Accounting For Startups: A Beginners Guide For 2024

A strategic guide to empower your business for financial success.

New business owners face many obstacles, and grappling with the intricacies of startup accounting and bookkeeping can become a huge headache.

The importance of the startup accounting process cannot be overstated, but deciding which bookkeeping software to use or how to handle financial management is challenging.

That’s why we’ve created this beginner’s guide to accounting for startups, offering you a roadmap to establish and maintain a solid financial foundation.

Key Takeaways

• The Difference Between Accounting and Bookkeeping

Accounting takes a broader, more strategic perspective on financial management, while bookkeeping focuses on accurately and efficiently capturing day-to-day transactions.

• Make Informed Decisions

Accountants produce financial reports that provide insights and analysis of your business, while bookkeepers focus on recording financial transactions and maintaining financial records.

• Obtain Timely Information

Your bookkeepers must capture daily business transactions as close to real-time as possible to facilitate accurate cash flow reporting.

• Use The Right Software Tools

The right accounting software helps small businesses streamline their financial processes to extract maximum value from the information.

• Get Professional Help When Needed

Your in-house staff can handle day-to-day bookkeeping tasks, but accounting professionals are best suited to handle more complex financial tasks and strategic planning.

Why Is Accounting Important For Startups?

Successful running of small businesses depends on the financial bottom line, and success requires you to manage a budget and meticulously balance your books.

Effective accounting practices clearly show your business's financial position and performance, showing returns to all stakeholders.

Understanding accounting terms is just one of the many ways to improve the understanding of your business.

Successful business owners leverage their accounting data to understand past performance, assess current status, and strategically plan for the future.

Monitoring Your Business’s Financial Health

The business's financial health is revealed through comprehensive financial reports that help break down financial data and assess the business's economic well-being.

Using financial statements and relevant financial data, owners can ensure business growth through astute financial management and deploy resources where needed.

Accurate accounting helps startups monitor their debts to suppliers and lenders, ensuring a transparent record of all goods and services purchased.

This is balanced by tracking customer receivables, ensuring that sales and revenue targets are met, and adjusting as needed.

Tax Compliance

Small businesses use financial statements to communicate with external stakeholders, sharing crucial information with entities such as banks, the IRS, investors, and leasing companies.

By using generally accepted accounting principles, accountants ensure adherence to legal and regulatory requirements to avoid penalties and legal complications related to local tax laws.

Without a robust, well-designed startup accounting system, companies will struggle to file tax returns and payroll taxes and meet their financial obligations.

Raising Capital

Based on its business structure and industry, companies can use financial accounting information to analyze competitors and evaluate potential investment opportunities.

Accurate financial records also enhance investor confidence, making your startup more attractive to prospective funders.

Potential investors can only assess a startup's financial health with comprehensive financial statements, making it difficult to expand or secure adequate business credit.

Accounting vs. Bookkeeping

Accounting takes a broader, more strategic perspective on the financial management of a business, whereas bookkeeping is concerned with capturing daily transactions.

A well-designed accounting system provides insights and analysis through financial reports, while bookkeeping focuses on recording financial transactions and maintaining accurate financial records.

Bookkeeping focuses on capturing daily business transactions in real time, while the accounting process involves periodic analysis, reporting, and cash flow management.

Your accountant can provide pertinent accounting tips to your bookkeeping department that will help provide better-quality information.

Selecting Bookkeeping Software

Accounting for startups requires selecting bookkeeping or cloud-based accounting software best suited to your small businesses.

When deciding on automated accounting software, an analysis of Xero vs Quickbooks or other bookkeeping software will show the best fit for you and your industry.

Accounting professionals are better placed to handle more complex financial management tasks and strategic planning, while bookkeepers deal with the day-to-day startup accounting process.

Accounting Basics Every Startup Needs To Track

To ensure compliance and produce quality information, the accounting system for small businesses must track all sources of income and expenses accurately.

1. Measuring Profitability

The financial transactions entered into the startup accounting system are used to prepare the income statement, which shows whether the business is operating profitably.

Your bookkeeper must have a system of checks and balances to capture each entry accurately and allocate items to the correct accounts in a timely fashion.

Each financial transaction is analyzed using basic accounting principles and then allocated to the correct account listed in the trial balance.

2. Cash Flow Management

Monitoring cash flow is arguably the most important daily function of accounting staff, as they must ensure a healthy financial position to sustain day-to-day operations.

By monitoring business finances and producing a cash flow statement, accountants see whether profits or losses will affect your company’s ability to meet financial obligations.

3. Balance Sheet Health

After the income statement, the balance sheet is the next financial report that helps gauge a startup business's financial health.

It gives management a snapshot of the business's financial health and is used to assess the assets, liabilities, and shareholders' equity.

4. Budget Variances

It is prudent for every startup business to create budgets that plan and control spending, as these help provide financial stability and resource allocation.

As financial transactions are recorded, financial reports like budgets should be updated to reveal variances requiring management's intervention.

Regular reporting must form part of the accounting process, as it is only through their analysis that the correct decisions can be made by management.

5. Accounts Receivable And Payable

Managing accounts receivable (AR) shows money due and accounts payable (AP) money owed, ensuring a healthy cash flow.

Once financial transactions for a period are finalized, reports must be generated to show the aging of AR and AP accounts so that outstanding amounts can be addressed.

Accounting For Startups: A Step-By-Step Guide For 2024

There are various benefits to automated accounting software and cloud-based accounting software that allow users to access information securely from remote locations.

These small business accounting tips will help you implement an accounting solution:

Step 1: Set Up Your Accounting System

The choice of which accounting software to use depends on several factors, including the complexity of your business and industry.

A small business may choose Xero or Quickbooks depending on which country they are in and how familiar their staff are with a particular system.

Larger businesses may run more sophisticated accounting software, such as SAP, which includes an ERP component to help manage the business more effectively.

Once a decision is made on which accounting software to use, a chart of accounts tailored to the startup's specific needs is set up.

Step 2: Record Financial Transactions

Bookkeeping entails recording daily financial transactions, allowing the accountant to produce accurate financial records.

Part of the accounting process includes managing invoices to record all sales accurately and collect the money owed on time.

Invoice management includes setting up a system that ensures that when an order is processed, it is authorized correctly and updates the sales account.

Step 3: Bank Reconciliation

Bank statements must be reconciled with accounting records regularly to update debtor payments and reflect all transactions in the ledger.

If there are errors in the accounting process, the reconciliation process will identify them.

Step 4: Budgeting And Forecasting

A budget is necessary to ensure that a startup business has revenue targets and doesn’t exceed expenses or run out of money.

Use the following steps to set up a monthly budget so that you can track and address any variances throughout the year.

Revenue Sources

Before a realistic budget can be drawn up, startup businesses must assess their revenue sources and gather historical data to help identify patterns and seasonal variations in income.

Estimate your sales figure for the following 12 months on the historical data and use it to set sales targets.

Fixed Expenses

To establish a baseline for predicting future fixed expenses, you must identify fixed costs such as rent, debt repayment, salaries, depreciation, property taxes, and insurance.

Variable Expenses

Identify all fluctuating costs linked to business output or production, such as hourly employee wages, raw materials, and utility costs.

Use any historical data available to help estimate future variable expenses and record them in each ledger account so that you can control them.

Establish Contingency Fund

A startup business must meet many challenges, so setting aside a contingency fund to cover unexpected costs is prudent.

Instead of allocating surplus income to additional variable expenses, consider creating an emergency fund for unexpected equipment breakdowns or sudden inventory replacement needs.

Calculate Projected Profit

Add projected revenue and subtract fixed and variable expenses to calculate net income to see if you made a profit or incurred a loss.

Compare these projections with past profits to ensure they are realistic, and adjust where necessary to reach a suitable result.

Set Realistic Goals And Monitor Progress

Finalize your budget by setting realistic spending and earning goals for each month, quarter, and year, and regularly compare actual financial numbers against the budget.

You may have to adjust strategies and projections when necessary to ensure your business stays on track and meets its financial objectives.

Step 5: Financial Reporting

Your accountant must generate financial statements regularly in the form of management accounts - preferably monthly, but at least quarterly.

The key financial reports include an income statement and balance sheet, an AP and AR age analysis, and a budget and variance analysis.

Your accountant should also include a cash flow statement in the management pack so that you can assess where the money is going.

Understanding The Income Statement

Start by evaluating the sources of revenue, including product and service sales, and identify major expense categories like operating expenses, capital expenses, and amortization expenses.

Highlight any amounts that show a large variance from the budgeted figures and establish the reason for the difference and any actions needed.

Assessing The Balance Sheet

Examine the balance sheet, focusing on the company's assets (cash, investments, receivables) and liabilities (loans, mortgages) together with supporting reports.

Pay close attention to net worth, which is calculated by subtracting liabilities from assets and shows whether the company is growing or not.

Cash Flow Analysis

Evaluate the cash flow statement to assess the startup's ability to manage its finances and identify any areas of concern.

Understanding the cash generated from operating activities, investing activities (e.g., buying and selling stocks), and financing activities (e.g., repurchasing shares).

Confirm that the business produces a positive cash flow, indicating its ability to meet future financial obligations.

Key Performance Indicators

Once you have worked through the financial statements and discussed any variances or unexpected amounts, you should run through the key performance indicators (KPIs).

Focus on identifying and analyzing the following KPIs:

• Net income
• Operating income
• Net cash flow
• Sales growth
• Gross margin
• EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
• Debt-to-equity ratio
• Working capital
• Equity and valuation

These KPIs provide insights into the startup's overall performance, profitability, and financial health and provide targets for you to aim for and areas for improvement.

Step 6: Tax Planning

Tax planning is a complex process, and it is best that you engage a tax specialist to assist you with your company's tax prep checklist and obligations.

Federal Income Tax

Startups are subject to federal income tax on profits, with rates varying depending on the business structure—C corporation, S corporation, LLC, or sole proprietorship.

State Income Tax

Depending on which state or states your business operates in, startups may be liable for state income taxes, which can vary significantly.

Understanding the multiple state-specific regulations that may apply to your business is crucial for effective tax planning.

Employment Taxes

Startups with employees must handle employment taxes, including social security and Medicare taxes, federal and state unemployment taxes, and possibly other payroll taxes.

Sales Tax

Collecting and remitting sales tax is a necessary complication for startups selling physical goods and/or certain services.

Rates and regulations of sales tax vary by state, and compliance is essential to avoid penalties ranging from 10% plus interest to $5,000 and 6 months in jail.

Business Property Tax

Some states also impose taxes on businesses' personal property, including equipment, machinery, and inventory, which must be properly valued and reported.

Tax Planning Strategies

Appoint a qualified tax professional to help guide you through complex tax codes, optimize your deductions, and minimize your tax liabilities.

Startups can also take advantage of available tax credits for research and development, hiring, and other qualified activities.

To start with, choose a business structure that aligns with your tax objectives, considering factors like liability, flexibility, and the various tax implications.

A qualified accountant constantly monitors changing regulations, stays informed about evolving tax laws and regulations, and helps you adjust your tax strategy accordingly.

A professional accountant can file taxes efficiently and to your best advantage, with minimal fuss and bother.

Step 7: Compliance and Regulations

You must keep abreast of changing financial regulations and compliance requirements, as non-compliance can result in heavy penalties.

This is best left to professional accountants, and you should seek their help and advice when faced with complex regulatory matters.

Step 8: Financial Audits

Startups can benefit from internal audits that help them navigate complex regulatory landscapes by independently assessing operations, financial reporting, and regulatory compliance.

Implementing An Internal Audit

Early implementation of internal controls by auditors helps maintain a healthy reputation for startups, preventing reputational damage arising from material weaknesses or deficiencies.

Appoint an internal auditor with a consulting mindset to offer valuable insights for process improvements, corrective actions, and efficient operations.

By regularly evaluating risk and internal controls, internal audits contribute to fraud prevention, error reduction, and overall risk mitigation, facilitating sustainable growth.

External Audits

Private US companies are not legally obligated to submit audited financial statements but may be required to do so if they borrow money.

Outside investors may also require audited financial statements as they are usually not involved in the business entity’s daily operations and require reliable information.

Step 9: Continuous Improvement

Startups must receive feedback on their financial position and analyze the data to identify areas for improvement in the accounting process.

As the business grows and evolves, the accounting system must be able to adapt to the changing needs of management and outside stakeholders.

The accounting system must be able to adapt to increasing transaction volumes, making use of automation to reduce the bookkeeping workload.

A workforce also increases as the company expands, requiring a robust payroll solution that can handle a larger team, employee benefits, and complex tax regulations.

Step 10: Seek Professional Guidance

Hiring an accountant for strategic financial planning and compliance makes sense when faced with a growing business and more complex financial problems.

A growing startup requires more sophisticated financial planning and forecasting, and initial budgeting processes may not be sufficient to deal with increasing size and complexity.

Professional accounting assistance can help streamline operations and enhance the efficiency of the integrated advanced accounting software to address increased demands on financial infrastructure.

Summary

The long-term benefits of implementing the right accounting systems in a startup may play a significant role in the success and sustainability of the business.

A professional accountant can help ensure tax compliance and raise much-needed capital by using the right accounting tools to obtain timely information.

The accounting process is an ongoing learning opportunity that needs to constantly change and adapt to keep up with the needs of a growing business.