Launching a startup requires handling many moving parts, from developing your product to marketing it. One critical piece that founders often overlook is mastering accounting for startups. With the struggle to make intelligent decisions regarding the company’s funding or attraction, you’ll have a solid understanding of your company’s financial position.
In this beginner’s guide, we’ll walk through the fundamentals of managing the accounts for your early-stage business.
Getting Setup
When you first form your company, you must set up key accounts to handle money coming in and out of the business. Here are a few must-haves to get started:
Business Bank Accounts
A dedicated business bank account helps keep company finances separate from your finances. The most common options are a business checking or savings account. These provide all the standard personal account features but with extra tools tailored to businesses, like expense tracking, invoicing capabilities, and multiple account users.
Adding other types of accounts may be worth it as you grow, like a line of credit or merchant services for credit card processing. But start simply with checking and savings until expansion makes sense.
Accounting Software
While you could always track finances on spreadsheets, we highly recommend investing in accounting for startups software tailored to startups. The right software automates time-consuming processes like invoicing, provides real-time financial reporting and helps ensure your data stays accurate and secure.
Credit Cards
Issuing company credit cards to founders and employees allows you to track purchases separate from personal expenses. This helps when categorizing costs for tax purposes. Make this process seamless by offering company cards with handy backends to export company spending data.
Financial Statements
With your system setup, it’s time to understand the key reports that provide snapshots of your company’s financial health. Mastering these statements empowers you to make strategic choices.
Balance Sheet
A balance sheet outlines your business’s assets, liabilities, and equity at a specific time. Think of it like a financial net worth statement. You’ll see what resources your company owns and debts or owner investments. Comparing monthly versions highlights areas of growth or potential cash flow issues.
Income Statement
This report summarizes income and expenses, typically monthly or annually, over a set period. An income statement shows whether your company turned an accounting profit or loss. It also allows you to analyze spending patterns and how specific cost areas impact your bottom line.
Cash Flow Statement
While an income statement gauges profitability, a cash flow statement depicts how changes in balance sheet accounts and income affect cash. It illustrates how money flows in and out of your business from operations, investments and financing. Reviewing cash flow statements helps ensure you have adequate access to cash.
Accounting Methods
As transactions occur in your startup, you need to categorize them within your accounting system using essential methods:
Double-Entry Accounting
This approach requires “entering” “each transaction in two accounts. For example, recording a sale of $100 would show a debit of $100 to your cash account and a credit of $100 to your revenue account. This dual recording helps produce the detailed reports mentioned above and maintains accurate books.
Accrual Accounting
With accrual accounting, you log income when earned and expenses when incurred. This differs from cash-based accounting, which records income and expenses when cash exchanges hands. Accrual is the preferred approach under generally accepted accounting principles (GAAP) because it better represents financial performance.
Depreciation
Since assets like technology and equipment lose value over time, accountants use depreciation to allocate the cost over an asset’s lifespan. Recording depreciation allows you to spread out upfront costs rather than taking a one-time hit. Different depreciation calculation methods exist, but straight-line depreciation is the simplest for startups.
Mastering these essential accounting disciplines ensures transactions get properly categorized within your system. This produces financial statements that accurately reflect company performance.
Financial Priorities
With your accounts established and accounting fundamentals squared away, let’s discuss moves that help put your startup on solid long-term footing:
Separate Business & Personal
Mixing business and personal finances muddies the waters, making analysis difficult. Use dedicated business accounts and cards only for company expenses, pay yourself an owner’s salary, and adequately document transactions between you and the business, like owner capital contributions or loans.
Understand the Cash Burn Rate
Calculate monthly expenses and measure them against revenue to determine your startup rate. Understanding this cash burn empowers you to predict funding needs. As expenses increase with hiring or growth, ensure your war chest grows parallel.
Set a Budget
Create an operating budget that lists expected monthly revenue and costs. Track actual monthly spend against your targets. Tight budgeting controls unnecessary expenses, which helps manage the burn rate. Continuously review and adjust to reflect reality.
Final Thoughts
Accounting tasks like invoicing, reporting, and categorizing transactions may not be glamorous founder duties. But nothing kills a startup faster than poor financial controls and decision-making. Master these accounting fundamentals early to set up your new company for sustainable growth.
