How to Do Accounting for Your Startup
A startup’s financial health is heavily dependent upon its capacity for organizing its funds. This process, known as accounting, keeps track of money coming in and going out of a business.
Information collected during this process is used to make strategic decisions that will determine whether a startup succeeds or fails. This skill set is essential for any aspiring entrepreneur.
Accounts Payable
Accounting is an integral component of startup businesses, yet it can be challenging to keep track of at first. Fortunately, there are several methods you and your employees can use to make it simpler for yourself and them to do their jobs correctly.
1. Establish accounting procedures from the start – Even if your startup is just getting off the ground, it’s essential to have reliable accounts payable filing systems in place. Doing this will help ensure you stay on top of debt payments and maintain healthy vendor relationships.
2. Maintain Accurate Records – To effectively manage a startup’s accounting processes, companies should keep paperwork that reflects income and expenses for at least three years, or longer in some cases. This helps you monitor your company’s finances and identify areas where you might be overspending or under-estimating spending.
3. Budget Your Expenses – Planning is a key element of starting a new business. You should project revenue and expenses, as well as profits and burn – or what remains after spending all cash. This way, you can budget accordingly.
4. Establish an Efficient Payment System – The most effective way to avoid cash flow issues is having efficient payment procedures in place. These should include a system for paying invoices quickly and accurately, as well as tracking unpaid balances so you can pursue repayment.
5. Be Aware of Your Liabilities – Many businesses struggle to secure loans or funding from banks or get approved for small business credit cards because they have not fully established an accurate account of their assets and obligations. This can lead to inefficiencies, late fees and penalties, or lack of clarity for potential investors.
6. Use accounting to forecast future cash flow – A sound accounting system will give you insight into how much money your startup is bringing in, spending and earning – all essential for planning its operations.
7. Stay abreast of tax law – The IRS wants to check on your business’ books and accounting records, so make sure they remain in excellent condition.
Accounts Receivable
Accounts receivable are the money customers owe a business for goods or services. This category appears on a company’s balance sheet as either an asset or liability depending on the accounting method employed. Most businesses opt to use accrual accounting methods when it comes to this type of revenue; this enables them to include accounts receivable as soon as a contract is signed instead of waiting until after payment from the customer has been made.
As a startup, it’s essential that your accounting is accurate and up-to-date. This is particularly crucial if you plan on applying for loans or providing financial information to investors. A reliable accounting system can save you a lot of hassle while keeping your business finances in order.
To maximize profitability and ensure the future success of your startup, it is essential to regularly review its financial statements. These reports give a complete picture of all cash flow, income, expenses and profits for you to review. By doing this, you can make informed decisions about how best to increase profitability while guaranteeing its long-term viability.
Record all receipts you receive. Doing this is an excellent way to demonstrate to tax authorities that your records are accurate and up-to-date, especially if applying for tax relief.
When managing accounting for your startup business, it’s essential to stay abreast of the rules and regulations applicable in your sector. These guidelines can protect your company from legal issues as well as potential tax penalties.
Tracking accounts receivable is essential for startups, as this is where their cash flows come from. Not collecting payments on time can have serious repercussions for your venture.
Establishing a standard payment timeline for your company to adhere to can be beneficial, as this gives your business flexibility while guaranteeing timely collection of funds. Furthermore, this increases efficiency by decreasing the number of invoices sent out to customers who don’t pay on time.
Financial Statements
Financial statements provide an overview of your startup’s revenue, expenses and cash flow. They give you insight into the financial resources at your disposal so you can make informed decisions regarding their management. Investors also use these reports to assess the success of your venture.
Three basic financial statements exist: the profit and loss statement (P&L), balance sheet, and cash flow statement. While they each provide slightly different information, they all paint an accurate portrait of your startup’s financial health.
The profit and loss statement is a financial report that displays how profitable your startup has been over time. It separates revenues from expenses to show how much net income was generated. Most small businesses produce this document annually with the assistance of an accountant.
Another commonly-used financial report is the balance sheet, which displays all assets, liabilities and equity your startup company has at a given point in time. This can help determine how much spending must be done and how to budget for future expansion.
Government entities require all companies to produce financial statements. These reports must abide by Generally Accepted Accounting Principles (GAAP), which establishes uniform reporting requirements.
Although your accountant can prepare these financial reports for you, it’s always beneficial to have a basic understanding of accounting for your startup yourself. Not only will this save you money in the long run, but it makes your job as a business owner that much simpler.
A balance sheet is a document that lists all your business assets, such as patents, buildings, equipment and customer receivables; plus it lists any debts and shareholders’ equity. It’s essential to keep this document up to date so you can assess the current state of your company.
Financial statements are an essential element of the accounting process for any business. They allow you to monitor the monetary resources of your company and compare them with others within its industry. Furthermore, they’re used for taxation purposes and often requested by investors. It is imperative that startups keep an eye on these numbers in order to succeed.
Taxes
Accounting systems are essential components of a startup’s overall business operations. They give an overview of the startup’s financial position, which helps owners and investors make informed decisions. Furthermore, an effective accounting system may enable startups to reduce their tax liabilities.
Before anything else, become familiar with the fundamentals of tax law and how it applies to your startup’s activities. This includes comprehending various types of taxes such as income/ payroll taxes, property/sales taxes, etc.
Next, choose a business structure that meets your tax and accounting requirements. Common forms are sole proprietorships, partnerships and limited liability companies (LLCs). Selecting the correct form will guarantee that all of your tax liabilities are manageable.
Another crucial consideration when starting your startup business is how to account for all expenses incurred. Although this may seem like a daunting task, having an organized record of all business expenditures will prove invaluable come tax season.
This will enable you to deduct costs that are essential and reasonable for running a business. Furthermore, it gives you insight into your startup’s spending patterns and provides suggestions on how it can be improved.
Once you’ve made these necessary adjustments, it’s time to create an income statement for your business. This will enable you to identify revenue, cost of goods sold and gross profit.
Report all revenue on the top line, then subtract your cost of goods sold from this figure to calculate gross profit. Compare this with total revenue to determine how well-run your business is financially.
Finally, report all capital expenses at the bottom of your income statement. This includes anything paid for the acquisition of fixed assets such as equipment or buildings.
Once you know how much your startup is making, start looking for ways to enhance its profitability and reduce its tax bill. One effective strategy is by taking advantage of all possible deductions – from office supplies to travel costs.
Benefits of accounting that are accurate for start-ups
A thorough startup accounting system will assist you in tracking your earnings and expenses. Let’s take a look at other advantages of starting a business with accounting.
Ensuring financial health
The startup accounting system will allow you to keep a close eye over your expenditures and debts. It can also help ensure that your company is the money it needs for its services and products. Monitoring your expenses, income and assets as well as the liabilities of your business will keep it in better financial condition.
Make an impression on investors
If a company has correct books, it’s much simpler to forecast its growth. A complete financial report will simplify the process of valuing a business. If you keep accurate records it is more likely that you will impress creditors, investors and lenders.
Make sure you pay the correct tax
The process of calculating the right business tax can be difficult in the absence of precise financial records. Accounting for startups records the income, expenses and deductions. This makes tax calculation and filing much simpler to accomplish.
Better analytics and better planning
If you have accurate financial statements such as the balance sheet, flow of cash and Profit and Loss statements, you’ll be able to determine the financial position of your startup. Also, it will tell you which areas you’re earning money and aids in planning for growth in your business.
“Don’t fake it till you make it when it comes to money, numbers, and taxes,” recommends Tatiana Tsoir, an accountant and entrepreneur expert. “Face it and face it early: prevent bad decisions, running out of money, anxiety, and eventual shutdown.”
How do I begin the process of accounting for a brand new business?
1. Select a structure for your business
The way you register your business will impact your startup’s accounting and taxation. You must choose the right business structure to meet your company’s needs and size requirements. The most common business structures are:
- Sole proprietorship
- Partnership
- Ltd-Liability company (LLC)
- Corporation
If you choose to go with the sole proprietorship option, you’ll have to keep your finances for both your personal and business. Make sure that you establish an account for your business in the early days in your venture. All business transactions must be deposited into this account, while your personal expenses should be able to be deposited into your personal banking accounts.
2. Select the accounting method you prefer.
While it may sound like a strange idea but there’s not a single method of accounting. There are many different kinds of accounts, all that is best suited for different needs.
Certain businesses record the expenses and income at the time they occur this is known as the cash-based accounting. In this type of accounting, you make a mark on the transaction only after you make or receive cash.
Another method that is popular is accrual-based accountingwhere you keep track of financial transactions as they are scheduled. For instance when you’re using accrual accounting, you keep track of an expense every time you make an order, instead of when the order is paid for.
Cash basis accounting is a good option for small businesses with cash transactions, but no inventory. However accrual basis accounting can help forecast your earnings and expenses to better forecast your business’s needs.
3. Choose an accounting software
You can control your startup’s accounting with different software options that are automated, manual and enterprise resource planning (ERP).
Manual systems require you to record every single income and expense in a notebook or spreadsheet. It’s a great option for small companies that have a limited number of financial transactions.
But, the majority of small-scale businesses owners employ an automatic system.
A computerized accounting system is an instrument that connects to your company’s bank account or credit cards. It automatically records for every financial transaction. It assists you in paying bills, schedule invoices and generate financial reports.
In the end, an ERP is a tool that manages product procurement and risk management, project management as well as compliance and accounting. In general, big companies with many departments employ an ERP.
4. Make general ledger entries
It is important to make sure that each financial transaction that you make in your company is recorded in an overall ledger. For instance, salary and bill payments are expenditures that you need to keep them in a debit transaction. But , the money you receive by your clients are credit transaction.
Every transaction, including the credit, income, expenses and deductions includes a journal entry. If you’re handling your accounts by hand it is necessary to add the transactions in the ledger general.
A majority of accounting software offers an online ledger. It automatically creates an entry in the ledger when you make your invoice. You can also pay for a bill.
Also, make sure to save the most important financial records as well as tax forms, like:
- Receipts, bills and invoices
- Statements from banks
- Forms for taxation of employees, such as W2s and 1099s
- Tax returns from the past
5. Reconcile bank accounts
It’s also essential to compare your bank statements to the general ledger in order to make sure that every transaction in your bank has the same ledger entry. This is also referred to in the field of reconciliation.
If you’re doing your own accounting, you’ll need examine every entry on your bank statement and compare them to General Ledger entry. The majority of accounting software comes with features that allow you to reconcile bank statements and the general ledger entries in a timely manner.
In any case whether you choose to compare your general ledger with credit and bank statements is essential due to:
- It can help you identify frauds such as duplicate or altered checks, unauthorised bank withdrawals and deposits that aren’t being made.
- It reveals mistakes on the part of the bank for instance, an inaccuracy in amount of deposit.
- It will detect any errors in data entry on your account.
6. Make your financial statements
Financial statements provide you with an overview of your business’s financial situation and can help to plan accordingly. They also contain important information for investors and other major customers of your business.
A few of the financial statements you must create in your initial accounting are:
- Balance sheet
- Statement of income
- Statement of Profit and Loss
In addition, if you’re using accounting software it will generate these financial statements from the entries in your general ledger.
The most efficient accounting software for start-ups.
Manual accounting can be difficult to keep track of and susceptible to human errors. That’s why investing in a startup Accounting software can be a smart option. Additionally, it will create invoices and pay bills, create ledger entries to reconcile bank accounts and create financial statements.
There are a variety of tools that can assist with the accounting process for start-ups. You must choose the one that matches your business structure and your accounting method.
Below are some of the most effective accounting software for startups.
Intuit QuickBooks Online
QuickBooks is a complete accounting software by Intuit. It is a great tool for small-scale businesses and entrepreneurs:
- Track expenses
- Create invoices
- Costs for tracking jobs
QuickBooks is very well-known which means that any accountant you choose to hire will probably work with it.
What we like about HTML0: QuickBooks is flexible and scalable, offering a variety of pricing plans.
Ideal for startups that can quickly expand into mid-sized to large-sized enterprises.
Pricing 4 plans beginning at $15 per month.
Kashoo
Kashoo is claimed to be the most user-friendly accounting software. There are two typesof Kashoo:
- TrulySmall is a small business that grows quickly.
- Kashoo to help established companies
Kashoo also has a mobile version but it’s only accessible for iOS.
What we like about HTML0: Kashoo makes accounting easier for startups without a background.
The best choice for Small and growing businesses that require basic accounting software.
Pricing for the first year, TrulySmall Accounting and Kashoo are priced at $1 and $2 each. Then, it’s $216/year and $324/year.
Wave
Wave is an easy accounting software designed for small businesses especially sole proprietors. It can be used to:
- Make and send customized invoices
- Monitor your expenses and income
- Automated payment reminders for payments
What we like about HTML0 The majority of Wave’s features are available for free to US and Canadian entrepreneurs.
The best for sole proprietors as well as freelancers working with small businesses.
Pricing Free for accounting, invoicing as well as banking functions.
Accounting tips for entrepreneurs
You now know the reasons why the accounting of startups is essential and how you can do it in a timely manner, here are some suggestions:
- Make a budget for your business and adhere to it.
- Do not just concentrate on the revenues. Instead, you should keep track of your actual profits.
- Digitally store documents such as bills, invoices, or receipts. Keep them safe for at least three years.
- Be aware of changes to tax laws to ensure you are in compliance.
- Review your finances regularly and ensure that you keep your accounts and records up-to-date.
- Find an accountant to work with you or opt for automated accounting software, if your budget permits.
- Make invoices available within a few hours of providing the service. Chase late payers.
- Make financial targets for the business and monitor your financial metrics.
Based on Shri Ganeshram, CEO and the founder of Awning an real estate investment company cash flow is the vital ingredient of every business. Startup founders and CFOs must be aware of it.
Making a cash flow forecast (where you forecast the flow of cash out and coming in from the previous performance) will allow you to prepare for deficits or surpluses and make adjustments according to the need.
The accounting costs of startups
Based on the Chamber of Commerce, 62 percent of small-sized businesses have an internal accountant. 30% use the services of an outside accountant. As a founder of a startup you have the option of handling your own accounting or outsource it to an external company.
Here’s how to decide whether outsourcing is worthwhile. Calculate how many hours, in the average, you’d devote to accounting at the beginning. Calculate the value in dollars for each hour.
If you think that the cost of external accounting less expensive than internal accounting, then go with it. If your company is complex in its finances, think about the cost of a penalty for a mistake.
The expense of accounting is according to the amount of complexity involved in your business’s operations. We evaluated a variety of US accounting firms and discovered that the median cost of accounting is between $500 to $1.5k/month.
Here are a few examples of the costs that accounting companies:
- Pilot’s “Core” package starts at $499 per month when it is billed annually.
- Early Growth Financial Services offers an “Finance Pro” package at $1k/month . There is also the “Finance Complete” package at $1.5k/month.
- inDinero offers inDinero has an “Essential” accounting package for $500/month , and the “Growth” package for $990/month.
Here’s the reason Chris Nddie, co-founder and CEO of ClothingRIC, an online discount and coupon provider believes that the investment in a sound accounting system is essential: “Accounting errors can truly stifle an organization’s growth, set you up for legal troubles, and stop your business from ever taking off.”