When your business is in its early days, your main, and definitely most important, areas of focus are product development and customer acquisition. While it won’t be your primary focus, your startup accounting is equally important to get right, in order to build a strong foundation to help you reach your strategic goals. In a recent webinar, Sirk Roh covered what you should be thinking and doing in terms of setting up an accounting system both when you’re just starting up and after you’ve raised a round of funding.
While you’re in pre-funding mode:
Set up your accounting structure and financial and cash management. Then keep things as simple as possible for as long as possible (i.e., until you reach a pain point). But while you want to keep things simple, make sure you choose a low-cost system that will scale with your startup. Otherwise, you’ll spend a lot of time and effort migrating to an alternative later on. QuickBooks Online is a good choice. It’s cloud-based, easy to set up, and very cost-effective. Xero is another. It’s newer and less established, but has the benefit of being easy and intuitive.
Keep separate banking and credit card accounts for your personal and business expenses. This is one cardinal rule that you should never break. Blending the two makes things much harder to track when it comes to financial reporting and can expose you to legal risk when it comes to personal versus business liability.
Monitor where your cash is going and exactly how much you’re spending. At this stage, beyond blocking and tackling (i.e., having a handle on your cash position and tracking all receipts and invoices), your reporting requirements are minimal.
Stay on top of accounts payable (A/P) by implementing a formal system to track all your receipts and invoices as early as possible. Then use it religiously. Also place vendors on net 30 days payment terms.
Don’t let accounts receivable (A/R) linger. Send invoices quickly for any revenue that you don’t collect upfront. Booking revenue is important, but the longer it goes unpaid, the smaller your chances of ever collecting. Establish an invoicing schedule, put your payment terms in writing, track who owes what, and make it a priority to stay on top of collections. We recommend Bill.com. It allows you to easily send bills and set email reminders for yourself and your clients.
Hire a preparer to handle your taxes. Once you’re set up, timely filing is critical — and something you need to absolutely stay on top of. Payroll taxes especially are just not worth doing on your own; the risk of non compliance and fines is way too high! Providers like ZenPayroll, Intuit, and others offer easy and cost effective solutions that will withhold taxes and file for you.
Also stay on top of your quarterly estimated payments to avoid a big penalty for underpayment when you file.
Another biggie: remember to file a 1099 for every consultant/contractor who performs more than $600 worth of services for you. The IRS levies a per instance penalty for non compliance.
Startup Accounting When You’re in Transition:
Once you’ve bootstrapped (using your own funds plus cash flow from operations) for as long as possible, and after you’ve developed your product and can show traction, you’re ready to transition to funded status. Why does it make sense to delay raising external funding until you get to this point? Because the earlier you raise, the more expensive it is. If you wait until after you’ve validated your product and market, you can fund at better terms and use the money you raise for growth.
Once you’re funded:
You should adopt GAAP-based financial reporting (if you haven’t already). Under GAAP, you accrue for expenses and defer associated revenue in order to match the timing of your startup expenses with your revenue recognition.
In terms of financial reporting, at a minimum, investors will want to see an income statement (I/S), balance sheet (B/S), and cash flow statement. Choose a system that gives you trend analysis of your revenue and expenses so you can track them (comparing your budget with your actual results on a monthly basis) and get visibility (and early warnings) on what’s happening with your cash burn. There’s no easy way to do this without an accounting system.
Save as much cash as you can. Don’t hire outside contractors or service providers until you need to. But also don’t be pennywise and pound foolish; weigh the cost/benefit between paying for outside help versus spending tons of time every month trying to do things on your own at the expense of gaining traction.
Finally, when you’re ready for help, whether it be outsourcing or hiring contractors, choose professional services providers that are good matches for both your market category and your stage of development.
Have questions or need help setting up your startup accounting infrastructure? Tell us about it in the comments section below or contact us at Early Growth Financial Services for a free 30-minute financial consultation.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.
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