A Smart Guide to Accounting for Startups

//
  • ACCOUNTING
Smart Guide to Accounting for Startups

In the early stages of a company’s lifecycle, the business owner often acts as the de facto accountant. While this may be feasible initially, the larger the company grows, the more complicated and time-consuming startup accounting becomes. 

Eventually, every business reaches the tipping point where accounting is too vital a task to be handled by anyone other than a dedicated finance professional. But what does accounting for startups involve? And how do you identify the appropriate accountant for your business's specific needs? 

Today we’ll answer these questions and more to get your startup on firm financial footing.

What Is Accounting for Startups?

As a business owner, your primary goal is to sell your product or services at a profit and scale your business. But how do you track and measure the success of your efforts?  

Enter startup accounting, a method by which a company can record, organize, and then act upon its financial data. Establishing a robust accounting system and compiling the three key financial statements (income statement, balance sheet, and cash flow statement) allows your business to:

  • Keep a thorough record of all of its business transactions
  • Maintain an accurate picture of the company’s financial health 
  • Facilitate decision-making for management
  • Comply with tax laws and industry regulations
  • Identify risks and opportunities as the company matures
  • Communicate results 

Operating a business without this knowledge is like voyaging to a location without a roadmap. While you may eventually arrive at your intended destination, how long will it take, and at what cost? 

Most importantly, what if the path of least resistance was right in front of you the entire time? Sound and accurate accounting demonstrates the financial health of your business, offering insights into growth patterns, potential pitfalls, and areas that are primed for optimization. 

Bookkeeping Isn’t Accounting

When considering accounting for startups, the tasks that likely come to mind are bookkeeping and tax filing. Although an accountant does control the general ledger, it’s important to note that bookkeeping isn’t a synonym for accounting. 

So what are the differences between bookkeeping and accounting? 

Bookkeeping Is Day-to-Day

A bookkeeper is primarily responsible for everyday accounting tasks, such as tracking your startup’s cash inflows and outflows. To that end, bookkeepers typically calculate profits or losses by subtracting expenses from revenue. 

Often, this is accomplished with the help of accounting software. As an overview, bookkeeping tasks typically involve: 

  • Maintaining the general ledger
  • Recording financial transactions
  • Producing invoices
  • Managing payroll
  • Posting debits and credits. 

Additionally, the IRS requires that all business transactions be supported by accurate documentation, including gross receipts, purchases, expenses, asset ledgers, and employment taxes. 

Accounting Is Big Picture 

On the other hand, while an accountant may fulfill the responsibilities of a bookkeeper, they offer the expertise that well exceeds data entry. They use analytics to draw insights from their findings, then craft growth strategies based on their analysis.  

A professional accountant can review your financial data and provide insights and recommendations for how your business can achieve its goals, both short- and long-term. To that end, there are several different subsets of accounting, including: 

  • Financial accounting summarizes your business’s financial transactions over a specific period via financial statements, which you can then share with key stakeholders or regulators. 
  • Managerial accounting records financial data to provide the information your business needs to make the informed decisions necessary to pursue its intended outcomes.
  • Tax accounting tracks incoming and outgoing funds regarding their impact on your company’s tax burden. The IRS will then regulate these actions. 
  • Cost accounting details financial information related to the costs of producing goods or services. Your startup can use this information to render predictions and analyze your past performance.   

How to Manage Startup Accounting

When it comes to accounting infrastructure, your business has three primary options:

  1. DIY (do-it-yourself)
  2. Hire in-house
  3. Outsource 

The initial route that most startups opt for is—for better or worse—wearing the accounting hat themselves. As mentioned, DIY accounting is technically the cheapest option, at least in the short term. However, DIY accounting is only sustainable in the earliest stages of your company’s lifecycle. 

As your company scales, your accounting ecosystem’s complexity follows suit. Eventually, accounting becomes too complex to be facilitated by an individual who lacks industry expertise. 

For instance, at a foundational level, consider the different financial records your business needs to track and monitor: 

  • Bank statements: Reconciling bank statements monthly helps you balance your ledger, account for cash flow volatility, and identify unnoticed errors.
  • Credit card statements: Similarly, reconciling credit card statements at the end of each month highlights spending patterns and potential budgetary lapses.
  • Payroll: There are detailed tax and payment forms for every employee you hire that must be maintained, such as 1099s, W-2s, and 941s.   
  • Invoices: You’ll need to create invoices to charge customers for the products or services provided, then balance your monthly revenue against overhead. 
  • Payments received: When a customer pays (whether by check, credit card, or ACH transfer), the payment record should be attached to the invoice and filed accordingly. 
  • Bills: Even a startup in its infancy will have various bills to pay. Ensuring you pay bills on time is crucial to maintaining healthy vendor relationships.

The above only scratches the surface of the myriad financial records a startup is required to track. Financial management’s sheer volume and complexity necessitate a bookkeeper. However, a startup accountant influences strategic decisions supported by critical insights when a venture gains momentum. 

By enlisting the services of a professional accountant, you improve the accuracy of your financial management, bolster your decision-making processes, and increase bandwidth for your leadership team – even if that’s just you!

Additionally, outsourced accountants take the spotlight when “traditional” business growth cadences experience a paradigm shift. 

In the past, you may not have been able to afford an in-house accountant or need someone full-time due to the varying cyclical workloads. You had to choose between two suboptimal paths:  

Freelancers/Freelancer-Staffed Firms

  • No incentive to collaborate
  • No single point of accountability; difficult and time-consuming to manage
  • No incentive to build standard systems/platforms
  • High turnover risk

In-House Bookkeeper or Controller

  • Underqualified for mission-critical functions
  • Overpaid for routine tasks
  • No flexibility as needs/stage evolves
  • High fixed-cost despite variable workload and stage-specific needs

However, now you can hire an accounting professional without the exorbitant costs involved with recruiting, onboarding, and payroll. 

Companies across various industries now realize the role’s importance with this new flexibility. 

The Importance of a Startup Accountant

General ledger oversight is only one aspect of accounting integral for your startup’s ability to control and maintain its financial health. The reality is that an experienced accountant can be instrumental to a startup’s success, especially when faced with the volatility that accompanies growth.

Here are eight ways an accountant can help your startup.

1. Render Financial Reporting 

If not legally obligated, your business is at least expected to document and communicate its financial activities over a specific time period. In that regard, an accountant can help compile and maintain the three primary financial statements. These documents provide a snapshot of the company’s financial health, activities, and underlying value.    

2. Solidify Your Tech Stack

Choosing the right apps to support your business and automate work is pivotal to creating more time for you to go out and grow your business.

3. Build Financial Forecasts

A skilled accountant can use historical financial reports to measure your company’s trajectory and then recommend prescriptive actions. This can include projecting P&L and balance sheets, setting long-term financial goals, and identifying investment opportunities and target goals. 

4. Structure the Business

If you’re championing an early-stage startup, you might not know the perfect business structure to establish. An accountant can help you select and integrate a system that aligns with your unique business model and growth targets. 

5. Meet Legal Requirements 

Robust accounting ensures your financial assets and liabilities are accurately recorded to the IRS and key stakeholders. Failure to do so could result in significant penalties, including fines, fees, suspension of activities, and reputational harm.  

6. Manage Cash Flow

According to U.S. Bank, more than eighty-two percent of startups fail due to poor cash flow management. Accounting enables you to categorize spending, benchmark usage, and then micromanage your spending habits—all while improving cash flow.

7. Increase Profitability

Cost accounting consolidates financial information, making it digestible for your leadership team and allowing them to evaluate the performance and profitability of the business. By utilizing these insights, you can then take the steps necessary to increase profits, including:

  • Reducing bad debts
  • Eliminating unprofitable products or services
  • Reallocating resources to strategic initiatives
  • Negotiating with suppliers
  • Restructuring financing  

8. Consolidate Data Management 

Accountants typically take the reins over the accounting system your company uses. Therefore, they can help identify, integrate, and optimize your company’s best accounting system and processes.

Lastly, before your startup ever files its first tax return, you’ll need to select one of the two accounting methodologies:

  • Cash basis accounting: Revenue and expenses are only reported when the cash is received or paid out. 
  • Accrual accounting: Revenue and expenses are recorded when the product or service is delivered, with the expectation that the money will be paid out. Note: Accrual accounting is required for CPG and DTC clients.

Your accounting methodology is paramount for your tax structure, but it’s also how you evaluate your business’ financial ecosystem. Neither of the options above is objectively favored over the other. 

However, depending on your specific business model, choosing the right fit directly influences scalability and the integrity of your financial forecasts. 

Finding the Right Accounting Solution for Your Startup

For your startup to scale proactively, you need clear, accurate, and updated financial records. In other words, accounting is fundamental to every initiative your company takes. This is why hiring your first accountant is such an important milestone. In many respects, it’s a waypoint in your success. 

But where do you find an outsourced accountant that perfectly aligns with your startup and industry? Fortunately, you’re already here. 

At Propeller Industries, we’ve spent nearly 15 years connecting burgeoning companies with the fractional financial experts they need to accelerate their growth. So whether you need a single startup accountant or an established team, we’ll ensure your support is curated for your growth targets, business model, and industry. 

Want to learn more? Connect with the experts at Propeller Industries today.

Read This Next

Looking for financial services and leadership that grows with you? Let’s chat. Schedule a free consultation today.