Accounting for Startups – the Entrepreneur’s guide

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    Establishing a new business is already challenging; looking for investors, employees, resources, clients, and others are toppings. Do they provide the same effort in accounting?

    In most cases, the answer is No, and the reason behind it is the owner’s busy schedule or to cut costs. But fulfilling accounting needs in a business is crucial to transforming your dream of success into reality.

    Regardless of how great your business idea is, if you don’t have finances in place, you fail. It makes accounting practice in startups a necessity. This guide will cover everything about accounting for startups.

    Table of contents

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    What is accounting for startup entrepreneurs?

    Entrepreneurs are individuals with innovative ideas from passion, determination and creativity. But they may lack proper accounting knowledge that can improve their business tactics and profit margins.

    Business accounting for startups is a set of financial activities from tracking, processing, interpreting and communicating business transaction entries. It also includes preparing and paying taxes, payroll management, mergers and acquisitions, tracking inventories, etc.

    What are the key performance indicators for entrepreneurs?

    Ask accountants for startups about what are the key performance indicators in your business. It is essential to identify them. Gross profit, conversion rates and net profits are the most common KPIs in companies, while a few may focus on debtors’ days and creditors’ days, etc.

    Some popular KPIs that a chartered accountant for startups speaks about are:

    ●  Revenue: The sales revenue in a business is the income from all customer purchases. To calculate the final sales revenue, you must subtract the returns or undelivered services from the total sales revenue.

    ●  Gross profit: This is the total profit earned from sales of products or services minus your direct costs.

    ●  MRR: Monthly Recurring Revenue from all your customers, including

    A.  Upgrades and downgrades
    B.  Discounts
    C.  Customer churn / lost revenue

    ●  ARR: Annual Recurring Revenue, multiply MRR by 12.

    ●  Gross profit margin: It shows how products in your business are performing and what is your overall business productivity.

    ●  Net profit: Pick gross profit and subtract overheads to determine net profit. Expenses like loan interest and taxes are also deducted.

    ●  Net profit margin: It is the percentage of net profit generated from your revenue.

    ●  Debtor days: The average number of days customers usually take to make payments.

    ●  Creditor days: The average number of days you take to pay suppliers.

    ●  Conversion rate: It is the rate of converting prospective customers into actual customers.

    ●  Customer acquisition cost: It refers to the price of acquiring a customer, including your marketing costs.

    ●  Net promoter score: It is the score of how likely an individual will recommend your business.

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      Essential elements of startup accounting practice

      1. Separate your business and personal account

      If you want your books to be clean, keep business and personal funds separate. Make sure you are not purchasing business equipment with your personal credit cards or a personal smartphone on business cards. Mixing these expenses results in difficulty when preparing for taxes and audits.

      2. Select a business structure

      Selecting a business structure is crucial before learning about accounting for startups uk. Usually, they are of three types; sole trader, partnership and limited company. A business structure determines your tax obligations, accounting requirements, and the complexity of finances.

      3. Choose an accounting method

      There are two main accounting methods; accrual and cash.

      ·   Accrual method
      Most businesses choose an accrual method that tracks real-time transactions even when they are not executed. It means your accounting book reflects future revenue billed but not paid, and debts are charged but not paid. Large businesses with annual revenue of at least £300,000 per year must use an accrual accounting method.

      ·   Cash method
      HMRC allows small businesses and sole traders with an annual turnover of less than £150,000 per year to use a cash-based accounting method for computing taxable profits. This accounting method recognises funds when they are received or paid.

      4. Know the accounting equation

      You must learn about the accounting equation that depicts the relationship between three primary entities of a startup; assets, liabilities and equity.

      ·   Assets: resources, equipment and startup cash
      ·   Liabilities: wages, debts, and taxes
      ·   Owner’s Equity: Everything in business left after deducting assets and liabilities

      The formula is Assets = Liabilities + Owner’s Equity.

      Ensure the left side of the equation always balances the right side.

      5. Learn about the three financial statements

      Every startup accounting measure primarily depends on three financial statements; balance sheet, cash flow statement and income statement.

      Balance sheet: It depicts the financial status of your business, your worth in the market, assets owned, and debts owed by the company.

      • Formula: Assets = Liabilities + Equity

      Income statement: It assists in evaluating your company’s performance, determines your expenses and revenue streams, and identifies any profit or losses during a specific period.

      • Formula: Net income = Revenue – Expenses

      Cash flow statement: It determines the amount of cash flows in and out of your business within a period. It generally covers three categories; operating, investing and financing activities.

      6. Know your tax obligations

      Regardless of your business size, you must pay taxes on your profits if you are making an earning out of it.

      However, you only pay taxes in the UK when your earnings are above the tax-free personal allowance. You can reduce your tax bills by learning about tax deductions and reliefs from the government under specific conditions.

      7. Choose the right accounting software

      Tech startup accountant London may charge you more than you can afford in your tech startup; will you ignore accounting? Get the right accounting software after considering the following:

      • Features
      • Easy-to-use interface
      • Better accessibility
      • Customer support
      • Flexibility
      • Integration with other applications
      • Cost
      • Reviews

      You can also outsource the tasks to freelance accountants for tech startups to cut business costs.

      Hire a Startup Accountant

      Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.

      Have a question? Call us on
      0203 900 3500
      Monday to Friday 9am – 5pm

      Wrapping up

      Hiring an accountant for a startup business is not legally required in the UK, but having them in the initial years can help you grow faster and survive the competition with big sharks in the market.

      However, with a good knowledge of numerics, accounting basics, and analytical skills, you can perform accounting for your business until finances get complicated.

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