Launching a new business is exciting, but it comes with its set of challenges. Needless to mention, one of the most vital aspects of running a startup is accounting and managing finances. With proper accounting, you can ensure that your business is on track financially and that you are able to make data-driven decisions. In this article, we have covered how to do accounting for your startup and have discussed the essential steps, best practices, tips, and tools that you need to stay on top of your finances.
Step 1: Choose the Right Accounting Method
The first step to managing accounting for your startup is to identify and select the right accounting method. There are two primary accounting methods – Cash-Basis versus Accrual:
- Cash-Basis Accounting: In this method of accounting, transactions are recorded when cash is either received or paid. This method is ideal for startups or small businesses that register simpler financial transactions and have no inventory to account for. Even though this a simple method, it fails to generate a complete picture of a business’s financial health, especially if there are payables or receivables that are yet to be settled.
- Accrual-basis accounting records transactions when they occur, regardless of the time of cash exchange. Startups that maintain inventory, deliver services, and offer products or services on credit use this method, which is ideal for tracking revenues and expenses but requires more effort and time.
Selecting the right accounting method depends on your business model, but most startups eventually shift to accrual accounting to gain better visibility into their financial health.
Step 2: Create a Chart of Accounts
A chart of accounts is a list of all the financial accounts that are seen in your company’s general ledger. Using this chart, you will be able to keep track of all your transactions efficiently. Common elements to be included in a chart of accounts are:
- Assets: Cash, accounts receivable, inventory, property, and equipment.
- Liabilities: Loans, accounts payable, credit card balances.
- Equity: Owner’s equity, retained earnings, and stockholder investments.
- Income/Revenue: Sales revenue, service income, other income.
- Expenses: Rent, payroll, marketing, utilities, and office supplies.
Things to Take Care of While Creating a Chart of Accounts
- Organize by category: Categorize your accounts logically.
- Add specific details: It is a good idea to subcategorize your accounts. For example, maintain separate revenue accounts for different products or services
- Create a simple chart: Avoid overcomplicating the chart at the initial stages. You can always expand as your business continues to grow.
Step 3: Deploy an Accounting System
Once you determine the right accounting method for your startup, you should set up your chart of accounts. This can either be a manual task or you may choose to deploy accounting software. As your business continues to scale, use of automated systems may prove to be a much better option.
Manual Accounting Using Spreadsheets
- Ideal for: Sole proprietors or very small businesses just starting out.
- Tools: Google Sheets, Microsoft Excel.
- Pros: Cost-effective, customizable, easy to learn.
- Cons: Time-consuming, associated with a higher possibility of errors, lacks scalability, and may fail to adhere to all legal requirements.
Investing in good accounting software will let you stay organized and save time in the long run.
Step 4: Keep Track of All Transactions
A vital aspect of startup accounting is keeping track of every financial transaction, including:
- Sales and revenue: Monitor all sources of income including products sold and services delivered.
- Expenses: You must document every business-related expense including payroll, utilities, and office supplies.
- Receivables and payables: Keep a record of money owed to you and money that you owe to others.
Best Practices for Tracking Transactions
- Use receipts: Deploy accounting software to store images of receipts.
- Regular updates: Update your accounts regularly, preferably weekly or bi-weekly.
- Automate where possible: Use accounting software to automate recurring transactions such as subscriptions or monthly bills.
Step 5: Reconcile Your Accounts Periodically
Compare all your financial records such as bank statements, credit card statements, and other financial reports to check if they match. This will help you identify discrepancies and fraud, and let you ensure that all financial data is recorded correctly.
The following steps are involved in the accounts reconciliation process:
- Gather your reports: Collect bank statements, credit card statements, and any other relevant documents.
- Compare each transaction: Check if the transactions in your records match with those in the statements.
- Identify discrepancies: Review any mismatched entries to detect errors or omissions.
- Adjust if necessary: Make the required adjustments in your accounts if you detect mistakes in your entries.
You should reconcile your accounts every month, and ideally more frequently if your business is registering a high volume of transactions.
Step 6: Generate Financial Statements
Generating and reviewing your financial statements will help you understand your startup’s financial performance. Financial statements let you track growth and analyze trends in income, expenses, and profit margins, estimate tax liabilities, and make informed decisions. The main financial statements that you need to consider are:
Generating and reviewing your financial statements will help you understand your startup’s financial performance. Financial statements let you track growth and analyze trends in income, expenses, and profit margins, estimate tax liabilities, and make informed decisions. The main financial statements that you need to consider are:
- Income Statement (Profit & Loss Statement): Displays your company’s revenue, expenses, and net profit or loss over a specific period of time, and helps you assess if your business is generating profits
- Balance Sheet: Provides a snapshot of your business’s assets, liabilities, and equity. Helps you determine your company’s financial stability and liquidity.
- Cash Flow Statement: Helps you monitor the flow of cash in and out of your business while letting you review if you have adequate cash to cover expenses and investments
Best Practices for Accounting for Startups
1. Segregate the Personal and Business Finances: Open a business bank account and keep your personal finances separate. Mixing personal and business funds may lead to confusion and wrong tax calculations.
2. Hire a Professional Accountant: While the DIY accounting approach may work initially, an experienced accountant can help you ensure compliance with tax regulations, manage complex financial tasks more efficiently, and offer valuable and reliable financial advice.
3. Stay Tax-Compliant: Set aside funds for taxes. Make it a point to understand your tax liabilities, including the quarterly taxes. Keep yourself updated about tax deductions that you can avail, and these may include certain business-related expenses and equipment depreciation.
4. Plan for the Future: Financial forecasting is essential for growth as well as long-term stability. Set up a budget and forecast future income, expenses, and profits. Set up and monitor key performance indicators (KPIs) to measure your startup’s financial status.
Essential Accounting Tips for Startups
- Establish a Robust Accounting System: Use cloud-based accounting software such as QuickBooks or Xero to streamline processes. Opt for a system that facilitates easy tracking of income, expenses, and taxes.
- Keep Detailed Financial Records: Keep your financial records updated and reconciled regularly. Make sure all transactions are accurately documented for future audits.
- Plan for Future Growth: Determine a budget for expansion, including the budgets for recruitment, marketing, and launching new product lines. Review financial projections from time to time to stay on the right track to achieve your growth goals.
- Establish Clear Financial Goals: Set measurable short- and long-term financial goals to measure progress. Customize your business strategies depending on your company’s financial performance.
Essential Accounting Tools for Startups
Investing in the right tools will help you simplify your accounting process. Here’s a list of some of the most popular accounting tools that startups use:
- QuickBooks: Equipped with features that enable invoicing, expense tracking, and tax calculations
- Xero: Offers a perfect collaboration platform between team members and accountants
- FreshBooks: An easy-to-use tool for small businesses that need basic support such as invoicing and time tracking
- Wave: A free accounting platform that perfectly suits the needs of small startups that have common accounting requirements
- Expensify: Supports functions such as expense management and receipt scanning
Final Thoughts
Good accounting practices contribute to the success of any startup. By following the above-mentioned steps, deploying the best practices, and utilizing the right tools, you can establish a solid financial foundation for your startup. Whether you are managing accounting manually or you are deploying accounting software, staying organized and maintaining consistency is the key to your success. With proper accounting practices, you can understand your business’s financial position, make smarter decisions, and achieve long-term growth.
The KnowVisory Edge
Looking for professional accountants who can help you adopt the best accounting practices for your startup? Look no further as the KnowVisory team is here to guide you through the accounting journey and deliver professional accounting service for startups. With decades of experience in the accounting and finance domain, we are specially equipped to address your accounting needs with the highest level of accuracy. Call us for a consultation today!
