The average small business pays nearly $175,000 in fees following an audit. Keeping this in mind, startups should take accounting very seriously. Startup founders generally don’t want to be bogged down by accounting woes, so it’s best to hire a resource who’ll take care of basic bookkeeping at least.
Accounting for startups can be tricky because of the nature of the business and budget constraints, but bringing in a professional does pay off. Here are a few guidelines for accounting for startups and small businesses.
1. Accounting vs Bookkeeping
Startup founders might have heard the term ‘bookkeeping’, but they might be confusing it with accounting. Of course, both are related to a company’s finances, but they’re not quite the same.
Bookkeeping is the process of tracking all financial records, mainly in terms of income and expenses. It’s a reasonably necessary means of tracking finances, and the practice is quite old.
On the other hand, accounting is the process of interpreting financial records for a multitude of things. For example, making sure taxes are paid on time, and business decisions are taken keeping in mind the company’s financial health.
Bookkeeping and accounting are of course important to a startup’s success, but for startups especially, there is a need to keep detailed financial records.
Many startups depend on investor funding, and to appease investors, you’ll need a detailed picture of your company’s finances at hand.
2. Important Financial Records for Startups
What types of financial records should a startup keep track of? To answer this simply, everything. Every vital piece of financial information should be documented. For example income, expenses, deductions and credits shown on your tax returns such as:
- Bank and credit card statements
- Proof of payments
- Financial statements from your bookkeeper
- W2 and 1099 forms
- Tax returns
And don’t just bin these documents once they’ve fulfilled their purpose. Ideally, you should keep financial records for as long as possible.
3. Bookkeeping Essentials
Startups should promptly update their business’s books, not just when it’s time to file taxes or attract new investors. Some bookkeeping essentials are:
Enter All Transactions Into an Excel Spreadsheet
Be sure to enter all transactions, weekly, into an Excel spreadsheet. You don’t need access to fancy/advanced bookkeeping software to maintain a simple business transactions book.
Tip: You can create a great-looking professional invoice with Excel and a simple template.
Categorize All Transactions
It is essential to categorize all transactions as even minor differences in expenditure intent can affect you when you’re filing taxes.
4. Hiring an Experienced Professional – Important!
The number one goal of any startup is to get the maximum productivity from as little money as possible. Understandably, a founder might prioritize funds for growth and development, and in the process, hire a fresh graduate for accounting purposes. This, however, can be a misstep.
Accountants with no experience have no idea how a real business runs, much less a sensitive market such as a startup. In situations like these, it’s hugely beneficial to hire someone who preferably has experience working with startups.
An experienced accountant will immediately know what to do and where to look once onboard. Moreover, this will also bring the founder much-needed peace of mind knowing that the company’s finances are in the hands of a capable person.
An experienced accountant will also give you timely advice on when to scale back efforts when the company is in a pinch. They’ve probably seen how startups perform on limited budgets, so listening to them is always a good idea.
5. The Right People Doing the Right Things
Startups are generally headed by experts in their field, are great at problem-solving and have a feel for the market. Jack of all trades; however, they’re not, especially when handling company finances. And the sooner business owners realize this, the better it is for their business.
It’s always better to introduce a professional accountant into the company at an early stage, so you can focus on growth and strategy. An accountant will not only save you a lot of time and hassle, but they’ll also know stuff you probably don’t, such as the tax code.
To put it simply, as a business owner, you have tons to manage already and keeping track of transactions shouldn’t be a concern. Even a part-time bookkeeper will do a better job of keeping track of sales, invoices, and receipts for small businesses.
6. Choosing the Right Accounting Software
Small businesses can certainly get by using nothing but Excel spreadsheets to manage financial data. It’s a system that can work, but know that there are far superior alternatives out there.
If you bring in an accountant who’s used to accounting software like Freshbooks, going back to spreadsheets might give them a mini heart attack. This isn’t an exaggeration – spreadsheets make it a nightmare to manage large quantities of financial data. And since you’re a startup, why not start with software that’s purpose-built?
Capable accounting software will help you automate tasks, calculate taxes, and itemize payments. Plus, it’s going to make the accountant’s job much less stressful. Be sure to consult with your accountant on what their special accounting software is. Chances are, though, that it’s not going to be Microsoft Excel.
If your company is already using software to manage its finances, it’s imperative to inform the accountant beforehand about it.
Running a fledgling business is an exciting yet challenging proposition. Startup founders, however talented and ambitious they might be, are only humans after all. As such, they shouldn’t burden themselves with financial tasks when someone else could do them efficiently in the proper manner.
Accounting and bookkeeping shouldn’t be taken lightly, no matter how small your business might be. If you’re looking to grow, having accurate and up-to-date financial information is invaluable as it can guide your future decisions. We hope these helpful tips serve as excellent guidelines for startup owners.