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Accounting for Startups 101: A Beginner's Guide

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July 19, 2021

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While accounting might not be the first office process on your mind for your startup, it could just prove to be one of the most important. 

 

But knowing how to manage your account efficiently might not be all that intuitive at first. 

If you have questions about getting started with your accounts - or whether you even need to yet - then you’ve come to the right place. 

Do I need accounts from day one of my startup?

The simple answer is yes. 

While it is not strictly necessary to focus a ton of energy on accounting in the early days of a business, failure to pay any attention at all might cause problems down the line. 

Accounting offers insight and direction in the early days of a business. It can help an owner to predict trends in their business, as well as to spot inefficiencies. It is also essential for tax preparation and for obtaining loans or lines of credit.

Accounting paints a picture of how a business is performing. This key data can help guide future decisions and is beneficial during the complicated and uncertain days following the launch of a startup. 

With that in mind, let’s explore exactly what "accounting" means for a startup specifically. 

What is accounting?

Accounting is the process of accurately recording and interpreting a business' financial data.

Financial data for startups often include payments made, payments received, credit statements, and tax returns. Accurate accounting tracks the flow of money through a business. Business owners can use this information to determine spending and inefficiencies. Accounting is an essential practice for tax preparation and for maintaining clean financial records.

What is the difference between accounting and bookkeeping?

Accounting is often confused with bookkeeping

Bookkeepers are similar to accountants when it comes to recording financial information; both must accurately record financial information in their roles. 

However, bookkeepers focus on recording data, while accountants analyze and interpret the financial data recorded by a business.

Bookkeeping and accounting are both necessary for healthy financials, but they are not interchangeable. An accountant offers unique services based on years of mathematics and finance education.

Who needs to keep accounts?

Every single business should maintain accurate, up-to-date financial records. 

The consequences of not doing so can be costly. A startup might not need an incredibly in-depth analysis in the early days. The amount of analysis will likely vary business to business, but every startup is advised to maintain well-kept records of all financial transactions.

At the absolute minimum, a business is likely to need records of its transactions when tax season rolls around. Maintaining good financial record-keeping habits from the beginning can illustrate deductions and exemptions that could save money when filing taxes, and avoid that end of tax year panic. 

What are the benefits of keeping good accounts?

As mentioned above, one immediate benefit of good accounting is access to valuable financial data. 

This data provides clues and insight into how a business operates and helps owners to make decisions for the future. In a competitive startup market, this extra insight might make the difference between success and failure.

Another benefit of good accounting is organization. 

Businesses with stellar financial records can quickly and easily produce detailed financial information. Easy-to-access records can lighten the load when paying taxes, resolving disputes, or applying for loans. It is difficult to imagine a scenario where accurate, well-maintained financial records would be detrimental to a new business.

Accounting 101 for startups

It might be easy to be put off from tackling accounting during the early days of your business. 

While accounting can undoubtedly be complex, startups can benefit from using even the most straightforward accounting practices, and these practices can grow alongside your business. 

How to start your accounts

Every startup must evaluate its priorities and determine which of the two accounting styles to use: cash or accrual

The cash method of accounting is simpler and more often used by small businesses. In the cash method, accounting takes place in real time as money is received and paid.

The accrual method of accounting is more complex and includes accounts receivable and accounts payable line items. The actual transaction of money from one account to another is less important in this method. Larger businesses most often use accrual accounting and, in some cases, the law requires it.

While an in-depth analysis might not always be necessary right away, businesses might be wise to keep basic records from day one. Keeping track of the financial records listed below is a great starting point for startups: 

Payroll

Some startups have only one employee, the founder, which makes payroll a non-issue in the early days. However, it is essential to maintain detailed payroll records for any startup with at least a few employees.

Bank and credit card statements

Startups may want to take the time to reconcile their bank and credit card statements. Try to examine statements and compare them to internal ledgers, and account for discrepancies.

Payments received

Forming a ledger documenting payment for goods or services, when the payment was received, and where the payment was deposited, is a solid basic practice to get into the habit of. 

Payments made

New businesses often don't have the flexibility to absorb big bumps in their supply chain. Keeping track of payments made to vendors can help to ensure that a company can resolve any disputes regarding payments swiftly.

Tax returns

Legally, businesses must keep tax returns on file for no less than three years. It is vital to maintain accurate tax records, especially if your company just began operation.

Keeping accurate accounting from day one can make your job a lot easier in the long run, and avoid costing you time and money. At the very least, you'll need to make sure you are keeping accurate records, even if your startup isn't ready for an in-depth financial analysis.

Do I need an accountant?

In most cases, you do not need an accountant from day one of your business.

It isn't easy to analyze data that doesn't exist, meaning there may be little for an accountant to actually do until the business ramps up operation. However, this does not mean financial records are not important from the start. On the contrary, bookkeeping from the first day is recommended. It is usually not until later in a business' life that an accountant becomes necessary.

Some businesses in specific situations might benefit from hiring an accountant early. 

For example, a tech startup soliciting investors might require detailed financial information that requires expert preparation. For most businesses, a professional accountant is a significant drain on liquidity when margins are still razor-thin.

It might be helpful to consider the difference in cost and service between hiring in-house and outsourcing your accounting needs. Outsourcing is typically less costly and often preferred when a business matures to the point of first requiring a professional accountant.

Many owners like the security provided by an accountant, and if cash is available, it could be a viable option. Aim to evaluate your startup on an ongoing basis to determine when a professional accountant might be the most beneficial to your business. 

Do I need specialist software?

Technically speaking, no. 

You can opt to do your accounting and bookkeeping manually. However, it is rarely cost-effective to do so. Startups are naturally concerned that fancy accounting software might be overkill and a drain on resources, especially when the business has only a few employees.

It can seem tempting to trim costs by omitting dedicated accounting software in favor of a well-built Excel document or hand ledger. This might save a few bucks but can come at the expense of jeopardizing accounting accuracy. In addition, the cost of accounting software has plummeted during the past two decades, making it a viable option for almost any business.

Software pricing varies depending on the provider and price plan, but several options fit the needs of startups. One of these, FreshBooks, starts at only $6 per month for up to five clients and $20 per month for unlimited clients.

Subscriptions include accurate, double-entry accounting. FreshBooks generates balance sheets, ledgers, accounts payable, trial balances, and many other valuable pieces of financial information.

Accounting software can be costly and complex, but most startups won't need such specialized software. An affordable product may be a good fit for the needs of new and small businesses.

Three accounting tips for startups

Create a budget and stick to it

The importance of a budget cannot be understated. No amount of accounting wizardry is likely to be able to help if a business spends beyond its means.

Allow your accounting process to develop alongside your startup

Don't feel compelled to rush into hiring a professional accountant and purchasing expensive software aimed at businesses with hundreds of employees. It can be worth taking the time to evaluate your business and determine your current accounting needs.

Use the best tools for the job

While you don't want to overextend your new business, you probably don't want to deprive yourself of helpful resources either. Evaluate the needs of your business regularly to determine the requirements for the best accounting you can afford. 

If your business is ready to invest in professional accounting, consider hiring an accountant through Hunt Club today!

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