A Quick-Start Guide to Startup Accounting

A Quick-Start Guide to Startup Accounting

There’s never a dull moment as a startup founder. You get to work in an area that you’re passionate about and live out your dreams. If the venture succeeds, you’ll have the satisfaction of knowing you’ve created a business from the ground up. And the financial rewards can be tremendous.

But once you’re on the startup rollercoaster, life can get hectic. There will always be a hundred things that need to be done, and, on most days, you’ll be rushing from one mini-crisis to another.

In your packed schedule, you may lose sight of one of the critical duties of an entrepreneur. Every startup founder must take the time to understand the organization’s financial and accounting records. It’s unwise to consider your accounting system as a black box best left to your CPA.

Instead, make an effort to familiarize yourself with your startup's credit cards, accounting software, income statement and balance sheet, and other financial records. Doing this can give you a more in-depth insight into your company’s financial health.

When you learn the basics of your accounting system, you’ll realize what goes into preparing the financial reports you see. This understanding can be crucial, as it could help you speak knowledgeably about your business’ finances to potential investors. What do the numbers in your income statement mean? Which assumptions have been used in preparing the cash flow statement? How long is your cash runway at the current burn rate?

You’ll be in a far better position to answer these questions after you have spent some time exploring how accounting for startups is carried out.

In this post, we’ll help you make a start on the subject of bookkeeping and startup accounting. 

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What is financial accounting?

Financial accounting is the branch of accounting that is concerned with reporting a company’s business activity. The main financial reports that a company generates from its financial accounting records are:

  • The income statement: This is also called the profit and loss statement. It provides the company’s revenues and expenses for a specific period, usually a quarter, six months, or a year.
  • The balance sheet: While an income statement is for a specific period, the balance sheet reports a company’s assets, liabilities, and shareholders’ equity on a particular date.
  • The cash flow statement: This provides data regarding how cash has been generated and deployed by the company. It is prepared for the same period as the income statement.
  • The statement of retained earnings: By looking at this statement, you can determine the changes in the retained earnings account during the period under review. The net income earned will lead to an increase in retained earnings, while dividend payouts will lead to a decrease.

Potential investors, venture capital firms, banks, and suppliers refer to these financial statements to determine the company’s financial health.

There’s an important point that needs to be mentioned here. Companies prepare their financial statements following generally accepted accounting principles (GAAP). These are accounting rules issued by the Financial Accounting Standards Board (FASB), a body that establishes financial accounting standards for public and private companies.

The fact that every company follows GAAP rules ensures that your startup’s financial reports are comparable with competitors and other firms in the same industry. This provides external users with the information they need to make decisions.

Accounting vs. bookkeeping

If you’re new to the subject of accounting for startups, it’s easy to get confused between the terms, accounting and bookkeeping.

Remember that a bookkeeper is someone who records your daily financial transactions. So, if you’re using an accounting software package like QuickBooks by Intuit, Xero, or FreshBooks, you would use a bookkeeper’s services to handle operational tasks. These include recording journal entries, managing the general ledger, and generating financial statements.

Bookkeepers don’t need a college degree or high-level skills to carry out their jobs. They can function effectively with a moderate level of on-the-job training.

Accounting is a very different kettle of fish. An accountant is a specialized professional who has earned a certification that equips them to perform their job. There are several well-recognized accounting certifications, but the CPA is widely acknowledged as the gold standard.

A startup’s accountant plays a crucial role in helping business owners analyze the company’s financial data. This individual would also play a part in preparing the tax return and in making the company’s tax filings. The accountant’s other tasks could include:

  • Providing inputs that would help you minimize your firm’s income tax liability.
  • Implementing the applicable accounting practices.
  • The responsibility for preparing accurate financial statements.
  • Preparing financial models to help management make business decisions.
  • Providing inputs for reducing indirect and direct costs.

In a nutshell, you can think of an accountant as someone who advises the company’s management on financial matters. Traditionally, many CFOs start as accountants.

The importance of business accounts

Managing a startup that doesn’t have a reliable method to keep track of its business performance is like driving a car blindfolded.

Here are several ways in which a new business or a company that is in its early stages of growth can benefit from an accurate system of business accounting:

Preparing financial forecasts

When raising money from potential investors, they require you to provide various types of financial information in addition to a comprehensive business plan. You should be able to answer questions like these:

  • What’s the expected volume of business per month for the rest of the year?
  • Is your gross margin increasing?
  • Are your accounts receivable numbers under control?
  • What’s your projected bottom line for the next three years?

Controlling costs

Up-to-date business accounts can help you identify weaknesses in your cost control system. For example, it’s possible to keep your credit card spend down by managing finance and accounting spend in real-time.

Monitoring and collecting customers’ payments

If your startup’s business model involves providing goods and services to your customers on credit, you’ll need to develop a strong accounts receivable management system.

The benefits of cloud accounting

Accounting for startups has been dramatically simplified by the easy availability of cloud accounting services like QuickBooks by Intuit and FreshBooks.

QuickBooks is one of the biggest cloud accounting firms. It has 4.5 million customers globally. More than 24 million people have used FreshBooks for its invoice services. It has paying customers in 160+ countries.

There’s a reason that small business owners and startups across the world have moved to cloud accounting. Web-based accounting is fast, convenient, and economical. Your data is hosted on remote web servers, so it’s safe and accessible over the internet. Additionally, it’s possible to update your financial information from anywhere.

There are other advantages, as well. Cloud accounting allows startups and small business owners to scale up their accounting services as their operations grow. The pay-as-you-go cloud accounting model that many providers offer will enable you to save money while ensuring that you can access the level of accounting services that your company requires.

If you’re unsure if cloud accounting is a good option for your small business, you can try it before committing. Both QuickBooks and FreshBooks offer a free 30-day trial.

Common accounting system set-up challenges

When you’re setting up your company’s accounting system, it’s advisable to opt for a reliable software package that can meet all your requirements. QuickBooks, FreshBooks, and Xero are the market leaders.

While these platforms will likely take care of your accounting needs, they may not have the capability to address the requirements of the rest of the organization. Fortunately, these cloud accounting packages provide a set of robust open APIs which allow you to add software that can help in areas like your organization’s budgeting and forecasting, and spend management.

Another thing to keep in mind is that it’s beneficial to get professional help when setting up your accounting system. If your business doesn’t require a full-time accountant, consider hiring a fractional CFO. You’ll get expert advice at a cost you can afford. When your company grows and moves to the next stage of its life cycle, you can think about employing a CFO permanently.

The bottom line

Accounting may not always get the attention it deserves in an early-stage startup. However, remember that the accounting function plays a key role in your company’s success. If your books are organized and up-to-date, you’ll be able to generate accurate and timely financial statements for your investors and lenders. You’ll also be able to provide your sales and operational teams with the information they need to carry out their work effectively.

About the Author: Ravinder Kapur
Ravinder Kapur is a commerce graduate and a fellow member of the Institute of Chartered Accountants of India. He has been affiliated with various interests in the financial services industry in India for more than 30 years.