Building a strong accounting foundation is crucial for startups in order to maintain organization, boost productivity, get funding, manage expenses, and spot potential risks and business opportunities. You must comprehend the fundamentals of startup accounting whether you decide to use accounting software or hire an accountant.
Accounting 101: What you need to know as a startup | Xero
How is accounting for a startup different from an established business?
Although the accounting department of a startup company and an established company perform many of the same tasks, there are still some areas where they diverge. Established companies frequently have an accounting department with a variety of staff members who are focused on specific tasks, such as taxes, financial statements, payroll, and more. However, due to their smaller budgets, startups may only employ one or two people to handle all of their accounting needs. In some cases, the business owner may handle most of the accounting duties themselves if a startup company lacks the funds to hire many employees.
What is accounting?
Businesses and organizations use accounting as a process to capture, preserve, and disseminate crucial financial information. Accountants and other experts typically handle accounting, ensuring that the business maintains budget balance, keeps track of expenses, and creates important financial strategies. This can assist companies in assessing their financial performance and determining whether they need to make any changes or adjustments in order to boost revenue. Accounting can also assist businesses in competitor analysis, opportunity identification, and financial reporting to stakeholders and investors.
How to do accounting for a startup
The following list of steps will assist you in setting up your startup’s accounting department:
1. Find the right software
For new businesses, selecting the appropriate accounting software is crucial because it can aid in the creation of an impressive bookkeeping system that includes processing business transactions and reconciling bank statements. Because it can assist businesses in producing their financial statements and in keeping track of crucial accounting decisions, bookkeeping is crucial.
If you want to use software to expand your startup, do some research on the various options and costs available to you to help you choose the solution that will work best for your company. Using a spreadsheet can be a simple and affordable alternative if you’re unsure whether your budget can support software.
2. Understand financial statements
Understanding the various financial statement types, their uses, and how frequently you should produce them can be helpful when setting up your accounting department. The three main types of financial statements include:
This can help you continuously assess the financial health of your business and decide which financial statement is most appropriate given the circumstances. For instance, an income statement may be the best option if you’re trying to determine how well the business has performed over the past year. A balance statement or cash flow statement, however, might be a better choice if you’re hoping to demonstrate to investors the strength of the company’s finances.
3. Establish your chart of accounts
Your company’s major financial accounts are listed in your chart of accounts (COA), also referred to as a general ledger. This can include both assets and liabilities, such as money you have in the bank, furniture, and vehicles.
Companies can demonstrate their financial health to investors and produce significant financial documents, like the balance sheet, by arranging these items in an easily readable format. It can be a useful tool for startup business owners to comprehend their key assets and monitor business activity and company growth.
4. Track financial documents
For new businesses, it can be crucial to keep track of their transactions and financial activity by gathering and organizing specific paperwork like receipts, invoices, bills, and more. These forms can be used by businesses to complete crucial tax forms, submit useful insurance claims, and support any potential legal disputes. It can be advantageous to develop a striking filing and organizational system for tracking financial documents, and to keep records for at least three years before erasing them.
The proof of payment statements are another significant document that can be useful to gather. These records or notifications give companies evidence that payments they made to suppliers or other companies were successful. These notices are typically sent to businesses prior to the formal transfer of funds. Keeping hold of these records can help you demonstrate to businesses that you have paid, particularly if the money doesn’t reach their account. The delay may be caused by a different source, such as the bank, as a result of which you won’t need to make the payment again.
5. Develop payroll
It can be crucial to create a payroll system if your business has at least one other employee in addition to you. Maintaining employee personnel records and controlling the completion and use of specific tax documents, like the W-2 form, are common tasks associated with payroll systems. These records ensure employees are paid correctly and the appropriate amount is withheld from paychecks for tax purposes. If you’re unsure of how to launch a payroll system, it can be helpful to look into various software solutions or think about using a payroll service that handles most of the work for you.
6. Learn to create invoices
Important documents called invoices are sent by companies and organizations to customers and clients to let them know how much they owe for various goods and services. It can be crucial to know how to create expert invoices that contain all the information required by customers when starting a business. You can still make invoices manually and save a basic template to use time and time again even though some accounting software and programs can generate invoices automatically. Once you know how to make invoices, you can also benefit from developing a system that monitors invoice payments so your business can produce accurate financial reports.
Tips for accounting for a startup
Here are some additional pointers to assist you in creating your accounting system:
Look for an accounting partner
Finding an accounting partner or employee can be very helpful for many startup business owners because it will allow them to let go of accounting duties and concentrate on other business issues, like marketing, sales, and long-term company goals. Finding an accounting partner with a strong skill set and experience can be advantageous in order to help maintain the company’s finances and provide guidance and support so that the company can continue to expand and develop.
A company might want to think about hiring a different company to handle their accounting department if they don’t have the time or resources to do so themselves. These distinct businesses frequently offer a wide range of services, including bookkeeping, payroll, the creation of financial statements, and others. Outsourcing can sometimes save business owners time, allowing them to focus their attention on more crucial tasks and assignments, even though the cost can vary depending on the type of company and the services they provide.
Understand the different roles
Understanding the major positions in the department and their primary responsibilities can be crucial before developing the accounting department for your startup. This can assist you in figuring out the main responsibilities the department carries out and whether you need to hire more staff. These roles can include:
4. Continuously re-examine the department
It may be advantageous to review your accounting department and its key systems as your company expands. This can help you stay current with the most recent accounting methods and enable your business to grow. For instance, if you initially chose to use a spreadsheet as your bookkeeping system, it might be beneficial to look into new software or perhaps a bookkeeper after the first year or two. You can do this to increase your accounting efficiency and concentrate on other aspects of your business.
How do startups do accounting?
- Cash basis accounting. …
- Accrual basis accounting. …
- Enter all transactions into your bookkeeping software or Excel spreadsheet.
- Categorize your transactions. …
- File or digitize receipts. …
- Reconcile your bank accounts. …
- Prepare and send invoices (if applicable) …
- Pay vendors and other bills.
Do startups need accountants?
Accountants can help with services like estate planning and loan applications as well as offering financial and strategic advice for your company. In some circumstances, a startup tech company raising capital may also require an accountant, he said.
How much should a startup spend on accounting?
Statistics show that the majority of small business owners spend at least $1,000 annually on internal costs, accounting administrative costs, and legal fees. Following is a breakdown of the data: 23% of small businesses spent $1,000 or less. 31 percent spent $1,000 to $5,000.
What should a startup accountant look for?
They should regularly review your company’s financial statements, not just around tax time. Find a certified accountant who is knowledgeable about accounting software, tax regulations, and business management.