Like many startup entrepreneurs, you might be more enthusiastic about sales than making a difference, but handling finance is essential to success.
If you don’t put up a reliable and accurate accounting system from the start, your company will experience financial errors, poor planning, and a high likelihood of failure.
On the other hand, if the accounting function is set up correctly from the start, you will pave the foundation for your company’s success. You can monitor the financial information necessary for a company to succeed, such as revenue, expenses, payroll, and general ledger.
So target maximum growth, revenue, and profit with this in-depth accounting guide for startups.
Table of contents
● Best tips for accountancy for startup businesses
● What types of financial records should your startup keep?
● Final thoughts
Best tips for accountancy for start up businesses
1. Identify the method of accounting
Once your business is in place, you must choose the basis of accounting that your company will follow.
- Cash Method: Income and expenditure are booked/recognised at the time when they are paid or received.
- Accrual Method: Income and expenditure are booked/recognised when the transaction happens, irrespective of whether cash is received for the particular transaction.
In practical terms, more than 95% of firms use the Accrual method of accounting as it determines the actual profit or loss of the firm.
2. Separating business and personal finances
If you start as a small proprietor, it’s perfectly legal to mingle business and personal money.
Lawfully, you and your new business are one entity. It’s often easier to pay for the raw material or supplies out of your pocket or fund a client check to pay for this week’s food.
It’s better to take time from the schedule to separate your business finances. A separate bank account, separate financial flows and credit cards will simplify business expense management and tracking without worrying whether that minor repair bill was for the office or work.
3. Pay vendors on time
Paying your vendors on time is essential if you want a positive working relationship.
That implies you will have to track when invoices come due (or past due) and also keep checking your cash flow because knowing it’s time to pay a client won’t be helpful if you don’t have sufficient finances in your account.
As you grow in this area, you may experience several difficulties. Growth implies buying more equipment, supplies, and inventory, which needs more time to track invoices and pay them.
The best solution will be to use digital solutions that handle payments automatically.
4. Track money coming in and out
The right digital products and a good workflow can keep you from losing track of expenses, income, and cash flows.
For instance, suppose that you spend petty cash to buy stationery or printer ink.
You enter the purchase and file or scan the receipts at the end of the day. During tax season, this simple but essential habit will assist you in listing all your deductible purchases.
Drawing up a cash flow statement and income statement on a monthly/quarterly basis is an essential startup accounting step.
These statements help you understand your income, cash and expense compared to your budget and where the variances lie. You can identify your primary expenses and income sources and make plans accordingly.
5. Manage payroll
Payroll is another business area where planning is just as crucial as crunching numbers.
Determine how often you will pay employees—weekly or monthly, compensation for holidays, sick leave and overtime. You’ll need to know how to calculate state and income taxes and the payment deadlines.
Like so many other areas of startup accounting, payroll may be simple to handle on your own when you only have one or two employees. But as you expand, investing money in payroll software might relieve you of the effort. Eventually, you might choose a business or service to manage your payroll.
What types of financial records should your startup keep?
An essential component of startup accounting is keeping the required financial records. We’ll start with the reports you must create and update.
Balance Sheet
The balance sheet is an overview of your firm’s financial health and is subject to change at any time. It involves short-term and long-term liabilities, assets and equity.
Profit and loss statement
An income statement is another name for your profit and loss statement. Its objective is to provide a summary of the company’s earnings and expenditures for a given time. The profit and loss statement assists you in tracking company growth. Remember that recurring losses are a red flag in any business.
Accounts receivable/ accounts payable (aka, “aging reports”)
A report on aging classifies debts owed to the company, including the length of time the debt is owed and how long they have been outstanding.
In accounting, “Accounts receivable” refers to a term for funds owed to your company, while “accounts payable” refers to the funds your company owes to others.
Aging reports enable you to monitor the number of accounts receivable that are overdue and how old they are to take appropriate action to collect the money you owe.
Cash flow statement
The cash flow statement is simply like a budget which is used to estimate income in and expenses out over a time of about three years.
Final thoughts
Managing your accounting and bookkeeping right from the beginning will help you better control your finances. Additionally, you’ll be aware of when you’re spending too much and when you require to increase sales.
Whether you perform the accounting yourself, hire a bookkeeper or accountant, or outsource such tasks, keep in mind that the better your business is managed from the start, the more likely it is to flourish.
