Accounting and regular bookkeeping are the cornerstones of a healthy startup. The knack for navigating financial statements and maintaining accurate financial records is paramount for the maturation of any entity.
Unfortunately, not many startup owners are competent in proper bookkeeping or accounting. It gets worse, considering it might overwhelm a startup’s operation to hire or outsource a qualified accountant to spearhead accounting duties.
The good news is that accounting for startups doesn’t have to be complex, and with a few tips, startup founders can manage the bookkeeping or accounting process independently. This post throws insights into the essence of making your startup’s financials a priority and how to go about doing so.
Why is accounting important for startups
As already outlined, accounting and bookkeeping are foundational to the health of your business. Although a startup’s expense and cash flow might not be complex enough to necessitate standard management, proper accounting from the initial launch of any venture will immensely benefit it in the long haul.
A solid accounting foundation ensures that your startup stays organized, increases its efficiency, makes it streamlined to obtain financing, and identifies possible risks and opportunities for the business.
Here are other noteworthy benefits of effective accounting practices and proper financial management for startups:
- Accounting gives a detailed overview of where your startup stands and how it’s performing financially.
- It makes it more practical to attract investors and a straightforward process when securing funding.
- Helps identify risks and weaknesses early on.
- Allows the business to have detailed financial records and their current stand. This, in turn, helps forecast and plan for the future.
- Accounting enables startups to keep track of their debts.
- Accounting insights will come in handy when comparing competitors and evaluating investment opportunities.
- Most importantly, accounting for startups helps ensure you are always on the right side with the taxman. That is, being on top of your firm’s finances and taxes.
Contrary to popular misconceptions, accounting doesn’t have to be intimidating and redundant. Entrepreneurs can seamlessly implement an effective accounting system for their yet-to-be-established venture with the following tips. For a starting point, differentiating between bookkeeping and accounting is essential to the sustainability of your startup.
Accounting vs. bookkeeping
Again, contrary to a prevalent misconception, bookkeeping and accounting are not synonymous. Although bookkeeping and accounting are used interchangeably, a thin line distinguishes them. Bookkeeping is the process of recording and organizing a company’s financial transactions, primarily income and expenses. It’s only a segment of the accounting system.
On the other hand, accounting covers a larger domain than bookkeeping. It’s the process of using financial records to interpret, analyze, summarize and report these transactions to oversight agencies, regulators, tax inspectors, and in sum, all stakeholders.
Both bookkeeping and accounting complement each other and are vital to every organization’s success. For instance, bookkeeping is the foundation of accounting. Without the information provided by bookkeeping, it’s improbable to prepare financial reports and statements. Still, as a growing entity, it would be best to have the additional need to keep good records.
Accounting tips for startup founders
As a startup, you can begin with manageable measures and gradually enhance the formality of the accounting processes as your venture matures. Also, accounting software will go a long way in managing your startup accounting. Moreover, there are several entry-level applications, such as Intuit QuickBooks and Xero, designed for startup owners with inept acumen in bookkeeping accounting basics.
Here are the tips for setting up an accounting system for your startup:
1. Open a business bank account
Opening a business account is as elementary as opening a personal account. It’s vital in helping automate bookkeeping and establishing your firm’s credit history. Opt for a preferable banking institution that offers the right combination of features, benefits, and costs.
The essence of a business bank account, separate from a personal account, is to keep records distinct and make tax preparations easier. Moreover, it protects your assets in the event of bankruptcy, lawsuits, and audits. Not to mention that you need a business bank account to accept debit or credit card transactions from clients.
The typical requirements to open a business bank account include personal identification, Employer Identification Number (EIN), business formation documents, licenses, and ownership agreements if you are running a partnership.
2. Monitor your sales and expenses
In essence, it’s establishing a bookkeeping system. Track your expenses regularly to keep accurate financial records. Consequently, you can monitor your startup’s growth, build financial statements, be aware of deductible costs, and offer proof during auditing.
In addition, keep track and safe keep documentation that shows income, expenses, deductions, and credit. They include receipts, bills, invoices, proof of payments, financial statements, and tax returns,
Also, depending on your business structure, identify a bookkeeping system that aligns with your startup needs. Cash basis and accrual methods are the prevalent accounting systems. The former involves recognizing revenues and expenses immediately after receiving or paying. Accrual accounting focuses on anticipated income and costs.
3. Implement a payment system
An elementary invoicing system will go a long way in ensuring you don’t make errors in your books, and lose money. It guarantees you get paid by your customers. Also, it helps you keep track of the amount of tax your startup will have to pay.
4. Set up a payroll system
A startup’s team members represent a significant expense in most cases. As a result, you might find yourself spending a lot of time and tedious work paying employees.
However, incorporating an efficient payroll system eliminates the hustle-and-bustle of paper pushing and spreadsheet filling. It ensures employees receive their payments accurately and provides vital protection for complying with payment regulations.
5. Determine your tax obligations
Understanding tax obligations ensure that your startup’s taxes are fully compliant with the law and help take advantage of tax benefits applicable to your business. Therefore, it’s paramount to file tax returns timely to avoid penalties. Most importantly, keep your tax records for at least three years.
Start your startup decently
Ultimately, the decision as to whether you will handle the accounting independently or hire help lies in your objectives and the stage your startup is at.
For instance, in its early stages, the chances are that a startup’s budget might be tight and financial activities are not overwhelming. It would be best to manage your business books by yourself in such scenarios. Moreover, you will glean insights into how the money flows in and out of your business.
However, you should hire an accountant immediately when you start experiencing growth transitions and bringing in substantial revenues. An accountant will guide making sound financial decisions for your startup and help navigate the tricky business taxes.
All in all, managing your bookkeeping and accounting from the beginning enables you to keep better control of your finances and contribute to your venture’s success.