Accounting For Startups-What You Need to Know
You’ve started a business…congratulations! You’re probably (justifiably) proud of creating a minimum viable product, and you’re burning the midnight oil finalizing your pitch deck. But you’re probably not spending sleepless nights wondering whether your books are balanced.
Accounting and bookkeeping are typically not of top-priority compared to hiring a technical cofounder, or figuring out your path to market. However, that doesn’t necessarily mean that accounting’s not imperative to the health of your business.
Especially now, businesses who haven’t kept up their accounting are likely facing heavy financial decision related to the health and economic impacts of COVID-19. Read more here about how businesses can manage their finances during the health crisis. And the U.S. Chamber of Commerce has released their own strategies for curbing coronavirus related business costs.
For those who are founders of a budding startup, you should find this article helpful in guiding you through all you need to learn about accounting and bookkeeping.
Accounting vs. Bookkeeping: What’s The Difference?
Although both bookkeeping and accounting are related, they are not quite the same. In general, bookkeeping involves the tracking of each financial record: primarily income & expenses. The term ‘bookkeeping’ stretches back to when business owners tracked their finances manually in paper books.
Accounting, on the other hand, deals with the analysis of your financial records, for everything. These might include ensuring that you pay the correct amount in taxes or making important business decisions depending on your business’s numbers.
Both accounting and bookkeeping are essential to every business’s success, and keeping good records is fundamental to success as a startup. In the event investors are involved, they’ll request you to provide them with thorough financial reports. What’s more, if you’re trying to obtain a business loan, you’ll require clear and readable financials to help potential investors make an educated decision about investing in your particular vision.
Select Your Accounting Method
You’ll have to pick one of two available accounting options before filing the first business tax return:
Cash Based Accounting
In general, cash-based accounting is the simplest form of accounting which tracks your income when it’s received and the expenses when paid.
Accrual Based Accounting
This form of accounting is quite different from the first in that it counts money when it is earned, instead of received (the same thing with expenses). For instance, in case your customer signs a major contract, you would take account of the money earned, regardless of whether or not they haven’t paid you.
Even though this procedure is more complex, it enables you to more precisely track a long-term image of the business, which is something of utmost significance when reporting to investors or making quick scaling decisions.
Accounting methods and entity types can become pretty complicated. For this reason, we advise speaking with a CPA before making any firm decisions.
What Financial Records Should You Keep?
Your business might be rolling quite well after you chose an entity and accounting method. So, what financial records do you require to keep track of?
Everything! That’s the short answer.
Long answer: Make sure to keep track of every documentation that shows deductions, expenses, income, and credits outlined in your tax returns. These may include:
Bank and credit card statements
Receipts
Invoices
Canceled checks
Financial statements from your bookkeeper or Bench
Proof of payments
W2 and 1099 forms
Previous tax returns
Any other documentary proof that supports an item of credit, deduction, or income outlined on your tax return
It would also be wise if you didn’t get rid of any of these items until you turn over your forms to your tax preparer. Best practice is to hang on to these records for a minimum of three years, although there are exceptions when you might need to keep your business’s financial records even a bit longer.
Weekly Bookkeeping Tasks
Input every transaction into your Excel spreadsheet or bookkeeping software
Regardless of whether or not you’ve integrated your particular financial accounts with dedicated accounting software, ensure that you input everything, including cash transactions, into a central database so you can easily track sales revenue.
Classify your transactions
Did you make that trip to Home Depot for supplies to make a new banner for your tradeshow booth, or were they office supplies? These two items are classified separately on your tax return; because of that, you’ll need to record the category of the purchase while you still remember the transactions.
Digitize/File your receipts
It is prudent to digitize or file your old invoices or receipts weekly. Otherwise, you might lose them, and if you get audited, you might not be in a position to prove specific expense deductions.
Monthly Bookkeeping Tasks
Reconciling your bank accounts
Not only is this step crucial, but it also protects you against any expenses or income from slipping through your fingers. Unless you are already used to it, bank reconciliations can be a little confusing the first time. Check your bank’s website for more information on how to reconcile your checking accounts.
Prepare and send invoices (when applicable)
Stay organized by preparing and sending out invoices as soon as possible.
Pay vendors and other expenses
This is something else you should always do as soon as you can. Otherwise, you may end up offering your vendors free money in terms of late payment interest. What’s more, late payments might also impact your overall business credit score.
Analyze outstanding invoices
Most businesses face one major question,” do you have enough cash to keep operating?” Evaluating how much money you have in your bank, and the amount of money you expect to come in, should tell you either “yes,” or “it’s time to make a few changes.”
We advise that you schedule a specific time for dealing with your business’s financials. Maintaining good records will simplify your life when it comes to your business’s quarterly and annual income taxes. Lastly, you will be ready to make great financial decisions for your startup with in-depth knowledge of your books.
Financial statements: The Secret Weapon for your Startup
Generally speaking, this is the best part of accounting. Besides using well-maintained books to make sure that you have more cash coming in than going out, your financials can be useful in making other decisions.
Runway
In simple terms, this fundamental startup metric is the amount of money you have on hand versus the amount you spend every month. For instance, if your bank has $50,000 and you estimate spending $5,000 every month, you have ten runway months even if you don’t make a penny in revenue.
The Net Profit Margin Ratio
It is also referred to as profit margin. In simple terms, this number tells you the amount of profit you’re earning for every dollar of revenue. So, are you overspending? Would it be best to cut or raise expenses? Although you might be depositing bundles of cash in the bank, this number should tell you if you’re treading water or genuinely making a profit.
Your Bench bookkeeper, or a reliable accountant, can help create these reports and control your business’ financial health.