The Ultimate Guide to Startup Accounting

First of all, congratulations on starting a business. That's huge!

Typically, founders are focused on important tasks such as creating a viable product/service and finding new equity partners. Tasks like bookkeeping & accounting can take a back seat to other more pressing tasks.

Whether you’ve been disregarding your books or you’re just getting started, this article is for you.

Table of Contents

• Before Bookkeeping
• Choosing Accounting Software
• Cash or Accrual Basis Accounting
• Your Bookkeeping Process
• Financial Statements
• Should you do your own Bookkeeping?

Why it’s important:

Having your finances in order for your startup is a very important part of running your business. As a start up, you’ll want to show that you’re organized & serious about successfully running your business to outside stakeholders such as lenders & equity investors. Having your Monthly financial accounting up-to-date & accurate can help your business in so many ways.

Before you even think about bookkeeping

Here are a few things you should have set up as a new business before you even think about operations.

• A business structure. Ask your CPA and/or Legal person about this
• An Employer Identifcation number(EIN) to file your taxes with.
• Choose a system(see below for options) to track your accounting transactions.
• Set up a business bank account. Don't make your accountant angry, keep business & personal expenses completely separate.

Accounting Software

First and foremost, it’s important to have somewhere to track all of your finances. This can be done in Google sheets or Excel early on but eventually you’ll need something a little more robust.

Quickbooks Online:

Quickbooks is a great option for most small businesses & has the ability to scale through the Intuit app marketplace.

Reasons why you should use Quickbooks:

• Easy to use for non-accountants with a simple interface
• Built in payments & payment receipt
• Built in payroll & contractor payments
• Easy report pulling abilities for standard accounting reports such as: Profit and Loss, Balance sheet, Statement of Cash Flows.
• Automation - Banking screen automations & workflows really speed up the bookkeeping process.
• One system for tracking all of your receipts, expenses, and revenues. You can even add attachments for a good backup.

FreshBooks:

Freshbooks is the free option for many small businesses. You can handle very basic accounting for new businesses in this system.

Reasons why you should use Freshbooks:

• It's cheap!
• It has a simple interface
• Handles all of the accounting basics.

The biggest downfall for Freshbooks is that it’s not scalable. Eventually you’ll need to move to a more robust system as your start-up grows.

Excel or Google Sheets

This is the barebones, most basic option for your bookkeeping. Not recommended for the long term but can be a decent option those first few months of business when the transaction levels are low.

Eventually, as your business grows, you’ll need to move to an accounting system such as Quickbooks or Fresh books.

If you’re unsure about what system to choose & you would like some more specific guidance feel free to get in touch. We offer system setup services at Celerity Accounting.

Cash or Accrual Basis Accounting

The type of accounting you choose to do depends on your business & the level of forecasting/accounting accuracy your business requires. See the two types of accounting recognition below.

Cash Basis Accounting

This is the most simplistic way of accounting for your income & expenses. This is what most small businesses start with as it’s how most non-accountants think of their finances.

Cash accounting is recognizing income & expenses as they cash flows in and out of your bank account. For example, if you invoiced a customer on March 10, and payment was received on March 11th, with cash basis accounting you would show that income on March 11th.

Many small businesses decide to stay with cash basis to keep things simple & more in-line with their cash flow expectations. However, it has limitations for financial planning & comparisons with other companies/historical data. Cash basis has a focus on liquidity.

Accrual Basis Accounting

This is the US GAAP(Generally accepted accounting principles) way to handle your accounting.

Accrual accounting is recognizing income are it's are earned and expenses as they are incurred. For example, if you invoice a customer on March 10th, but you do not complete the work or ship the product until April 10th, the revenue would not be recognized until April 10th. The same with Expenses, if you pre-pay for a yearly subscription, typically you’ll recognized that expense monthly over than entire 12 months.

Starting out with accrual based accounting early on in your business cycle will help with scalability of your accounting in the future & will allow for a less painful transition process down the line.

Accrual basis also paints a more accurate picture of your finances and sets up your books in a way that is more comparable to other businesses. For example, if you’re comparing industry KPI’s from a cash basis business to an accrual basis business, it would be inaccurate and misleading.

Quick tip:

Starting out with accrual based accounting early on in your business cycle will help with scalability of your accounting in the future & will allow for a less painful transition process down the line.

We recommend speaking to an expert or CPA before making this decision. We would be happy to help.

   

9 Steps to Setting up your Bookkeeping Process

Follow these steps & get your business accounting system on track:

Recordkeeping: Keep all records. This includes receipts, bank statements, credit card statements, payroll reports, and invoices.

1. A tracking system:
Enter all of your data into an accounting system. Having a full picture of your finances can be very important. It’s important to include all income and expenses related to the business here.

P.S. An up-to-date system will include many ways to automate your bookkeeping & accounting processes making it easier and/or cheaper for you & your business.

2. Categorize every transaction:
This simply means giving a tag to each expense coming through. If you’re using a system like Quickbooks Online you’ll start out with a pre-loaded Chart of Accounts full of categories. An example would be a $100 phone bill expense, coding that to an account called “Telephone expense” would suffice.
3. Reconciliations:
At a minimum, your business should have bank & credit card reconciliations monthly. This simply means that you compare your accounting system to the balance in your bank. This is a very important step as it ensures that everything is accounted for in the period selected and it’s also a great check up on your banking data for suspicious activity.
4. Track your startup costs:
According to the IRS(2022), a portion qualifying startup costs may be deducted from federal taxes. Tax deductions are always a good reason to start tracking something separately.

More info: Here

5. Bill pay:
In order to run your business you’ll need to pay some bills. Those expenses need to be paid in a timely manner to help ensure your business credit is in a healthy state and to avoid any late interest/fees.
6. Invoicing customers:
Invoicing your customers as soon as possible for services/products is very important to new businesses The faster you invoice typically the faster you will receive payment.
7. Payroll:
Payroll is usually a businesses biggest expense. Finding a good outsourced payroll provider such as Gusto or Paychex that syncs into your accounting system will be key. This way, you don't need to bother with filing your own state/federal payroll taxes.

They even handle W2's and 1099's too!

P.S. Did we mention that Quickbooks has payroll built in?

8. Cash Flow Tracking:
Keeping tabs on your businesses cash flow, especially as a start up, is very important. Bank fees for overdrafts can be expensive and it’s not a great look to have checks bounce with your vendors or missing a payroll.

Many start ups calculate burn rate to ensure there is enough capital to keep the business running for the foreseeable future. Having an organized accounting system will help project this out more accurately.

All of these things will help keep your business organized when it comes time to send your investors financial statements or sending data to your tax accountant.

Further reading 4 Benefits to Hiring a Bookkeeper/Accountant for your Growing Business

Financial Reporting

Financial statements are what all of this tracking & record-keeping is for. These are your golden ticket to making informed business decisions and giving your stakeholders a clear picture of your business health.

Profit & Loss:

This report shows your revenues, expenses, and net income(loss) for a certain time period.



Source: AccountingCoach

Revenues: This is all of your incoming sales for the period selected.

Cost of Goods Sold: Direct costs associated with the sales recognized in this period. Costs such as labor, materials used in production, outgoing shipping costs.

Gross Profit: This is the profit remaining after Sales less COGS. This is the amount leftover before taking into accounting operating costs.

Net Income This is the amount left over after all revenues and expenses for the period have been accounted for. This is how much your business truly made(or lost).

Balance Sheet:

A Balance Sheet is a representation of all of your assets, liabilities, and your Equity. Assets = Liabilities + Equity. This report should always balance.

Assets: Bank balances, Receivables, large equipment/furniture/buildings, and investments.

Liabilities: Loans, Bills due, credit cards, etc.

Equity: Common stock, Retained earnings, Capital contributions.



Statement of Cash Flows:

This report breaks down the in’s and out’s of your cash flow for your business and breaks it down between operating, financing, and investing.

Source: AccountingCoach

The Cash flows statement is a great tool for viewing where the cash is coming from and where the cash is being spent. This shows how well a company is with cash management and how well it generates cash.

Should you do your own Bookkeeping?

Yes! Handling your own books as a founder can be very informative and helpful early on. You’ll have a hand on the pulse of your business operations & you’ll have a great grasp on your cash flows. You’ll also probably notice any expenses you can remove or decrease as you work through this process each month. Thus, keeping things leaner overall.

It also makes a ton of sense for you to understand accounting & financial statements as you'll use this as a way to make business decisions & to understand your business. This helps so you can properly explain your financial situation to potential investors.

However, as a founder, It’s very likely you wear several other hats for your business. Time management is a huge part of running a successful start up & your accounting is one process that can be easily delegated or outsourced.

Once it becomes a hassle/pain to manage your own bookkeeping & you find yourself consistently behind on the processes, it’s probably time to outsource this process to someone else.

Check out our guide on the differences between hiring an in house accountant vs outsourcing here.

Why Celerity Accounting

Celerity Accounting is a remote accounting firm that specializes in small business outsourcing. We can handle your bookkeeping, payroll, financial statements, and much more. Feel confident about your financial accounting and your businesses finances today!



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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Celerity Accounting assumes no liability for actions taken in reliance upon the information contained herein