Accounting basics for startups
April 8, 2019
A business is only as good as it’s accounting. Startups earning their first few bucks can be exciting. But sales have a long way to go before they can actually be deemed profits.
Running a startup can be hectic enough before even considering financials. But if you neglect your accounting practices now, you’ll be scrambling later.
Why does it matter? Staying up-to-date on your financials allows you to keep your head above the surface; it saves you from the workload of untangling a hot mess of expenses; and it helps you plan for the future. After all, that hot mess is one of the main reasons many startups and small businesses fail. Another being poor planning.
The success of your business relies on your ability to be organized and transparent, which of course, is easier said than done.
Aside from monitoring your profits and expenses for your own benefit and planning needs, you need to be organized for banks and potential investors. At the sight of disorganization or poor planning, banks and investors are likely to flee. And they’re not wrong to do so.
So, whether you’re outsourcing your accounting or bookkeeping tasks to a professional, or taking matters into your own hands, there are some things you ought to know.
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Stashing your cash
Your first move in respect to your finances is researching which banks will be most beneficial to your business size. Startups aren’t usually left with many options when it comes to banks, which generally leads to them being taken advantage of and financially abused.
Once you’ve decided on a bank, the next step is opening a bank account in order to maintain a division between personal and business spending. Overlaps in your accounts can complicate your records. Do you really want to over-complicate tax season?
While you’re at the bank, start a savings account specifically for taxes. If it’s out of sight, it’s out of mind. It’s proactive and won’t make you think you have more cash than you really do.
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Consider what’s important
Adding too many details into your core accounting system is a waste of time and can be distracting. Your chart of accounts really only needs some basic information. You don’t need to be too specific.
When it comes to recording information, your profit and loss statement will contain your income and expenses. You can find out the difference between what you own and owe from your balance sheet. Other major financial statements are the income statement, statement of cash flows, and statement of stockholders’ equity.
What should you track?
Along the lines of reporting on what’s important, you should be tracking specific metrics that will help reduce your burn rate in the future.
It’s important to understand your past and current expenses in order to make positive changes. Of course, it’s good to save money any way you can, but making uneducated cuts can hurt and might not even solve any problems.
Startups have a unique list of metrics to track, compared to weathered companies and big businesses. One of the most important metrics for startups to track is customer acquisition costs (you got one! But at what cost?). Next, churn rate, revenue run rate, and burn rate are all top the list.
Keep your eyes on the prize and don’t get distracted by irrelevant metrics. Focus for metrics that lead to better decisions.
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What method should you follow?
There are two methods of accounting: cash basis and accrual basis. If your business earns $25 million or less in gross revenue, you can use cash basis. On the other hand, any business can use accrual basis, but it is used mostly by larger businesses.
Accrual method is highly regarded by accounting professionals. It is also reinforced by tons of accounting software packages that cater to businesses based on its complexity. For this reason, larger companies generally use accrual basis accounting. So although it’s more difficult and is not for the inexperienced, it also offers some slack in terms of software.
Since accrual basis allows you to track your profits more accurately, even on a monthly basis, you’re able to make better informed decisions.
Remember all that stuff afore mentioned about banks and investors? They prefer accrual because it provides better visibility into your business’ profitability.
Organization, transparency. Ring a bell?
Cash basis is known to be more simplistic and more widely used by small businesses. If your startup is looking to handle its own financials without the help of a professional accountant, cash basis accounting is the way to go. It’s simple and practical. There are no figurative numbers or credit. Businesses using cash basis record a sale only once a payment is received. The same goes for expenses, as they are not recorded until paid out.
Choosing a method isn’t so hard. However, once you’ve chosen, you must remain consistent.
What year is it?
That’s right. The world is at your fingertips.
I hate that expression. But it’s true.
There’s no reason why you can’t keep your financials up-to-date and accessible. The days of stashing receipts in strange places, only to lose them are over. Scan or take a photo of any important documents, receipts, and invoices and store them on a cloud. Never lose a record. Then, share them digitally with whoever needs access.
These days, it’s easy to take charge of your startup or small business by prioritizing your accounting responsibilities. Take advantage of the resources that are available to you and you’ll thank yourself later.