Accounting For Startups

What Is Accounting for Startups?

Startup accounting involves keeping records of cash received and spent and then presenting this information in financial statements that will be useful in evaluating the business’s performance.

Why Accounting Matters For Startups

The management of accounting practices is important to startups since they can offer a projection of the financial status of the business. Accounting is useful in keeping records of expenditures, monitoring cash flow and ensuring legal compliance with taxes. It also has a critical role when it comes to raising capital since investors and creditors want to have accurate financial information to make informed decisions.

Overview Of Key Accounting Principles

Some of the key concepts in accounting principles include consistency, reliability, relevance, and comparability. Consistency ensures that both the amount of costs and valuation procedures remain in harmony from one period to another. Reliability relates to the accuracy of the financial statements and its credibility. Relevance ensures that the information in a particular period is useful in decision-making. Comparability enables financial performance to be measured together with different periods, and with other companies.

Startup Bookkeeping Vs Accounting

However, let us not confuse bookkeeping with accounting.

Bookkeeping is the actual recording of all your business transactions. It therefore does not entail a lot of analytical input unlike accounting where there is intensive financial analysis of the business.

As a startup founder, you’ll frequently encounter various financial tasks, including:

• Managing daily bookkeeping, such as processing payments, recording journal entries, and generating financial reports.
• Issuing and sending invoices to clients.
• Monitoring payables and receivables to ensure timely client payments.
• Ensuring cash flow is sufficient to cover upcoming expenses.
• Calculating tax obligations and filing tax returns.

Each of the tasks above requires a lot of documentation. Recording and monitoring of the above could be done manually in excel and filing of physical folders while it could also be done through an automated accounting software.

However, we do not advise for the manual approach to be used. Accounting is a time-consuming process, especially if a business is not a small one; writing all that down by hand (or by typing) is not practical. It could be time consuming, tiring, and most of all, there is much possibilities for making mistakes.

Which is why business owners tend to spend money on accounting software and rely on automation of the steps of the accounting cycle.

Before we dive into the details of how you can automate accounting for your startup, it would be beneficial to understand some basic accounting terms and ideas a startup should be aware of.

Accounting Essentials You Should Know

The Accounting Equation

From the largest international corporation to your local barbershop, they all follow the same principle regarding their financial status. This principle is known as the accounting equation which is as follows;

The accounting equation illustrates the connection between three key components of your startup: Assets, Liabilities, and Equity.

• Assets represent the resources, equipment, and cash owned by your startup.
• Liabilities are the obligations, such as wages, debts, and taxes, that your startup must pay.
• Owner’s Equity is the remaining value after deducting liabilities from assets.

The accounting equation is expressed as:

Assets = Liabilities + Owner’s Equity

When a business accurately records its transactions, this equation always remains in balance, ensuring that the left side is equal to the right.

Double-entry bookkeeping

Now, how does the accounting equation always balance? By the use of a method known as double-entry bookkeeping.

Under double entry system every transaction affects two accounts and therefore two entries are made. This process involves the opposite entry within the accounting books wherein one account is debited, while the other is credited. This mechanism helps to maintain the balance of the equation.

But what are debits and credits, in particular? They are known as terms that capture whether cash is inflowing or outflowing an account. Debits indicate money coming in, while credits show money going out.

Here’s a table that compiles everything you need to understand about the relationship between debits and credits for each account:

Chart of Accounts

The chart of accounts is a list of all the different classifications of accounts. This is a tool for organizing information that is necessary in order to prepare concise and accurate financial statements.

While every business maintains a unique chart of accounts tailored to its financial transactions, these accounts generally fall into five primary categories:

• Assets include the resources, equipment, and cash that your startup possesses.
• Liabilities encompass the wages, debts, and taxes that your startup is responsible for.
• Owner’s Equity is the remaining value after subtracting liabilities from assets, as outlined in the accounting equation.
• Revenue is the income generated from sales or other business activities.
• Expenses are the costs incurred in running the business.

Here, in the table below, you will identify the most common accounts that businesses and their types may be useful when addressing accounting at your startup. The bold ones are the 8 most fundamental accounts that can be useful to any given business.

Ethics In Accounting

Similar to how a doctor addresses a patient’s sickness in accordance with particular guidelines, an accountant acts when preparing finances in accordance with certain principles too. These are known as the GAAP (Generally Accepted Accounting Principles) and include guidelines on how certain economic activities should be reported. For example, the principle of non-compensation means that any aspect of business performance has to be included, whether it is beneficial or not. All the above rules in GAAP as well as the other collection of rules are mandatory to follow because they help in accurate and ethical reporting.

The Four Core Accounting Reports for a Startup

Recording entries and segregating them into accounts is the first step in the accounting process. This data has to be sorted into some format that is more beneficial to investors, creditors and analysts who may have interest in the performance of this startup. That is why we make financial statements. Moreover, financial statements are legal (with reference to GAAP), due to the need for transparency and convenience as well.

The following are the four main reports you need to prepare for your startup.

Balance Sheet

The balance sheet gives a snapshot of the financial position of an enterprise at a particular date in terms of its assets, liabilities, and equity. This financial statement is special in that it gives information which relates to a single day unlike a month or a year.

Assets = Liabilities + Owner’s Equity.

Income Statement

The income statement or the profit and loss statement shows the financial performance of your startup for a given period in terms of profitability.

Revenues and expenses are separated in this report to determine how much net income has been produced. Which in turn helps you in evaluating the performance of your startup during that specific time line.

Example

Income Statement for the Year Ended December 31, 2023

Net Income = $12,000

Cash Flow

The cash flow statement shows the flow of money in and out of the business. It is prepared along with the income statement and balance sheet.

The three main components of the cash flow statement are:

• Operating activities like receipt of sales, payment of income taxes, payment of interest, payment of employees’ salaries, etc.
• Financing activities like acquiring loans from banks, declaration and payment of dividends, re-issue of treasury shares etc.
• Investing activities such as the purchase of buildings, land, bonds, etc.

Cash Flow Statement for the Year Ended December 31, 2023

Net Increase in Cash = $13,000 

Cash at the Beginning of the Year = $5,000 

Cash at the End of the Year = $18,000 

Statement of Owner’s Equity

The owner’s equity statement or statement of retained earnings is a sum of the owner’s investment, withdrawal, income, and expenses of the business. Thus, in a nutshell, this statement explains to what degree your capital has increased or decreased because of these four factors. However, for small startups, it is not a necessary step. The owner’s equity is often applied by large companies when it comes to decision making involving matters such as dividends, firm appraisal, etc.

Statement of Owner’s Equity for the Year Ended December 31, 2023

Startup Accounting Procedures

1. Setting Up Your Accounting System

The first procedure in setting up your accounting system is to select an appropriate accounting method, that is cash or accrual basis. Proper cash accounting records transactions when cash is exchanged while proper accrual-basis accounting records when they are earned. Organizational startup accounts favour the accrual way as it gives a clearer picture of the organizational financial status.Accounting software is essential for managing a company’s financial operations, and thus choosing the right one is critical. There are specific aspects that should be considered in choosing software such as invoicing, expense tracking, payroll management and financial reports. The well-known choices for such business entities include QuickBooks, Xero, and FreshBooks. They are easily accessible and equipped with reliable features suitable for the proper functioning of small companies.

2. Tracking Expenses: Every Penny Counts

Tracking of expenses is critical to the management of finances. Organize receipts and invoices with the help of an accounting program to correctly categorize. You should also periodically check your expenses to determine areas that might require you to cut down on your expenses or ways on how to optimize the expenses. The compiling of figures also means that you can track every penny spent, which is crucial, especially when it comes to preparing your accounts for taxation or making a balance sheet.

3. Revenue Recognition: When to Record Income

The process of identifying the time when to record income is the revenue recognition method which is different from the cash receipt. Understanding the pattern of your startup’s accrued expenses and revenues is important since it deals with the fiscal health of your business. Ensure that you have sound revenue recognition policies that overview when and how a particular amount of revenue is taken into the books. Revenue recognition is critical as it assists in the matching of the revenue with the expenses incurred.

4. Cash Flow Management: Keeping the Lights On

Cash flow management entails an assessment of the cash flows coming to and going out of a business to ensure a sufficient amount of capital for the efficient operation of the startup. Make sure you have short-term cash flow statements and schedules for your business and look for signs that you’re running low for improvement. Measures that can strengthen the cash flow include accurate receivables and payables management, credit lines, as well as having an emergency fund.

Read Streamlining Cash Flow: Xero’s Receivables & Payables

Compliance And Legal Considerations

Understanding Tax Obligations For Startups

In terms of taxes, companies are required to comply with income tax, sales tax, and payroll tax depending on particular states and business structure. It is necessary to get familiarized with the legislation of the chosen country concerning taxes and their due dates. It is wise to consult a tax expert to abide by the law and to learn about all the tax incentives of the law.

Navigating Payroll And Employee Benefits

In the area of startup accounting, it is paramount to consider the financial management of salaries and employee bonuses. It is also important that all protocols for employees’ labour rights and tax laws are complied with. Leverage the services of payroll software and ensure that employee payroll data and information concerning the employees’ earnings and their other compensation and benefits are well recorded. Providing competitive benefits is key to employee retention.

Staying Compliant With Financial Regulations

Complying with the financial regulations is important to startups and they may differ from one industry to another as well as from one country to another. These regulations are meant for the protection of the stakeholders and ensure transparency. Regularly review regulatory requirements and stay updated on any changes. Failure to observe these laws can lead to penalties such as fines, legal issues, and damage to your startup’s reputation.

Budgeting And Forecasting

Creating A Realistic Budget For Your Startup

A realistic budget defines a company’s revenue expectations and its expenditure in a given timeframe. In essence, it underlines the strategic roadmap of money and offers direction in guiding how to spend, and avoid to overspend it. It is also important to update to reflect the budget to actual performance and modify it accordingly consistently.

Financial Forecasting: Predicting Future Success

Budgeting involves the estimation of your startup financial report by analyzing past data and current trends in the market. By doing so, you will be able to establish realistic objectives, evaluate the potential for expansion and gain investors. Carry out expenditure and revenue forecasting as well as forecasting of future cash flows and make sure that the forecast reflects the current situation as closely as possible.

Adjusting Your Budget As You Grow

When your startup is in its early stages, it undergoes changes in its financial needs and priorities. It is recommended that you adjust your budget around these facts by reviewing the budget frequently. This flexible approach allows you to grasp new opportunities and overcome new threats while maintaining your business strategy and financial plan.

Accounting Challenges For Startups

Accounting problems that are common among start-ups include poor cash flow management, and failure to capture costs and taxes which you would realize they never recorded until they are served. To avoid these traps, good accounting software is needed and get professional help if necessary. It is useful to review the organization’s financial statements to identify errors that need to be rectified on time.

Managing Financial Risks

All businesses have financial threats ranging from fluctuation in the market to other emerging costs which were not anticipated. To overcome this, you should identify the potential opportunities and threats and come up with ways to manage them. This could be diversifying of revenue stream, having cash reserves and having adequate insurance. Thus, risk identification and evaluation will enable you to be ready for unpredictable occurrences.

Dealing With Investors And Financial Transparency

For investors, to make decisions, they require clarity and proper records of your start-up. You should provide them with regular status reports, maintain records and documentation of your financials and be prepared to discuss with them about your financials. Transparency with investors will get you funded and help your startup.

Leveraging Technology In Accounting

The Role Of Automation In Modern Accounting

Automation can streamline many accounting tasks such as data entry, accounts receivable, accounts payable, trial balance, and fiscal reports. Automated accounting helps in minimizing mistakes, saves time, and hence increases efficiency. Automation can be integrated into areas such as invoicing, payroll, and expenses that involve repetitive tasks.

Integrating FinTech Solutions

There are numerous solutions that FinTech tools can contribute to the efficient financial management of your startup. They can give real-time financial information, make transactions easy and help with financial analysis. The appropriateness of FinTech solutions to your accounting can improve your performance and provide a competitive edge.

Benefits of Cloud-Based Accounting

The advantages of cloud-based accounting are that clients have access to it, it is easily scalable, and collaborative. These platforms enable you to get access to your financial data, safely store it, and make updates whenever you want from any location. Cloud accounting solutions can prove very useful in organizing your finances and can assist your startup’s growth.

Read Xero for Startups: Laying the Foundation for Growth

Hiring Professional Help for Business Startup Accounting and Bookkeeping Services

Outsourcing Vs. In-House for Business Startup Accounting and Bookkeeping Services

The decision of whether to outsource or do accounting within your startup depends on the startup’s size, budget, and requirements of your startup. Outsourcing brings potential cost benefits and access to specialized human capital while in-house accounting allows centralized control and communication. Analyse the advantages and disadvantages to determine which one to choose the best option for your business.

Finding The Right Accounting Firm Or Professional

When selecting an accounting firm or professional, it is recommended to look specifically for a firm or an individual who has prior experience working with startup companies, understands the industry the business operates in and has a good reputation. Consider their range of services, fees, and communication style. Building a strong relationship with a trusted accounting partner can support your startup’s financial success.

Conclusion

Accounting is an essential component of achieving objectives and developing any startup enterprise. Therefore, a proper accounting system, diligent management of funds, and compliance with legal requirements will allow you to maintain the economic stability of the business’s financial health.

Make a habit of regularly going through your company’s financial statements, updating the trends on tax laws, and incorporating technological solutions for account management. Ensure you are always up to date and mindful of accounting practices and patterns and always make changes that will make your accounting better to cater to the growth and development of the business. Remember, if all these blends you with stress and anxiety, it is important to consult with a professional immediately. 

How FastLane Group Can Help

FastLane Group, a platinum partner and Xero Certified Advisor, offers comprehensive business startup accounting and bookkeeping services. From setting up your accounting system to managing compliance and financial reporting, we provide the expertise and support you need to succeed. Contact us now to learn more about accounting and bookkeeping service for startups..