Startups are young companies that are being started by an entrepreneur to enter the market with the idea of providing new products or services. But with so much hard work and determination on the part of these entrepreneurs, 30% of startups fail every year due to inappropriate cash management.
Bookkeeping for startups involves recording financial transactions, which can be accounts payable, accounts receivables, etc. Accounting for startups means the process of interpreting financial data, which can be expenses incurred, income received, credit statements and tax returns. This will help you better manage your cash flows and determine inefficiencies. It will help you raise capital and provide the financing with a proper presentation to take a loan from a bank or any other source.
Key Accounting Tips for a Startup
Accounting for startups is very important and provides various benefits, such as helping the business owners see where they stand and their financial performance. It helps in the creation of a simple financial model and creates financial projections, which further help in the evaluation of investment opportunities.
It can help in keeping track of debts and modifying strategies as per market conditions. It can help you be the point of contact for external parties such as banks, creditors, tax authorities and future investors. Therefore, here are some of the accounting tips that a startup entrepreneur or owner can follow to monitor and manage finances well.
1. Separating business accounts from personal accounts
It is critical to keep personal liabilities separate from business liabilities by maintaining separate bank accounts for each of them. If this is not done, it will complicate bookkeeping for startups and accounting processes. Your personal savings and money will be used in the business to incur expenses and pay taxes.
2. Budgeting
It is the first and most crucial step for a startup accounting process. It will help you plan your cash flows and achieve your goals. It creates accountability and a check on the work of an accountant for a startup company. It will help you meet your expectations and 60% of businesses will always build a budget to keep a check on their financial health. You can also check the number of employees you are hiring and report to each department on how much they can spend.
3. Choosing the accounting method
The two types of accounting methods used to record the transactions in the books of accounts are the cash method and the accrual method. These methods are a way to record entries into the financial statements. The cash method is easier to use and records income and expenses when they are earned or paid for. In this method, there are no accounts receivable or payable. Many startups choose to use this method as it is easier to follow and extracts the information when the transactions have actually occurred.
Difference between Cash accounting and Accrual accounting
The accrual method records the items when you owe money to creditors or vendors and payments are due from customers or debtors. It is recorded on the date when the credit transaction occurs, not the actual date of paying or receiving it. In this method, there are accounts receivable or payable in the books of accounts. It is recommended that you use this method because it provides an accurate and clear financial view of the business.
4. Go with the accounting software
As per the report, the accounting software market is expected to grow to $19.59 billion by 2026 from $12.01 billion in 2020, at a CAGR of 8.5%. Therefore, using it for your startup business can help you with time and cost saving. Hiring an in-house accountant for startup business is not a good idea in terms of cost and services. Therefore, hiring an outsourced bookkeeping and accounting firm is more helpful, comes at a much lower cost and provides access to the best all in one accounting software. It helps you track and record your finances on a real-time basis.
Source : Research and Markets
The accounting software market is expected to grow at a CAGR of 8.5% from FY20 to FY26.
5. Accurate Recordkeeping
It is also called bookkeeping for startups, in which you have to clearly keep an automated way of maintaining your books of accounts. Keep the receipts ready to read at any time and the expenses ready to pay at any time. Follow up with the accurate accounting standards that are applicable in your country.
6. Updated records
Accounting reports for small business can be made easy by maintaining up-to-date records of three financial statements: income statements, balance sheets and cash flow statements. Additionally, bank account reconciliation should be done on a monthly or quarterly basis to ensure accuracy of the internal financial records.
7. Keep an eye on some financial metrics
The owner or accountant for startup business has to keep a check and keep an eye on these important financial metrics. The first is burn rate, which shows how much expenses you are incurring in every month and the cash-out date, which helps in finding the date until all your cash is exhausted. The second is deferred revenue, which is the advance payments you get from your customers or debtors, which leads to showing off more cash flow than you actually have because you have to deliver the product or services in the coming future. The third is the accounts receivables, which is the amount you will get from the customers which increases your liability and accounts payables, which is the amount that is due to pay to the vendors or suppliers.
8. Inventory management
It is very important to have proper and accurate inventory management in place and to record COGS (Cost of Goods Sold) on income statements and at fair value on the balance sheet. You can also use software that will help track inventory and can be very fruitful if it’s integrated with the point-of-sale system and accounting software.
9. Reduce your labour and inventory costs
If you are a product-based startup company, then your extensive amount of money is being used for paying the labour and managing the inventory. You can choose to outsource your labour work to contractors and pay on an hourly basis, which will help you increase productivity as well as reduce costs. You can track inventory by analysing inventory carrying costs and checking the inventory turnover ratio, which helps you analyse how much sales you are converting from your inventory in a certain period of time.
10. Analysis of liabilities
Accounting for startups will also help the startups to analyse their liabilities on the balance sheet because in the early years of the business, the liabilities are generally very high as you might have borrowed more to finance the assets and the business operations. You have taken out loans from various formal and informal lenders and credit card facilities from banks, which need to be paid on time to avoid any fines later. Alternatively, it helps in checking whether extra liabilities can hamper the startup’s growth or not.
Tax filings on time are also very important for startups.
11. On-time tax filings
Tax filings and payments are regulatory and legal work that every company needs to do on time. The accountant for startup business should file the tax on time to take advantage of the tax exemption or tax credits that the government generally provides to startup firms to boost entrepreneurship.
Outsource your accounting work to IBN Tech
You can also choose to do the bookkeeping work yourself, but that requires sound accounting knowledge and a lot of time. The other option might be to hire an in-house bookkeeper for your startup business, but that comes with a lot of cost and cost is an important factor to analyse as a startup because you are in the early stages of setting up a business. Therefore, by choosing to outsource your accounting tasks to a specialized firm, you can effectively reduce accounting costs and enjoy additional benefits.
Here are some of the benefits of outsourcing your accounting work to IBN Tech:
1. Bookkeeping services begin at a very low cost of $10 per hour or $250 per month, depending on your needs and customization options, which can help you save up to 50% of the cost.
2. We have been in business and have experience providing services for more than 100 man-hours in various industries such as automobiles, banking, healthcare, hospitality, insurance, mortgage, multi-location businesses, non-profit organisations, travel, recruitment firms, retail and telecommunications.
3. We have a team of qualified and certified bookkeepers, teams for CPAs, CAs, CFAs and CMAs and also provide CFO virtual assistance in the US and UK.
4. In terms of software expertise, we have qualified Intuit ProAdvisor’s, Xero software, Wave software and so on.
5. For data security, we have Cert certification, and we deliver 99.9% accuracy in our work.
Conclusion
Setting up a startup in a market will only help you win half the battle. The actual battle starts with sustaining and maintaining its continuity and profitability in the long run. But you don’t need to worry if you have used these tips in your accounting for startups and manage your finances well. You can always choose to outsource your bookkeeping and accounting work, which will help you easily track your finances while reducing the cost.
Frequently Asked Questions (FAQs)
1. How do startups handle accounts?
Startups can handle their accounts by following these simple steps:
Open a separate business account apart from your personal bank account.
Divide your expenses into the types such as operating expenses which can be salary, rent, material purchasing, tax payments and capital expenditures which can be purchasing land, machinery, or equipment.
Make a list of your vendors which can provide the materials and equipment.
Use an automated way of maintaining your data to customers in order to give them the best services and maintain a long-term relationship.
Follow up with the bookkeeping system, either by doing it yourself, hiring an expert or outsourcing the work.
Check with the method of accounting and use the method which helps in a longer period.
Set up your payroll and HR system in order to smooth the salary payments and hiring process.
Lastly, file a tax on time as well as payments on time.
2. Why is accounting important for startups?
Accounting is important for startups because it helps the owner’s forecast profitability in the future, preparation of budgets based on past finances and managing payroll and taxes, etc.
3. What financial records should a startup keep?
Startups should keep financial records of money earned and spent on the core activities of the business, including the record of inventory and purchasing and selling of goods and rendering of services and assets and liabilities of the business at a point in time.
