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In conversations with tech startup owners, it’s easy to pick up on their passion. They know their product inside and out. They’ve studied the market and have a plan to improve peoples’ lives. And when the conversation shifts to accounting, the energy just … gets lost.
Often, the energy fades away because many startup owners don’t have a solid grasp on the accounting side of their business. But even understanding the basics can help these owners make better decisions and steer their companies in the right direction.
At a high level, this is what tech startups need to know about accounting.
Look At the Big Picture
An effective accounting system gives tech startup owners a clear picture of the business’s financial health. But owners won’t know what they’re looking for until they define certain aspects of their business.
Add financials into the strategic planning process. Be very clear about the startup costs and short- and long-term financial goals. Identify actual and potential revenue streams. Decide how to handle unexpected costs that come up.
Also, it’s never too early to dive into Accounting 101. Tech startup owners should have a base
knowledge of common accounting and bookkeeping terms and what the practical application is for their business. For example:
What’s an income statement and what’s on it?
What does the balance sheet communicate?
How does the general ledger work?
What’s the difference between fixed and variable costs, and what are they within the business?
Method of Accounting
After the startup chooses its business entity, the next step is figuring out how to treat the accounting. Before the first tax return is filed, tech startups will need to decide which accounting method to use: either cash basis or accrual. Both have benefits; cash basis is the simplest and what most businesses start off with. But it’s less than ideal for growth-oriented startups because it’s more long-term. For example, accrual basis accounting recognizes money when it’s earned rather than received – when a new contract is signed rather than when it’s paid.
Financial Records
Even in the earliest stages, keep track of any financial documentation that supports business expenses, income, credits and deductions. An automated, cloud-based platform is better than manual Excel spreadsheet so you may want to consider using one from the beginning. The process of keeping financial records organized and streamlined will be easier as the startup grows.
There’s no definitive list of which financial records to keep, so startups will need to talk with their accountant based on their situation. These records are a good place to start, though.
Invoices
Bills
Receipts and proof of payment
Financial statements
Cancelled checks
Previous tax returns
Tax forms, like W2s, 1099s, and others
Financial statements (as the startup grows)
Generally, financial records need to be kept on file for at least three years; some are longer. It’s a good idea to store them in at least two places so there’s always a backup.
Ongoing Financial Tasks
So the accounting method is chosen. There’s a list of which records to keep track of. Next up? Staying on top of everything on a regular basis.
Every week, make sure that all transactions are entered into QuickBooks online or whatever system is being used. Categorize the transactions appropriately when they’re entered. This will avoid headaches later. Same goes for filing receipts, proof of purchase and invoices. Get them filed and make a digital copy so it’s quick to access them later if the IRS wants to look closer.
Every month, balance the books. This means reconciling the credit card and bank statements. Pay bills and vendors when they’re due and issue invoices. When sending invoices, some startups set aside one day a month to take care of everything. Others bill as soon as the service or contract is executed. Whatever method is chosen, stick to it – don’t leave money on the table by forgetting to invoice customers.
To that end, make sure there aren’t any outstanding invoices, either.
Finally, review the budget. Understand how much money is available and what’s coming due. Getting a clear picture of the startup’s finances can inform solid decisions about capital investments and new hires. There won’t be any wondering.
Bookkeeping and Accounting are Needed
Remember that accounting and bookkeeping aren’t interchangeable. Bookkeeping records and tracks financials. It deals mostly with income and expenses. Accounting takes the entire financial picture and analyzes it, from income and expenses to taxes and financial ratios. Bookkeeping keeps the business on track. Accounting helps the business make better decisions.
Start with solid bookkeeping. Then build on that with accurate, up-to-date accounting from one reporting period to the next. It will be easier to scale up, secure funding and other types of financing, and demonstrate to investors that yes, the product works ... and the business will, too.
Some startups choose to manage their own bookkeeping and accounting until they get to the point where they need outside help – usually just before or after a major funding round. Although this can sometimes work, it’s best to involve an outside accountant early, even before the owner thinks it’s necessary. Otherwise, when startups get to the point that they finally need help, it usually takes more time and money to organize the financials and get the company back on track than if processes were in place from the beginning.
Questions about your own startup’s accounting or bookkeeping? Reach out. We love talking numbers with startups!