, financial accounting information relates to the company as a whole, while managerial accounting focuses on the parts or segments of the company.

Because the external users of accounting information vary greatly, the way that financial information is presented must be consistent from year to year and company to company. In order to facilitate this, financial accountants adhere to set of rules called G enerally Accepted Accounting Principles (GAAP). GAAP are a uniform set of accounting rules that allow users to compare the financial statements issued by one company to those of another company in the same industry. These principles for financial reporting are issued by an independent non-profit agency created by the Securities Exchange Commission (SEC) called the Financial Accounting Standards Board (FASB) . The FASB’s mission is to “establish and improve financial accounting and reporting standards to provide useful information to investors and other users of financial reports and educate stakeholders on how to most effectively understand and implement those standards.” [1]

Tax accounting information includes financial accounting information, written and presented in the tax code of the government—namely the Internal Revenue Code. Tax accounting focuses on compliance with the tax code and presenting the profit and loss story of a business to minimize its tax liability.

Accounting is more than just reporting income to taxing authorities or providing revenue and expense information to potential investors. As the language of business, accounting is used for decision-making as well.

Managerial accounting information is for internal use and provides special information for the managers of a company. The information managers use may range from broad, long-range planning data to detailed explanations of why actual costs varied from cost estimates. The employees of a firm who perform these managerial accounting functions are often referred to as Cost Accountants. Managerial accounting is more concerned with forward looking projections and making decisions that will affect the future of the organization, than in the historical recording and compliance aspects of the financial accountants. There are no reporting guidelines such as GAAP; therefore, managerial accounting reports will vary widely in both scope and content. Also, much of the information generated by managerial accountants is confidential and not intended to be shared outside of the organization. Managerial accounting focus on range of topics from production planning to budgets for raw materials. When a company makes a decision to purchase a component part instead of manufacture it in house, that decision is based primarily on managerial accounting information. For this reason, many managerial accountants consider themselves to be providing “accounting information for decision making.”

Bookkeeping vs. Accounting

Accounting is often confused with bookkeeping. Bookkeeping is a mechanical process that records the routine economic activities of a business. Accounting includes bookkeeping, but it goes further to analyze and interpret financial information, prepare financial statements, conduct audits, design accounting systems, prepare special business and financial studies, prepare forecasts and budgets, and provide tax services.

Importance of Accounting

You probably will find that of all the business knowledge you have acquired or will learn, the study of accounting will be the most useful. Your financial and economic decisions as a student and consumer involve accounting information. When you file income tax returns, accounting information helps determine your taxes payable.

Understanding the discipline of accounting also can influence many of your future professional decisions. You cannot escape the effects of accounting information on your personal and professional life.

Practice Questions

• "FASB, Financial Accounting Standards Board." FAS 131 (as Issued). Accessed March 01, 2019. https://fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495 . ↵
• Revision and adaptation. Authored by : Linda Williams and Lumen Learning. License : CC BY: Attribution
• Practice Questions. Authored by : Nina Burokas. Provided by : Lumen Learning. License : CC BY: Attribution
• What Is Accounting from Financial Accounting. Authored by : Debbie Porter and Lumen Learning. Located at : https://courses.lumenlearning.com/finaccounting/chapter/chapter-1/ . License : CC BY: Attribution
• Accounting Defined from Financial Accounting. Authored by : Debbie Porter and Lumen Learning. Located at : https://courses.lumenlearning.com/finaccounting/chapter/accounting-defined/ . License : CC BY: Attribution
• Numbers and Finance. Authored by : Reynermedia. Located at : https://www.flickr.com/photos/89228431@N06/11322953266/ . License : CC BY: Attribution
• Accountant Jobs - What is Accounting?. Authored by : Accountant Jobs. Located at : https://youtu.be/Yj24JwZVd54 . License : All Rights Reserved . License Terms : Standard YouTube license

How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated May 7, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

Free business plan templates and examples

Kickstart your business plan writing with one of our free business plan templates or recommended tools.

Free business plan template

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Sample business plan library

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How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan
• Templates and examples

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What Is a Business Plan? Definition and Planning Essentials Explained

Posted february 21, 2022 by kody wirth.

What is a business plan? It’s the roadmap for your business. The outline of your goals, objectives, and the steps you’ll take to get there. It describes the structure of your organization, how it operates, as well as the financial expectations and actual performance. 

A business plan can help you explore ideas, successfully start a business, manage operations, and pursue growth. In short, a business plan is a lot of different things. It’s more than just a stack of paper and can be one of your most effective tools as a business owner. 

Let’s explore the basics of business planning, the structure of a traditional plan, your planning options, and how you can use your plan to succeed. 

What is a business plan?

A business plan is a document that explains how your business operates. It summarizes your business structure, objectives, milestones, and financial performance. Again, it’s a guide that helps you, and anyone else, better understand how your business will succeed.  

Why do you need a business plan?

The primary purpose of a business plan is to help you understand the direction of your business and the steps it will take to get there. Having a solid business plan can help you grow up to 30% faster and according to our own 2021 Small Business research working on a business plan increases confidence regarding business health—even in the midst of a crisis. 

These benefits are directly connected to how writing a business plan makes you more informed and better prepares you for entrepreneurship. It helps you reduce risk and avoid pursuing potentially poor ideas. You’ll also be able to more easily uncover your business’s potential. By regularly returning to your plan you can understand what parts of your strategy are working and those that are not.

That just scratches the surface for why having a plan is valuable. Check out our full write-up for fifteen more reasons why you need a business plan .  

What can you do with your plan?

So what can you do with a business plan once you’ve created it? It can be all too easy to write a plan and just let it be. Here are just a few ways you can leverage your plan to benefit your business.

Test an idea

Writing a plan isn’t just for those that are ready to start a business. It’s just as valuable for those that have an idea and want to determine if it’s actually possible or not. By writing a plan to explore the validity of an idea, you are working through the process of understanding what it would take to be successful. 

The market and competitive research alone can tell you a lot about your idea. Is the marketplace too crowded? Is the solution you have in mind not really needed? Add in the exploration of milestones, potential expenses, and the sales needed to attain profitability and you can paint a pretty clear picture of the potential of your business.

Document your strategy and goals

For those starting or managing a business understanding where you’re going and how you’re going to get there are vital. Writing your plan helps you do that. It ensures that you are considering all aspects of your business, know what milestones you need to hit, and can effectively make adjustments if that doesn’t happen. 

With a plan in place, you’ll have an idea of where you want your business to go as well as how you’ve performed in the past. This alone better prepares you to take on challenges, review what you’ve done before, and make the right adjustments.

Pursue funding

Even if you do not intend to pursue funding right away, having a business plan will prepare you for it. It will ensure that you have all of the information necessary to submit a loan application and pitch to investors. So, rather than scrambling to gather documentation and write a cohesive plan once it’s relevant, you can instead keep your plan up-to-date and attempt to attain funding. Just add a use of funds report to your financial plan and you’ll be ready to go.

The benefits of having a plan don’t stop there. You can then use your business plan to help you manage the funding you receive. You’ll not only be able to easily track and forecast how you’ll use your funds but easily report on how it’s been used. 

Better manage your business

A solid business plan isn’t meant to be something you do once and forget about. Instead, it should be a useful tool that you can regularly use to analyze performance, make strategic decisions, and anticipate future scenarios. It’s a document that you should regularly update and adjust as you go to better fit the actual state of your business.

Doing so makes it easier to understand what’s working and what’s not. It helps you understand if you’re truly reaching your goals or if you need to make further adjustments. Having your plan in place makes that process quicker, more informative, and leaves you with far more time to actually spend running your business.

What should your business plan include?

The content and structure of your business plan should include anything that will help you use it effectively. That being said, there are some key elements that you should cover and that investors will expect to see. 

Executive summary

The executive summary is a simple overview of your business and your overall plan. It should serve as a standalone document that provides enough detail for anyone—including yourself, team members, or investors—to fully understand your business strategy. Make sure to cover the problem you’re solving, a description of your product or service, your target market, organizational structure, a financial summary, and any necessary funding requirements.

This will be the first part of your plan but it’s easiest to write it after you’ve created your full plan.

Products & Services

When describing your products or services, you need to start by outlining the problem you’re solving and why what you offer is valuable. This is where you’ll also address current competition in the market and any competitive advantages your products or services bring to the table. Lastly, be sure to outline the steps or milestones that you’ll need to hit to successfully launch your business. If you’ve already hit some initial milestones, like taking pre-orders or early funding, be sure to include it here to further prove the validity of your business. 

Market analysis

A market analysis is a qualitative and quantitative assessment of the current market you’re entering or competing in. It helps you understand the overall state and potential of the industry, who your ideal customers are, the positioning of your competition, and how you intend to position your own business. This helps you better explore the long-term trends of the market, what challenges to expect, and how you will need to initially introduce and even price your products or services.

Check out our full guide for how to conduct a market analysis in just four easy steps .  

Marketing & sales

Here you detail how you intend to reach your target market. This includes your sales activities, general pricing plan, and the beginnings of your marketing strategy. If you have any branding elements, sample marketing campaigns, or messaging available—this is the place to add it. 

Additionally, it may be wise to include a SWOT analysis that demonstrates your business or specific product/service position. This will showcase how you intend to leverage sales and marketing channels to deal with competitive threats and take advantage of any opportunities.

Check out our full write-up to learn how to create a cohesive marketing strategy for your business. 

Organization & management

This section addresses the legal structure of your business, your current team, and any gaps that need to be filled. Depending on your business type and longevity, you’ll also need to include your location, ownership information, and business history. Basically, add any information that helps explain your organizational structure and how you operate. This section is particularly important for pitching to investors but should be included even if attempted funding is not in your immediate future.

Financial projections

Possibly the most important piece of your plan, your financials section is vital for showcasing the viability of your business. It also helps you establish a baseline to measure against and makes it easier to make ongoing strategic decisions as your business grows. This may seem complex on the surface, but it can be far easier than you think. 

Focus on building solid forecasts, keep your categories simple, and lean on assumptions. You can always return to this section to add more details and refine your financial statements as you operate. 

Here are the statements you should include in your financial plan:

• Sales and revenue projections
• Profit and loss statement
• Cash flow statement
• Balance sheet

The appendix is where you add additional detail, documentation, or extended notes that support the other sections of your plan. Don’t worry about adding this section at first and only add documentation that you think will be beneficial for anyone reading your plan.

Types of business plans explained

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. So, to get the most out of your plan, it’s best to find a format that suits your needs. Here are a few common business plan types worth considering. 

Traditional business plan

The tried-and-true traditional business plan is a formal document meant to be used for external purposes. Typically this is the type of plan you’ll need when applying for funding or pitching to investors. It can also be used when training or hiring employees, working with vendors, or any other situation where the full details of your business must be understood by another individual. 

This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix. We recommend only starting with this business plan format if you plan to immediately pursue funding and already have a solid handle on your business information. 

Business model canvas

The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea. 

The structure ditches a linear structure in favor of a cell-based template. It encourages you to build connections between every element of your business. It’s faster to write out and update, and much easier for you, your team, and anyone else to visualize your business operations. This is really best for those exploring their business idea for the first time, but keep in mind that it can be difficult to actually validate your idea this way as well as adapt it into a full plan.

One-page business plan

The true middle ground between the business model canvas and a traditional business plan is the one-page business plan. This format is a simplified version of the traditional plan that focuses on the core aspects of your business. It basically serves as a beefed-up pitch document and can be finished as quickly as the business model canvas.

By starting with a one-page plan, you give yourself a minimal document to build from. You’ll typically stick with bullet points and single sentences making it much easier to elaborate or expand sections into a longer-form business plan. This plan type is useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Now, the option that we here at LivePlan recommend is the Lean Plan . This is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance.

It holds all of the benefits of the single-page plan, including the potential to complete it in as little as 27-minutes . However, it’s even easier to convert into a full plan thanks to how heavily it’s tied to your financials. The overall goal of Lean Planning isn’t to just produce documents that you use once and shelve. Instead, the Lean Planning process helps you build a healthier company that thrives in times of growth and stable through times of crisis.

It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

Try the LivePlan Method for Lean Business Planning

Now that you know the basics of business planning, it’s time to get started. Again we recommend leveraging a Lean Plan for a faster, easier, and far more useful planning process. 

To get familiar with the Lean Plan format, you can download our free Lean Plan template . However, if you want to elevate your ability to create and use your lean plan even further, you may want to explore LivePlan. 

It features step-by-step guidance that ensures you cover everything necessary while reducing the time spent on formatting and presenting. You’ll also gain access to financial forecasting tools that propel you through the process. Finally, it will transform your plan into a management tool that will help you easily compare your forecasts to your actual results. 

Check out how LivePlan streamlines Lean Planning by downloading our Kickstart Your Business ebook .

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What Is an Asset? Types & Examples in Business Accounting

“Asset” is one of those words that has both a casual meaning and a specific definition. As part of everyday speech, asset is used favorably: “He’s a real asset to the community.” But in the business accounting sense, what do finance professionals mean by assets? In that context, an asset is something of value that a company expects will provide future benefit.

Assets are a key component of a company’s net worth. Lenders may also factor in a company’s assets when issuing loans. As a note, this article only addresses company-owned assets, not Right of Use assets (i.e. leased assets).

What Is an Asset?

The International Financial Reporting Standards (IFRS) defines an asset as “a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”

Put another way, assets are valuable because they can generate revenue or be converted into cash. They can be physical items, such as machinery, or intangible, such as intellectual property. Assets are reported on a company’s balance sheet, one of its key financial statements.

Assets vs. Liabilities

It’s critical to understand the difference between assets and liabilities. A company lists its assets, liabilities and equity on its balance sheet. Assets are resources a business either owns or controls that are expected to result in future economic value. Liabilities are what a company owes to others—for example, outstanding bills to suppliers, wages and benefits due to employees, as well as lease payments, mortgages, taxes and loans.

As a note, for public companies, leased property and equipment is listed on the balance sheet as both an asset (Right of Use) and a liability (the present value of future lease payments). Private companies will soon be required to do the same under U.S. GAAP .

Equity is the company’s net worth—the value that would be returned to the owners or shareholders if all assets were sold and all debts were settled. The relationship between assets, liabilities and equity is defined in the “accounting equation,” one of the basic principles of accounting :

Assets = Liabilities + Shareholders’ Equity

A business with more assets than liabilities is considered to have positive equity or shareholder value. If assets are less than liabilities, a company has negative equity or owes more than it is worth.

How Assets Work

Assets underpin a company’s ability to produce cash and grow. They are categorized based on specific characteristics, such as how easily they can be converted into cash (for company-owned assets) and their business purpose. They help accountants assess a company’s solvency and risk, and they assist lenders in determining whether to loan money to a company.

Types of Assets

Assets can be classified based on a number of criteria. For companies, the correct classification is critical to financial reporting and evaluating the business’s financial health. Typically, assets are valued by the expected future cash flows they represent in their current condition, according to the IFRS.

Personal: Soft personal assets, such as intellect, wit or a winning smile are different than personal financial assets, which contribute to an individual’s or household’s net worth. Examples of personal financial assets include cash and bank accounts, real estate, personal property such as furniture and vehicles, and investments such as stocks, mutual funds and retirement plans.

Business: Business assets deliver value to a company because they can be used to produce goods, fund operations and drive growth. Assets include physical items such as machinery, property, raw materials and inventory, and intangible items like patents, royalties and other intellectual property. Companies account for their assets on their balance sheet and categorize them based on a set of criteria that reflect their liquidity, or how readily they can be converted to cash, as well as whether they are physical or nonphysical assets and how they’re used to derive value.

Convertible: Convertibility, or liquidity , refers to how readily a business can convert an asset to cash. Assets that are likely to be turned into cash within one fiscal year or operating cycle are called current assets. While any asset can be converted into cash within 12 months if the price is sufficiently discounted, current assets only include assets that are expected to be converted into cash within 12 months.

Current assets include:

• Cash and cash equivalents, such as treasury bills and certificates of deposits.
• Marketable securities, such as stocks, bonds and other types of securities.
• Accounts receivable (AR), or sales to customers on credit that must be paid in the short term.
• Inventory , or the salable goods and materials a company has on hand.

Non-current assets are items that may not be readily converted to cash within a year. Examples of such assets include facilities and heavy equipment, which are listed on the balance sheet, typically under the heading property, plant and equipment (PP&E). Not all companies use the term “PP&E” on their balance sheet—they may instead list non-current assets under the heading fixed assets, long-term assets or simply non-current assets.

Tangible: Assets that have a physical existence are called tangible assets. They include cash, PP&E, inventory, raw materials or tools and office supplies. Tangible and intangible assets that are expected to provide an economic benefit beyond the current year, such as manufacturing equipment or buildings, are called or “long-lived” assets.

Intangible assets, as the name implies, lack a physical presence. Examples of intangible assets include right of use assets, patents, copyrights and trademarks, the value of which can sometimes be difficult to quantify.

Some tangible and intangible assets are referred to as wasting assets, or assets that decline in value over a limited life span. Tangible assets that qualify as wasting assets include manufacturing equipment and vehicles, which wear down or become obsolete over time. Intangible assets such as patents also qualify as wasting assets because they have a limited lifespan before they expire. To reflect wasting assets’ reduction in value over time, accountants reduce the assets’ value on the balance sheet by applying depreciation (for tangible assets) or amortization (for intangible assets).

Asset Usage: Finally, an asset can be classified as operating or non-operating based on how a company uses it. Operating assets are necessary to the primary operations of a business, such as cash, inventory, factories and patents. For a mining company, heavy equipment qualifies as an operating asset, as does a manufacturer’s production equipment.

Non-operating assets are not necessary for funding business operations but have other peripheral value. Examples include short-term investments, marketable securities, interest from deposits and administrative computers.

Examples of Assets

There are a wide variety of assets that businesses might have to perform at their highest level. They include:

• Cash and cash equivalents
• Accounts receivable (AR)
• Marketable securities
• Product designs
• Distribution rights
• Mineral rights
• Furniture and fixtures

Three Key Properties of Assets

For something to be considered an asset, it must have three properties:

• Ownership: First, a company must have ownership or control of the asset. This enables the company to convert the asset into cash or a cash equivalent and limits others’ control over the item. Note, right of use assets aren’t always convertible. Lease agreements often stipulate that the lease cannot be transferred or sold. The ownership property is important when considering an asset’s informal meaning versus its technical meaning. For example, companies often say their employees are their “greatest asset,” but in terms of accounting, companies don’t have true control over them—employees can easily leave for a new job.
• Economic value: Second, an asset must also provide economic value. All assets can be sold or otherwise converted to cash, except for some right of use assets such as lease agreements. In that way, assets can be used to support production and business growth.
• Resource: Finally, an asset must be a resource, which means it has or can be used to generate future economic value. This generally means that the asset can create future positive cash inflows.

Importance of Asset Classification

Properly classifying assets is important for company leaders to have an accurate picture of key financial metrics such as working capital and cash flow. Asset classification can also help a business qualify for loans—it gives the bank a clearer picture of the risk it’s taking on—work through bankruptcy and calculate tax liabilities.

Distinguishing operating assets from non-operating assets also helps organizations see how each asset type drives overall revenue.

Three Classifications of Assets

Business assets can be divided into three different categories based on their convertibility, physical existence and usage. What are these three types of assets?

• Convertibility describes how easily assets can be converted to cash.
• Physical existence describes whether an asset physically exists or is intangible.
• Usage describes the purpose of an object as it relates to business operations.

How Do Assets Play Into Accounting?

Understanding and properly valuing assets is integral to accurate accounting, business planning and financial reporting. And in the case of public companies, accurately accounting for leased assets is required by law. Classifying and valuing assets is critical to understanding a company’s cash flow and working capital. Accountants have to properly classify assets for purposes such as securing credit and obtaining insurance. They also have to properly value assets in order to calculate depreciation and amortization for tax purposes, and to enable the company to sell them if necessary.

Automated Asset Management Solutions

Keeping track of assets can be challenging given the number and diversity of assets a company may own. Automated asset management solutions offer a way to inventory, categorize and track assets in order to understand their value and plan operations efficiently. Asset management solutions can also help to track and plan the operational life cycle of an asset from acquisition to disposal, including operating and maintaining the asset. In addition, automated asset management solutions can help a company comply with shifting government or industry regulations.

Assets include almost everything owned and controlled by a company that’s of monetary value and will provide future benefit. Assets are classified by how quickly they can be converted to cash, whether they are tangible or intangible, and how a business uses them. Assets are a key component of a company’s net worth and an important factor in its overall financial health.

How can a business tell if something is an asset?

An asset is anything that has current or future economic value to a business. Essentially, for businesses, assets include everything controlled and owned by the company that’s currently valuable or could provide monetary benefit in the future. Examples include patents, machinery, and investments.

What are intangible assets?

Intangible assets are non-physical assets that provide value to a company but don’t exist in physical form. Non-physical assets include things like goodwill, reputation,patents and trademarks, royalties, brand equity, and contractual obligations.

Does labor count as an asset?

Labor is not an asset. In most cases, labor is an expense. Wages payable count as a current liability to hold salaries that are due to employees at the end of the month or whenever payday is.

What’s the difference between current and fixed assets?

Current assets are generally used up within a year and are therefore short-term. They are involved in the daily processes of running a business. Fixed assets are those that have a longer lifespan – generally over one year.

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What is Accounting? Definition, Objectives, Advantages, Limitation, Process

• Post last modified: 22 February 2022
• Reading time: 35 mins read
• Post category: Finance

What is Accounting?

Accounting is the art of recording, classifying, summarising and analyzing business transactions and interpreting the results thereof. In accounting, only those transactions and events are recorded which can be measured in terms of money.

The basic objective of accounting is to provide the desired information to the owner as well as to all other interested parties i.e. investors, creditors, employees, financial institutions, government etc.

In short, we can say that accounting is the language of business by which all the financial and other information are communicated to various interested parties.

Table of Content

• 1 What is Accounting?
• 2 Introduction to Accounting
• 3 Definition of Accounting
• 4 Characteristics of Accounting
• 5.1 Financial Accounting
• 5.2 Management Accounting
• 5.3 Cost Accounting
• 5.4 Tax Accounting
• 5.5 Social Accounting
• 5.6 Human Resource Accounting
• 5.7 National Accounting
• 5.8 Green Accounting
• 5.9 Creative Accounting
• 5.10 Forensic Accounting
• 6.1 Stewardship functions
• 6.2 Managerial functions
• 6.3 Statutory compliance function
• 7.1 Reliability
• 7.2 Understand ability
• 7.3 Comparability
• 8.1 Single Entry
• 8.2 Double Entry System
• 9 Concept of Accounting Process
• 10.1 Maintaining systematic records
• 10.2 Communicating the financial results
• 10.3 Meeting legal needs
• 10.4 Stewardship
• 10.5 Fixing responsibility
• 11.1 Owners/Shareholders
• 11.2 Managers
• 11.3 Prospective Investors
• 11.4 Creditors, Bankers and other Lending Institutions
• 11.5 Government
• 11.6 Employees
• 11.7 Customers
• 12.1 Helpful in the Determination of Financial Results
• 12.2 Comparison of Results
• 12.3 Assistance to Management
• 12.4 Helpful in Assessing the Tax Liability
• 12.5 Helpful in the Case of Insolvency
• 12.6 Provides Information to Interested Parties
• 12.7 Raising of Funds Become Easy
• 13.1 Recording of Monetary Items Only
• 13.2 Effect of Inflation
• 13.3 Accounting Information May be Biased
• 13.4 Conflict Between Accounting Principles
• 14.1 Identification of Transaction
• 14.2 Recording the Transaction
• 14.3 Classifying
• 14.4 Summarising
• 14.5 Presentation of Financial Information

Introduction to Accounting

Accounting is a business language which explains the various kinds of transactions during a given period of time. Accounting is used by business entities for keeping records of their money or financial transactions.

A businessman who invested money in his business would like to know whether his business is making a profit or incurring a loss, the position of his assets and liabilities and whether his capital in the business has increased or decreased during a particular period. The main object of a business house is to earn profit. Accounting is the medium of recording business activities and it is considered a language of business.

To find out the results of a business, the information relating to the cost of the products and revenues from the products is collected. Then the costs and revenues are compared to find out the profit or loss of the business. If volume of sales of the products is high and the number of transactions of the business is very high, it is impossible to keep all these transactions in the mind of a businessman.

Thus a need of recording of all these business transactions rose. The recording of business transactions or activities is done through a process of accounting.

Definition of Accounting

The Accounting definition is given by the American Institute of Certified Public Accountants (‘AICPA’) clearly brings out the meaning of accounting. According to it, accounting is “ the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof ” .

As per Robert N. Anthony , “ Accounting system is a means of collecting, summarizing, analyzing and reporting, in monetary terms, information about the business”.

As per Smith and Ashburne , “ Accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating the results to persons who must take decisions or form judgment.”

As per R.N. Anthony “Nearly every business enterprise has accounting system, it is a means of collecting, summarising and reporting in monetary terms, information about business.”

Characteristics of Accounting

Following are the characteristics of accounting :

• Accounting is an art which it helps us in attaining our aim of ascertaining the financial results, that is, operating profit and financial position. Analysis and interpretation of financial data require special knowledge, experience and judgement.
• In accounting the financial transactions are recorded in the Journal. With the help of Journal, the recorded data are classified into ledger under appropriate heads. Then with the help of ledger the trial balance and financial statements are prepared.
• It records only those transactions and events which are of financial character: If a transaction has no financial character then it will not be measured in terms of money and not recorded.
• It records transactions in terms of money. All transactions are recorded in terms of common measure i.e. money.
• On account of recording of business transactions in a systematic manner, it is also called a science. First the business transactions are recorded in the primary books i.e. Journal, for classification the ledger is prepared. With the help of ledger the Trial Balance, Profit and Loss account and Balance Sheet is prepared. Profit and Loss account is prepared after a period to find the result of the business and Balance Sheet to know the financial position of the business

Divisions of Accounting

Accountants tend to specialize in various types of accounting work and this has resulted in the development of different branches of accounting. Some of the divisions of accounting are given as:

Financial Accounting

Management Accounting

Cost Accounting

Tax accounting, social accounting, human resource accounting, national accounting, green accounting, creative accounting, forensic accounting.

Accounting designed or meant for outsiders is known as financial accounting. It is concerned with the recording of business transactions and the periodic preparation of income statement, balance sheets and cash flow statement from such records.

It is concerned with the interpretation of accounting information to guide the management for future planning, decision-making, control, etc. Management accounting, therefore, serves the information needs of the insiders, e.g., owners, managers and employees.

It has been developed to ascertain the costs incurred for carrying out various business activities and to help the management to exercise strict cost control.

This branch of accounting has grown in response to the difficult tax laws such as relating to income tax, sales tax, excise duties, customs duties, etc. An accountant is required to be fully aware of various tax legislations.

This branch of accounting is also known as social reporting or social responsibility accounting. It discloses the social benefits created and the costs incurred by the enterprise. Social benefits include such facilities as medical, housing, education, canteen, provident fund and so on while the social costs may include such matters as extra hours worked by employees without payment, environment pollution, unreasonable terminations, etc.

It is concerned with the human resources of an enterprise. Accounting methods are applied to evaluate the human resources in money terms so that the society might judge the total work of the business enterprises including, its non-human assets.

It is, therefore, accounting for the people of the organisation. Unfortunately, no objectively verifiable method has been developed for universal application.

The accounting for the resources of the nation as a whole. It is generally not concerned with the accounting of individual business entities and is not based on generally accepted accounting principles. It has been developed by economists and statisticians.

The concept of green accounting is related to the calculation of national income in which standard measures of income and output are Gross National Product (GNP) Gross Domestic Product (GDP) Gross National Income (GNP) etc.

In simple words, Green Accounting is a kind of accounting that tries to take into consideration the environmental costs in the calculation of the operating income of an enterprise. Green Accounting discloses or emphasizes more clearly about the quality of economic growth in terms of sustainable development.

It is the primary duty of the persons in accounting professions, the accountants, to report a true and fair view of the financial statements, namely: the profit and loss account and the balance sheet.

Creative accounting is nothing but the manipulation of the operating results and financial position of the company, of course, within the confines (limits) of the accounting standards.

Financial scams and frauds in accounting practices have drawn attention of the users of the accounting information supplied by business enterprises. Even the well-governed multinational companies like Enron and other World companies have not escaped from the fraudulent accounting practices.

Auditors who are also qualified accountants have the increased responsibility of detecting the frauds and scams in the corporate world

Functions of Accounting

As mentioned earlier, accounting information is used by different stakeholders, especially the management, to decide the future course of action for the organisation.

There are three main functions of accounting, which are explained as follows:

Stewardship functions

Managerial functions, statutory compliance function.

These functions of accounting include the following:

• Recording, classifying and summarising the financial transactions of an organisation
• Analysing the financial data
• Representing the financial position of the organisation by displaying various results such as net profit, credit, debit, loan, etc.
• Communicating the financial information to the interested stakeholders.
• Formulating a financial policy
• Conducting planning
• Preparing budget and controlling costs
• Preventing financial errors and frauds

These functions include the following:

• Submitting financial statements such as profit and loss account, balance sheet, etc. to regulatory bodies as a legal and regulatory requirement
• Providing the bases for filing returns for both direct and in- direct taxes

Qualitative Characteristics of Accounting Information

Relevance: Financial information obtained through financial statements should be according to the objectives of the organization. The objective-oriented information helps the investors, managers and creditors to take decisions about the business. The information should be given according to the priorities and needs of each and every interested party.

Reliability

Understand ability, comparability.

Financial Information should be based on facts which can easily be verified. Financial information can be verifiable if it is based on original source documents. Source documents include cash memo, purchase invoices, sales invoices, property transfer papers and written agreements, etc.

Financial information should be presented in a simple and easy way so that the users i.e. investors, debenture holders, employees and government officials can understand it easily. It should be simple enough even for a person who is not aware about the rules and terms used in accounting. Some explanatory notes should be given so as to make the information more understandable.

The financial statements must show corresponding information for the preceding year(s) so that the users may be able to compare the financial performance, position and cash flows of different years. The measurement and display of the net financial effects of similar type of transactions must be treated in a consistent form.

Methods of Accounting

Single entry.

It is an incomplete system of recording business transactions. The business organization maintains only cash book and personal accounts of debtors and creditors. So the complete recording of transactions cannot be made and trail balance cannot be prepared.

Double Entry System

The double entry system is based on scientific principles and is, therefore, used by most of business houses. The system recognizes the fact that every transaction has two aspects and records both aspects of each and every transaction.

Under this system, in every transaction an account is debited and other account is credited. The crux of accountancy lies in finding out which of the two accounts are affected by a particular transaction and out of these two accounts which account is to be debited and which account is to be credited.

Concept of Accounting Process

Accounting process is the complete sequence of accounting procedures which begin with the recording of business transactions from source documents in the Journal or in subsidiary books, as the case may be, and end with the preparation of two basic financial statements, namely Income Statement (or profit and loss account) and Balance Sheet. In the case of Limited Liability Companies, the Cash Flow Statement is also prepared.

The essential steps in the Accounting Process are:

• To enter the transactions in the source documents such as purchase invoice, sales invoice, cash receipts, bank pay-in-slips etc.
• To record or enter the transactions in the Journal or in subsidiary books, as the case may be.
• Classifying the transactions (i.e., the entries found in the Journal or Subsidiary Books) to post or transfer those entries in the appropriate accounts in the ledger.
• To enter the adjustments, if any, in the Journal.
• To balance the various accounts in the ledger to prepare the trial balance in order to check the arithmetical accuracy of the ledger accounts.
• To prepare the final accounts or final statements in the form of trading and profit and loss account (i.e., income statement) and Balance Sheet from the Trial Balance, at the end of the accounting period to ascertain profit or loss of the business for the accounting period and the financial position of the business at the end of the accounting period.

Objectives of Accounting

Following are the objectives of accounting :

Maintaining systematic records

Communicating the financial results, meeting legal needs, stewardship, fixing responsibility.

Business transactions are properly recorded, classified under appropriate accounts and summarized into financial statement.

Accounting is used to communicate financial information in respect of net profits (or loss), assets, liabilities etc., to the interested parties.

The provisions of various laws such as Companies Act, Income Tax and GST Acts require the submission of various statements, i.e., annual account, income tax returns and so on.

Accounting assists the management in the task of planning, control and coordination of business activities.

In the case of limited companies, the management is entrusted with the resources of the enterprise. The managers are expected to act true trustees of the funds and the accounting helps them to achieve the same.

Accounting helps in the computation of the profits of different departments of an enterprise which help in fixing the responsibility of departmental heads.

Users of Accounting Information

Owners/shareholders, prospective investors, creditors, bankers and other lending institutions.

The primary aim of accounting is to provide necessary information to the owners related to business.

In large business organizations and in corporations, there is a separation of ownership and management functions. The management of such business are more concerned with the accounting information because they are answerable to the owners.

The person who is contemplating an investment in a business will like to know about its profitability and financial position. They derive this information from the accounting reports of the concern.

Trade creditors, bankers and other lending institutions would like to be satisfied that they will be paid on time. The financial statements help them in judging such position. Banks and other lending agencies rely heavily upon accounting statements for determining the acceptability of a loan application.

The Government is interested in the financial statements of business enterprise on account of taxation, labour and corporate laws.

Employees are interested in financial statements on accounts because their wage increase and payment of bonus depend on the size of the profit earned.

Customers may also have either short-term or long-term interest in the reporting entity or long-term interest in the reporting entity and they may be satisfied with the profitability, liquidity and solvency position.

Advantages of Accounting

Following are the advantages of accounting :

Helpful in the Determination of Financial Results

Comparison of results, assistance to management, helpful in assessing the tax liability, helpful in the case of insolvency, provides information to interested parties, raising of funds become easy.

Accounting is very useful in the determination of the profit and loss of a business and showing the financial position of the business.

Accounting information when properly recorded can be used to compare the results of one year with those of earlier years so that the significant changes can be analyzed.

The accounting information helps the management to plan its future activities by preparing budgets in respect of sales, production, expenses, cash, etc. Accounting helps in the coordination of various activities in different departments by providing financial details of each department.

The managerial control is achieved by analyzing in money terms the departures from the planned activities and by taking corrective measures to improve the situation in future.

Generally, a businessman has to pay corporate tax, VAT and excise duty, etc. Therefore, it is necessary that proper accounts should be maintained to compute the tax liability of the business.

Sometimes the businessman becomes insolvent. If he has properly maintained the accounts, he will not face the problems in explaining few things in court.

Interested parties like owners, creditors, management, employees, customers, government, etc. are interested in accounting information.

It helps in raising funds from investors or financial institutions by promising investors a fixed claim (interest payments) on the cash flows generated by the assets, with a limited or no role in the day-to-day running of the business.

Limitation of Accounting

Following are the limitation of accounting :

Recording of Monetary Items Only

Effect of inflation, accounting information may be biased, conflict between accounting principles.

In accounting, only those transactions, which have monetary value, are recorded. And those transactions which do not have financial value whether those are important in business are not recorded in the accounting.

In accounting, the transactions are recorded at the historical cost. Accordingly, the assets of the business are shown at cost in the balance sheet. Thus the balance sheet prepared on the basis of historical cost ignores the price-level changes (inflation). In this way, the balance sheet of the business does not present the true and fair picture of the business.

Accounting information is not without personal influence or bias of the accountant. In measuring income, accountant has a choice between different methods of inventory valuation, deprecation methods, treatment of capital and revenue items etc. Hence, due to the lack of objectivity income arrived at may not be correct in certain cases.

In accounting, one accounting principle conflicts another. For instance, inventory should be valued on the basis of ‘least of the cost and market price’ as per the principle of conservatism.

Accounting Process

Accounting process involves the following steps or stages:

Identification of Transaction

Recording the transaction, classifying, summarising, presentation of financial information.

In accounting, only business transactions are recorded. A transaction is an event which can be expressed in terms of money and which brings a change in the financial position of a business enterprise. An event is an incident or a happening which may or may not being any change in the financial position of a business enterprise.

Therefore, all transactions are events but all events are not transactions. A transaction is a complete action, to an expected or possible future action. In every transaction, there is a movement of value from one source to another.

For example, when goods are purchased for cash, there is a movement of goods from the seller to the buyer and a movement of cash from buyer to the seller. Transactions may be external (between a business entity and a second party, e.g., goods sold on credit to Hari or internal (do not involve a second party, e.g., depreciation charged on the machinery).

Journal is the first book of original entry in which all transactions are recorded event-wise and date-wise and presents a historical record of all monetary transactions. It may further be divided into sub-journals as well which are also known subsidiary books.

Accounting is the art of classifying business transactions. Classification means statement setting out for a period where all the similar transactions relating to a person, a thing, expense, or any other subject are groped together under appropriate heads of accounts.

Summarising is the art of making the activities of the business enterprise as classified in the ledger for the use of management or other user groups i.e. Sundry debtors, Sundry creditors etc. Summarisation helps in the preparation of Profit and Loss Accounts and Balance sheet for a particular fiscal year.

Analysis and Interpretation The financial information or data as recorded in the books of an account must further be analyzed and interpreted so to draw useful conclusions. Thus, analysis of accounting information will help the management to assess in the performance of the business operations and forming future plans also.

The end users of accounting statements must be benefited from analysis and interpretation of data as some of them are the ‘stock holders’ and other one the ‘stakeholders’. Comparison of past and present statements and reports, use of ratio analysis and trend analysis are the different tools of analysis and interpretation.

From the above discussion, one can conclude that accounting is a art which starts and includes steps right from recording of business transactions of monetary character to the communicating or reporting the results thereof to the various interested parties.

( Click on Topic to Read )

• 4 Accounting Conventions
• What Is Accounting Standards?
• What is Accounting Equation?
• What is Source Documents?
• What i s Accounting Cycle?
• Classification Of Accounts
• 3 Branches of Accounting
• What is Double Entry System of Accounting?
• What i s Journal In Accounting?
• What is Ledger In Accounting?
• What is Posting In Accounting?
• What is Trial Balance?
• What is Accounting Errors?
• What is Depreciation In Accounting?
• What is Financial Statements?
• What is Departmental Accounts?
• What is Branch Accounting?
• Accounting for Dependent Branches
• Independent Branch Accounting
• Accounting for Foreign Branches

Corporate Finance

• What is Corporate Finance?
• Long Term Financing
• What is Inventory Management?
• External Sources Of Finance
• Short Term Financing
• Time Value Of Money
• Capital Assets Pricing Model (CAPM)
• What is Capital Rationing?
• What is Capital Budgeting?
• What is Cost o f Capital?
• What is Dividend?
• Dividend Theories
• What is Dividend Policy?
• What is Cash Management?
• Types of Derivatives Contract
• What is Inventory Control?
• What is Consumer Financing?
• What is Management Accounting?
• What is Financial Statement Analysis?
• Types of Accounting
• What is a Management Accountant?
• Inventory Control Techniques
• Determination Of Working Capital
• What is Cash Flow Statement?
• Determination of Working Capital

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What Is Managerial Accounting?

• How It Works
• Managerial vs. Financial Accounting

Types of Managerial Accounting

The bottom line.

• Corporate Finance

Managerial Accounting Meaning, Pillars, and Types

Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization's goals.

Managerial accounting differs from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions.

Key Takeaways

• Managerial accounting involves the presentation of financial information for internal purposes to be used by management in making key business decisions.
• Techniques used by managerial accountants are not dictated by accounting standards, unlike financial accounting.
• The presentation of managerial accounting data can be modified to meet the specific needs of its end-user.
• Managerial accounting encompasses many facets of accounting, including product costing, budgeting, forecasting, and various financial analysis.
• This differs from financial accounting, which produces and disseminates official financial statements for public consumption that conform to prevailing accounting standards.

Investopedia / Jessica Olah

How Managerial Accounting Works

Managerial accounting aims to improve the quality of information delivered to management about business operation metrics. Managerial accountants use information relating to the cost and sales revenue of goods and services generated by the company. Cost accounting is a large subset of managerial accounting that specifically focuses on capturing a company's total costs of production by assessing the variable costs of each step of production, as well as fixed costs. It allows businesses to identify and reduce unnecessary spending and maximize profits.

The pillars of managerial accounting are planning, decision-making, and controlling. In addition, forecasting and performance tracking are key components. Through this focus, managerial accountants provide information that aims to help companies and departments in these key areas.

Managerial Accounting vs. Financial Accounting

The key difference between managerial accounting and financial accounting relates to the intended users of the information. Managerial accounting information is aimed at helping managers within the organization make well-informed business decisions, while financial accounting is aimed at providing financial information to parties outside the organization.

Financial accounting must conform to certain standards, such as generally accepted accounting principles (GAAP). All publicly held companies are required to complete their financial statements in accordance with GAAP as a requisite for maintaining their publicly traded status. Most other companies in the U.S. conform to GAAP in order to meet debt covenants often required by financial institutions offering lines of credit.

Because managerial accounting is not for external users, it can be modified to meet the needs of its intended users. This may vary considerably by company or even by department within a company. For example, managers in the production department may want to see their financial information displayed as a percentage of units produced in the period. The HR department manager may be interested in seeing a graph of salaries by employee over a period of time. Managerial accounting is able to meet the needs of both departments by offering information in whatever format is most beneficial to that specific need.

Managerial accounting does not need to follow GAAP standards because it is used for internal purposes and not for external reports.

Product Costing and Valuation

Product costing deals with determining the total costs involved in the production of a good or service. Costs may be broken down into subcategories, such as variable, fixed, direct, or indirect costs. Cost accounting is used to measure and identify those costs, in addition to assigning overhead to each type of product created by the company.

Managerial accountants calculate and allocate overhead charges to assess the full expense related to the production of a good. The overhead expenses may be allocated based on the number of goods produced or other activity drivers related to production, such as the square footage of the facility. In conjunction with overhead costs, managerial accountants use direct costs to properly value the cost of goods sold and inventory that may be in different stages of production.

Marginal costing (sometimes called  cost-volume-profit analysis ) is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. The contribution margin of a specific product is its impact on the overall profit of the company. Margin analysis flows into break-even analysis, which involves calculating the contribution margin on the sales mix to determine the unit volume at which the business’s gross sales equals total expenses. Break-even point analysis is useful for determining price points for products and services.

Cash Flow Analysis

Managerial accountants perform cash flow analysis in order to determine the cash impact of business decisions. Most companies record their financial information on the accrual basis of accounting. Although accrual accounting provides a more accurate picture of a company's true financial position, it also makes it harder to see the true cash impact of a single financial transaction. A managerial accountant may implement working capital management strategies in order to optimize cash flow and ensure the company has enough liquid assets to cover short-term obligations.

When a managerial accountant performs cash flow analysis, he will consider the cash inflow or outflow generated as a result of a specific business decision. For example, if a department manager is considering purchasing a company vehicle, he may have the option to either buy the vehicle outright or get a loan. A managerial accountant may run different scenarios by the department manager depicting the cash outlay required to purchase outright upfront versus the cash outlay over time with a loan at various interest rates .

Inventory Turnover Analysis

Inventory turnover is a calculation of how many times a company has sold and replaced inventory in a given time period. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory. A managerial accountant may identify the carrying cost of inventory, which is the amount of expense a company incurs to store unsold items.

If the company is carrying an excessive amount of inventory, there could be efficiency improvements made to reduce storage costs and free up cash flow for other business purposes.

Constraint Analysis

Managerial accounting also involves reviewing the constraints within a production line or sales process. Managerial accountants help determine where bottlenecks occur and calculate the impact of these constraints on revenue, profit, and cash flow. Managers then can use this information to implement changes and improve efficiencies in the production or sales process.

Financial Leverage Metrics

Financial leverage refers to a company's use of borrowed capital in order to acquire assets and increase its return on investments. Through balance sheet analysis, managerial accountants can provide management with the tools they need to study the company's debt and equity mix in order to put leverage to its most optimal use.

Performance measures such as return on equity, debt to equity, and return on invested capital help management identify key information about borrowed capital, prior to relaying these statistics to outside sources. It is important for management to review ratios and statistics regularly to be able to appropriately answer questions from its board of directors, investors, and creditors.

Accounts Receivable (AR) Management

Appropriately managing accounts receivable (AR) can have positive effects on a company's bottom line. An accounts receivable aging report categorizes AR invoices by the length of time they have been outstanding. For example, an AR aging report may list all outstanding receivables less than 30 days, 30 to 60 days, 60 to 90 days, and 90+ days.

Through a review of outstanding receivables, managerial accountants can indicate to appropriate department managers if certain customers are becoming credit risks. If a customer routinely pays late, management may reconsider doing any future business on credit with that customer.

Budgeting, Trend Analysis, and Forecasting

Budgets are extensively used as a quantitative expression of the company's plan of operation. Managerial accountants utilize performance reports to note deviations of actual results from budgets. The positive or negative deviations from a budget also referred to as budget-to-actual variances, are analyzed in order to make appropriate changes going forward.

Managerial accountants analyze and relay information related to capital expenditure decisions. This includes the use of standard capital budgeting metrics, such as net present value and internal rate of return , to assist decision-makers on whether to embark on capital-intensive projects or purchases. Managerial accounting involves examining proposals, deciding if the products or services are needed, and finding the appropriate way to finance the purchase. It also outlines payback periods so management is able to anticipate future economic benefits.

Managerial accounting also involves reviewing the trendline for certain expenses and investigating unusual variances or deviations. It is important to review this information regularly because expenses that vary considerably from what is typically expected are commonly questioned during external financial audits. This field of accounting also utilizes previous period information to calculate and project future financial information. This may include the use of historical pricing, sales volumes, geographical locations, customer tendencies, or financial information.

Is Financial Accounting the Same As Managerial Accounting?

While they often perform similar tasks, financial accounting is the process of preparing and presenting official quarterly or annual financial information for external use. Such reports may include audited financial statements that help investors and analysts decide whether to buy or sell shares of the company.

Managerial accounting, in contrast, uses pro forma measures that describe and measure the financial information tracked internally by corporate managers.

Do Managerial Accountants Need to Follow GAAP?

No, managerial accountants are not legally obligated to follow GAAP because the documents they produce are not regulated by GAAP. These documents focus on internal company metrics that focus on company performance.

What Types of Information Does Managerial Accounting Compute?

Managerial accounting is useful for companies to track and craft spending budgets, reduce costs, project sales figures, and manage cash flows, among other tasks.

Managerial accounting is important for drafting accurate and complete financial statements for internal use and crafting a company's long-term strategy. Without good managerial accounting, corporate leadership can struggle to make appropriate choices or misunderstand the firm's true financial picture. Because managerial accounting documents are not official, they do not have to conform to GAAP and can be used internally for a variety of purposes.

CFA Institute. " US GAAP: Generally Accepted Accounting Principles ."

University of Nevada, Reno. " Financial Accounting vs. Managerial Accounting: What’s the Difference? "

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