The average cost of launching a startup is $3,000, and payroll is one of the highest costs a business incurs. What’s clear from these statistics is that starting your own business is expensive, so you need to stay on top of your finances. Not only will that help with your overhead, but it’ll also help you stay compliant.
This means that you must perform accounting, whether it’s done in-house or through a third party. Read on to find out all about accounting for startups to make sure that you have all your paperwork done right.
What Is Accounting?
Accounting is where you record, analyze, interpret, and summarize the financial transactions of an organization. It’s the backbone of financial management, as it provides a comprehensive framework for businesses to track their economic activities and make informed decisions.
Because accounting uses standardized principles and guidelines, this establishes an accurate and transparent representation of a company’s financial health.
The key components of accounting include creating financial statements, such as:
- Income statements
- Balance sheets
- Cash flow statements
Why Do You Need Accounting?
Accounting can offer a snapshot of your startup’s performance, and it can facilitate comparisons over time. What’s more important than historical record-keeping is that accounting plays a crucial role in:
- Budgeting
- Tax compliance
- Strategic planning
One last reason why you need accounting is that it provides stakeholders (such as management, investors, and regulatory bodies) with essential information to assess your organization’s viability. This information can guide future actions too.
The Basics of Accounting for Startups
You may now understand what accounting is, but you probably don’t know where to start. Here are the basics of accounting you should know.
Initial Steps
Obviously, you’ll have to set up a company first. To do so, you’ll need to choose a business structure, such as a limited liability company (LLC). This is a smart decision, as it separates your personal and business finances in terms of liability.
Once you’ve decided on a business type, use our business registration service. We at Business Anywhere will take care of the tedious work and get your startup registered within a few days.
Next, open a business business account. This will make accounting a lot easier, as your personal transactions will remain in your own bank account, and your startup’s will be in the business bank account.
Set up a Chart of Accounts
Develop a chart of accounts that categorizes transactions into different accounts, such as assets, liabilities, equity, revenue, and expenses. When you have this structure, it’ll provide a framework for recording and organizing financial transactions.
Choose an Accounting Method
There are two types of accounting methods: cash and accrual basis. Cash basis records transactions when cash changes hands, while accrual basis recognizes transactions when they occur, regardless of when the cash is exchanged.
In most cases, startups use accrual accounting since it gives them a more accurate representation of financial health.
Use Accounting Software
Accounting software for startups is highly recommended, as it’ll streamline the process and reduce errors. Some popular options for startups include:
- QuickBooks
- Xero
- FreshBooks
Whichever tool you choose, it’ll automate many aspects of accounting, such as invoicing, expense tracking, and financial reporting.
Track Your Expenses
Keep detailed records of all business expenses, including your receipts. This includes costs related to product development, marketing, office space, utilities, and any other operational expenses.
Proper expense tracking helps with budgeting, as well as tax preparation. This means taking this extra step will definitely pay off.
Determine the “When” for Revenue Recognition
If you have a subscription-based business, revenue might be recognized over the life of the subscription. For product-based businesses, this is typically recognized when the product is delivered or the service is performed.
Focus on Budgeting
Develop a budget to plan for future expenses and revenue. This will help you make informed financial decisions, which will increase the chances that the startup remains financially sustainable.
Regularly compare actual financial performance against the budget to identify variances. From there, you can make corrections and make better use of your money.
Do Cash Flow Management
Monitor cash flow closely. Even a profitable business can face financial challenges if cash flow isn’t managed well. Keep track of cash coming in and going out to ensure your startup can meet its short-term obligations.
Prepare and Review Financial Statements
You should be doing both actions on a regular basis. Key financial statements include the income statement, balance sheet, and cash flower statement.
These statements can give you more details about the financial health and performance of your startup.
Ensure Tax Compliance
Understand tax obligations and deadlines, as compliance is essential to avoid penalties and legal issues. For example, does your LLC need an EIN? And when it comes to Form W-9 vs W-4, which one do you need? If you can’t answer these questions, then it’s time to brush up on your tax knowledge.
Other things you need to understand include income taxes, payroll taxes, and any other applicable taxes.
Seek Professional Advice
No matter how well you understand accounting, it’s always wise to consult with an accountant or financial advisor, especially during critical periods, such as tax season or when making significant financial decisions. Professional advice can help you navigate complex financial matters and ensure compliance with both local and federal regulations.
While you can handle accounting on your own, you’ll most likely need additional assistance when your startup grows bigger. You may also need to consider outside help if you’re feeling overwhelmed by transactions.
Do Startup Accounting Right
Accounting for startups may sound like a complicated task, but don’t neglect it. It’s necessary for tax compliance, and it provides vital information that can keep your startup surviving and thriving.
So after you pick a business structure and form your company, in regards to accounting, tackle it straightaway. If you feel you can take care of it by yourself, then by all means, go for it. Otherwise, don’t be afraid to enlist the help of an accountant, CPA, and/or bookkeeper.
To further make things easier on yourself, have Business Anywhere register your startup. Sign up for our services now to take advantage of our intuitive platform.
