Accounting for Startups: A Practical Guide for Founders

Starting a new business is a lot of work, and if you’re like most founders, your focus is often on the value proposition of your business model more than anything else. Typically, startups spend their time validating their ideas, building their team, and developing their operations. However, accounting for startups is just as critical, even if it doesn’t seem like it at first.

Part of the problem, though, is the perception of what accounting actually is for a startup or a business. At its core, accounting is about managing your company’s cash flow, not just putting numbers into spreadsheets. Even experienced businesses can fail when their cash flow starts moving in the wrong direction, so it’s imperative to build a strong accounting foundation from the beginning.

In fact, nearly 45% of startups don’t survive past their fifth year, and poor financial management is often a major contributing factor. That’s why establishing solid accounting habits early can make a significant difference in your company’s long-term stability.

But you don’t need to take a course or learn the finer points of accounting to set your startup on the right path. This article will outline what you should track, why it’s important, and when to seek professional input.

Do startups need accounting?

In many cases, startups neglect their accounting needs for several reasons:

• Lack of revenue
• Simplified business model or operations
• Limited time and resources to devote to accounting

Instead, founders often focus most or all of their attention on idea validation, as it can help secure funding, attract top talent, and boost brand recognition. But while that element is crucial for success, accounting is an integral part of a stable foundation.

Even basic accounting practices can help prevent problems later on, such as regulatory compliance, tax burdens, or cash flow squeezes. Simply put, if you don’t know what your company’s finances are like, these issues can compound on each other, creating massive headaches or expensive mistakes in the future.

Often, the main setback is that startups don’t focus on accounting until after the company takes off. However, rapid growth can make it much harder to track revenue and expenses, so you don’t realize there’s a massive problem until it’s too late.

More than anything else, managing cash flow is the key to long-term success, so you should focus on tracking it as quickly as possible. Not only can you minimize your financial risk, but you can also build trust among lenders, creditors, and investors, as they can see whether your startup is on a stable footing.

What startups need to track from day one

Generally speaking, accounting breaks down into five categories:

• Income and expenses (cash flow) – How much money you’re bringing in versus how much money you’re spending.
• Bank and credit card activity – There’s a difference between paying with cash and paying with credit, and you need to know how much of each your business is doing.
• Invoices and receipts – It’s not enough to just know your company’s revenue and spending totals. You must also understand where your cash flow comes from and where it goes (aka, accounts receivable and accounts payable).
• Payroll – As a startup, you may be running the show by yourself or with volunteer help. However, as soon as you start paying employees, you need to track your payroll, both to manage your cash flow and to ensure compliance with state and federal laws.
• Assets and liabilities – Simply put, an asset makes money (or increases in value) while a liability takes money from your bottom line. For example, commercial equipment can be an asset, while utility bills and debts are liabilities.

Even if you don’t have much activity within one of these categories, it’s best to track each one as soon as possible. Overall, it’s much easier to clean up and streamline existing records than it is to create them retroactively and chase down old information.

How to start accounting for a startup

One reason why many startups avoid accounting early on is that it seems too complicated to manage, especially when revenue and expenditures are all over the place. However, successful accounting relies on systems more than individual transactions, so focus on building and integrating those systems as early as possible. Here are some best practices to get you started.

• Keep personal and business finances separate – If possible, open a merchant account or a business credit card. It’s much easier to track expenses and revenue when you don’t have personal and business data mixed in the same account.
• Choose a baseline accounting method – Broadly speaking, there are two main accounting methods: cash and accrual. Cash accounting tracks income and expenses as soon as money exchanges hands, and it’s the simpler of the two. Accrual accounting records these items when they occur, even if no cash has changed hands. For example, you may track unpaid invoices that have been sent to clients or upcoming bills.
• Create an accounting chart – One of the easiest ways to track numerous line items is to create and assign categories. Examples of these categories can include utility bills, food and beverage, equipment, subscriptions, and more. This makes it easier to break down your spending habits and understand your operational expenses.
• Record everything consistently – Overall, consistency is crucial for successful accounting, such as recording on a weekly or biweekly schedule.
• Reconcile all accounts often – A critical part of tracking your cash flow is ensuring that the numbers always match. For example, if your monthly expenses are $5,000, you should have receipts or invoices totaling that amount. If there’s a discrepancy, you should be able to track it down.

In the beginning of starting a business, simplicity is often the best option, especially if you’re not familiar with accounting software or spreadsheets.

Accounting software for startups

The primary benefit of using accounting software is that it streamlines the process and reduces human error. Whenever possible, it’s best to set up automations, such as tracking transactions from merchant accounts or credit cards, sending notifications, or compiling data into a weekly or monthly report.

Some of the best small business accounting software include:

• QuickBooks
• Xero
• Zoho Books
• Fresh Books
• Wave

If you have the time and know-how to compare different systems, do that. Don’t just pick one and assume it will work best for your needs. Factors to consider when comparing software can include:

• Ease of use – Can anyone master the basic tools, or do you need some advanced accounting knowledge to run the program?
• Integrations – Your startup likely uses multiple platforms and subscriptions, so make sure they can integrate with the accounting software to make it easier to manage your cash flow.
• Scalability – Try to pick a software that can scale with you so you don’t have to migrate everything to a new program later on.
• Cost – At first, free versions may suffice, but you’ll have to pay for accounting software eventually. Make sure to balance the cost of the program as well as any outside help you might need later (e.g., hiring an in-house accountant or working with a CPA).

Do startups need an accountant?

Typically, most startups don’t need a full-time accountant to handle their cash flow needs. However, it’s always best to understand your limitations and rely on professional insight as needed. For example, when tax season hits, you may hire an accountant to help clean up your books and ensure compliance so you don’t incur any penalties.

But accountants can help with more than just balancing spreadsheets and inputting data. They can also provide guidance and support for the financial side of your business. They can help you create a stronger accounting system, recommend different programs or procedures, or instill confidence in investors and lenders.

Overall, accountants are a crucial asset to your business, so don’t hesitate to lean on their expertise when you’re struggling or as your business scales.

Startup accounting services: what your options are

As your business develops, so will your accounting needs. Here’s a quick overview of common accounting services for startups and when they may serve you best.

• DIY accounting – You handle everything yourself, either digitally or on paper.
• Accounting software – These programs can assist with tasks like tax compliance, payroll accounting, and reporting.
• Part-time accountant – You can hire an accountant temporarily when you’re too busy or you need expert guidance.
• Accounting firm – Once your business reaches a certain size, one person can’t handle it all, so you’ll have to outsource to an accounting firm or create your own in-house accounting department.

Realistically, you’ll take a hybrid approach to these services, especially early on. For example, you might use a program to handle most of the accounting yourself, and then hire a professional as needed. Once the work becomes too much, you can start outsourcing it.

How much does accounting cost for a startup?

Fortunately, accounting services don’t have to impact your bottom line too much. First, you can take advantage of free tools, such as Google worksheets or a free version of QuickBooks.

As your business grows, you can start paying for accountants, which will likely cost between $100 to $500 per month, depending on your needs. Then, when full-time accounting becomes necessary, you’ll likely pay around $1,000 to $2,000 a month or higher. Eventually, you may need to retain the services of high-end firms, but only when it makes sense financially.

Common accounting mistakes startups make

As an entrepreneur, numbers may not be your specialty, but that doesn’t mean you have to put your business on unstable footing. Some of the most pervasive mistakes founders make include:

• Not separating business and personal expenses. Not only is it harder to track your cash flow, but it’s more complicated to pay taxes.
• Not being consistent with tracking and reconciliation. It’s not enough to keep receipts or invoices; you have to track them often to ensure you’re financially stable.
• Not focusing on cash flow. All too often, founders focus on line items and cost-cutting measures without knowing their real cash flow. Start here, and it’ll be easier to tell if your business is thriving or struggling.
• Not starting accounting early on. While you’re juggling so many different tasks, it’s easy to let accounting fall by the wayside. But the longer you wait, the harder it is to get everything on track, and your business will likely suffer.

Preparing your startup for proper accounting

Before you can build stable accounting practices for your startup, you need to handle a few key tasks, including:

• Structuring your business – Understand the pros and cons of forming an LLC, corporation, or partnership and file all the right paperwork.
• Obtaining an EIN from the IRS – You’ll need an employer ID number (EIN) to hire employees and manage business taxes.
• Getting a separate business account – Even if you can’t open a merchant account right away, having a business credit card helps track your expenses more easily.
• Organizing your financial records – Start building spreadsheets or set up an account with a free version of an accounting program.

While you can handle these tasks yourself, you can also outsource them to a reliable partner like Tailor Brands. With them, you can handle most of your administrative duties, such as forming your business, filing paperwork with the IRS and your local Secretary of State, and managing basic bookkeeping. Tailor Brands makes it easy to incorporate accounting practices into your business without taking up too much of your time or budget.

Conclusion

Overall, accounting for startups doesn’t have to be a massive, complex ordeal. A big part of success is getting into the right mindset, which is understanding that accounting is a vital part of the entrepreneurial process. Plus, don’t assume that you have to handle every detail yourself; don’t be afraid to outsource or seek guidance when necessary.

By building systems early and monitoring your startup’s cash flow, you make it much easier to help your company thrive in the long term. Don’t worry about mastering accounting practices; just start with the basics.