Congratulations! you have taken a bold step and have successfully launched your startup. Surely, all of those sleepless nights researching and working on your business plan mean that everything should work itself out? Not necessarily. As a new venture, you and your team will have to manage many basic functions vital to the success of your startup – accounting being one of them.
Accounting is an underrated component of your company’s long-term success. Think of it as a valuable means of summarizing, recording and communicating financial information. Considering the fact that 90% of startups fail in part due to financial missteps, we want to ensure that you are well equipped with the information you need to focus on the bigger picture.
In this article, we are going to guide you through the general knowledge a startup entrepreneur should know about accounting that will help your company grow.
Choosing an accounting method
The accounting method your business chooses impacts everything from your tax obligations to prospects from potential investors and lenders. You need to carefully determine the accounting method that will benefit your company’s long term financial picture. The primary accounting methods are the cash and accrual method listed below:
Cash Basis Accounting
The cash basis accounting method recognizes revenues and expenses when cash is received or exchanged. This method can be ideal for early-stage startups who deal primarily in cash and have fewer financial transactions to record into their books. It should be noted that this method does not include every business model; If you carry inventory or sell goods on credit, you will have to use the accrual basis method.
Accrual Basis Accounting
The accrual basis accounting method differs from cash basis because revenue and expenses are recorded when a transaction is incurred regardless of when payment is actually received. Accrual basis accounting can benefit your business by providing an accurate financial picture of the overall cash flow the company is receiving – especially if you are a growing venture. While it is the more complex of the two, the scalability of your business may inform your decision to use this method. You may decide to go public one day (dream big), and a cash accounting method simply will not be able to facilitate that.
It is always good to speak with a designated CPA before making a choice on the accounting method your startup will choose.
The Big Three: Financial Statements
Basic understanding of financial statements will provide you with a better understanding of your startup’s financial performance to make informed financial decisions. Here are some statements you should know:
- Income statement – The income statement summarizes your company’s revenues and expenses during a specific time. This is a great starting point to understand the financial health of your startup.
- Balance Sheet – The balance sheet illustrates your company’s assets, liabilities and net worth(equity). This will help you understand the value of your company.
- Cash flow statement – The cash flow statement lets you know the number of cash inflows and outflows that enter and leave the company during a given time. This will help track potential cash flow issues before they arise.
Bottom Line: The financial statements work together as a cohesive unit. Failure to understand either one of these can lead to poor decisions that can hurt your business.
What financial records should I keep?
It can be a daunting task to know which financial records to keep, so we’ll make it easy for you – All documents related to the business should be kept and recorded.
Some examples include:
- Business Receipts
- Bank and Credit card statements
- Proof of Payments
- Tax returns
You should aim to keep these documents for at least 3 years but understand that some can be held up to 6 years depending on your situation.
Should I do this myself or seek help?
As a startup founder, you will be wearing multiple hats. You have to make the choice – especially early on – whether or not you will need the assistance of an accountant. While performing simple tasks using software like QuickBooks to do your accounting may save you some money in the short term, outsourcing the help of an accountant has a host of benefits including improved expense tracking, payroll support, cash flow analysis and tax preparation. Remember, it is never too late to seek the help of a trusted professional. Your business will thank you later!
Let us know what you think! What else do you think is important for a startup entrepreneur to know about accounting?