Accounting for startups: What you need to know

    Don't Miss Out

    Sign up for the weekly newsletter. Introducing you to the best insight of accounting, bookkeeping, startup and business news

    Accounting for startups includes keeping precise financial records and examining your finances to recognise opportunities for growth and improvement.

    For startup owners, accounting can be particularly crucial because it’s likely that you’re running your new company on a low budget.

    If you have a startup, this blogpost will help you through everything you need to understand about bookkeeping and accounting and some profitable benefits of thoroughly knowing your numbers accurately.

    Table of content

    Need Startup Accountant

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

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

    Why is accounting important for a business startup?

    Running a business requires you to generate profits. The progress of your startup is based on effective budget management, balancing the books and adapting financial strategies when needed.

    Some of the main advantages of accounting for startups are:

    • to assess where company stands and how it performs financially quickly.
    • to understand past performance and current situation to plan for future growth.
    • to keep records of their debts and receivables for produced goods and services.
    • to share information with external parties who use a company’s financial data, such as banks, HMRC, leasing firms, suppliers, and creditors.
    • to assess investment opportunities and analyse the competition.

      Your monthly Startup advice by 123Financials

      Enoll for Our free Update
      • Accounting and Bookkeeping and Tax Guide

      • Startup news and Updates

      Important things to consider before starting a new startup

      Select a business entity
      Your business entity affects several things, including how you pay yourself, how much you could potentially owe in taxes, and more.

      There are three primary categories of business entities:

      • Sole proprietorship
      • Partnership
      • Limited liability company

      Select an accounting method
      Before filing your startup business tax return, you must choose one of two possible accounting methods.

      Cash basis accounting
      This is the simplest form of accounting which tracks income when it is received and expenses after they are paid.

      Accrual basis accounting
      This second method counts income when it is earned rather than received, and the same as expenses. For instance, even if a customer has not paid you, you would still consider the money earned if they signed a big contract. This approach is more complex, but it gives you a better view of the firm over the long term, which is helpful whether you’re reporting to investors or making quick scaling decisions.

      What financial records should a startup keep?
      So you’ve selected an entity and accounting method, and your company is rolling along. What kinds of financial documents are necessary to maintain?

      Keep records of documentation that demonstrates income, expenses, deductions, and credits shown on your tax returns. These could consist of:

      • Receipts and bills
      • Bank and credit card statements
      • Cancelled checks
      • Invoices
      • Previous tax returns
      • Other proofs that support an item of income deduction, or credit shown on your tax return

      Though there are some cases where you wish to preserve your business’s financial records longer, you’ll want to hold onto most documents for at least three years.

      Fundamental accounting tasks

      As a startup owner, you must practice vital weekly, quarterly and yearly accounting habits.

      The tasks are broken down by duration below:

      1. Weekly tasks

      • Reconcile all the bank accounts

      This includes ensuring the bank account connection is updated with real-time information. It also involves examining that your income and expenses have synchronised to your accounting software flawlessly, which ensures accuracy.

      • Categorise income and expenses

      Make sure to pay special attention to expenses. Verify that eligible expenses fall under legal requirements.

      Some ways to do this are checking the HMRC website and using tax software to categorise expenses quickly. These approved expenses then seamlessly translate to your income statement in an easy-to-understand format.

      • Review employee timesheets

      Reviewing employee timesheets at least once a week can help you identify any inconsistencies and activities that may be unnecessary to your organisation.

      There is also the problem of unauthorised overtime pay – if any staff member works more than 40 hours/week, you could be liable to pay for overtime even if you haven’t authorised it.

      Once-a-week checks can help make sure such situations are minimised.

      2. Monthly tasks

      • Review your cash position

      Even if it seems relatively simple, this job is frequently overlooked, leading to unnecessary difficulties or emergencies if there isn’t enough cash to spend. You need to determine how much cash you’ll need each month and put aside at least that much as a reserve.

      • Update your bookkeeping software

      Updating your accounting and reporting software is a big part of preventing anything from slipping through the cracks.

      Verify everything that needs to be classified, documented and organised, and make sure you’ve not missed anything over the previous month.

      • Review your inventory

      Every month, assess the condition of your inventory to avoid being caught off guard by a supply shortage. If you’re in or have recently completed a peak period, you might like to analyse your inventory more regularly to ensure things go smoothly.

      Need Startup Accountant

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

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

      3. Yearly tasks

      • Determine your company tax return

      For companies, profit is the positive financial gain after all taxes, costs, and expenses have been subtracted from total sales. You will use your profit to estimate how much Corporation Tax your company has to pay.

      • Submit annual accounts

      You should submit these documents to the HMRC: annual income statement, yearly statement of financial position and footnotes. These show your annual P&L, a picture of your company’s cumulative value of a business based on its assets, capital and reserves, liabilities, and information about transactions between your firm and its directors.

      • Round up outstanding invoices

      Your business year-end should be as precise as possible. Make sure to contact anyone who owes you money to collect it before the end of the year.

      Final thoughts

      Any company that wants to remain functioning must have an accounting strategy. That means hiring an expert, but founders also need to know the basics.

      Structured financial records and precisely balanced finances, combined with a smart financial approach and appropriate tax filing, will directly relate to the long-term success of your business.

        Learn more about Accounting , Bookkeeping and Tax

        Subscribe to get our monthly dose of accounting, bookkeeping, tax and startup knowledge, inspiration and news.