Accounting is an essential part of any business, even during the startup phase. Once you’ve gotten your idea off the ground, established the structure of your business, and figured out your basic logistics, you need to start thinking about accounting. Since money is what will ultimately drive the success of your startup, how you manage your finances will play a significant role in the viability of your company.
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While it may appear that your expenses are not complex enough to warrantsuch formal management, doing so can benefit your business significantly in the long run. Among the most notable advantages of establishing accounting during the startup of your business are:
- Optimal financial management
- Financial position accurately reflected
- increased effectiveness
- More likely to receive investor funding
- Early detection of financial risks or weaknesses
- Better financial stability prospects
- Have detailed financial history records on hand.
- Keep track of your debts.
- Compare your company to its competitors.
Similarly, failing to implement accounting processes from the start can be costly for your startup. The following are the risks of ignoring your startup's accounting:
- Forecasting Difficulties
- Concerns about your financial situation
- Inability to provide detailed financials to investors
- More difficult to obtain funding
- A lack of financial history indicates a higher risk of inaccurate financial information.
Problems with the IRS and other reporting agencies
For these and other reasons, it is typically recommended that businesses prioritise accounting from the start. Accounting, on the other hand, does not have to be a complicated or intimidating process.
Accounting vs. Bookkeeping for New Businesses
Despite popular belief, bookkeeping and accounting are not synonymous. They are, however, both critical to your company's financial health. Let us quickly define these two concepts to help you understand the distinction between accounting and bookkeeping:
Bookkeeping:
Maintaining records and tracking business finances on a daily basis. A bookkeeper's duties may include collecting and recording invoices from clients, paying suppliers, reconciling bank accounts, and other duties.
Example:
When you receive a bill from a vendor, your bookkeeper will make sure it is paid and will record the transaction.
Accounting:
Using business financial records to assess the company's health and make recommendations. Your accountant will be responsible for reviewing financial reports for accuracy, assisting with the company's budget, and ensuring that financial reporting is in compliance as part of their job function.
Example:
After generating the financial statements, the accountant will review them for accuracy and use the documents to advise you on budgeting and other financial matters.
As you can see, bookkeeping and accounting are intertwined, but the two functions are typically separated into two distinct roles: bookkeeper and accountant. While the bookkeeper is in charge of tracking all of your transactions and keeping your financial records up to date, the accountant will review your financial records to identify issues and recommend solutions for improving your business's financial well-being and growth.
How Do Startups Establish Accounting?
While accounting should be a priority, during the startup phase, you can start with simple measures and gradually increase the formality of your accounting processes as your business grows.
Here are seven simple steps to setting up accounting for your startup:
Step 1: Establish a business bank account.
Opening a bank account for your startup is a simple process that only requires a few steps. To begin, decide which financial institution you want to open an account with. Because convenience is important to some business owners, you could open your business account with the same bank you use for your personal account—most banks offer both types of accounts. Alternatively, you could shop around for the best perks, such as low fees, locations close to where you live or work, or other benefits that are important to you.
When you're ready, provide certain identification information and business documentation, such as a partnership agreement (if you have one), your Employer Identification Number (EIN), and fictitious business name certificate (if applicable).
Step 2: Keep meticulous records of your sales and expenses.
The majority of your transactions will most likely be sales and expenses at first. It is critical to keep close track of these numbers in order to keep accurate financial records. Essentially, you want to set up a bookkeeping system.
You should also keep a record of all payments, both made and received. This will not only allow you to provide proof if your records are ever audited, but it will also allow you to refer back to them if there is a discrepancy.
Step 3: Put in place a payment system.
It can be difficult to keep track of all the money owed to you when you first start out. To avoid losing money, potentially making errors in your books, and struggling to collect money from clients, you must decide how you will handle payments. In most cases, a basic invoicing system will suffice.
Step 4: Create a procedure for checking key metrics on a regular basis.
You'll want to keep an eye on certain aspects of your startup's finances, just like you would any other aspect of your business. To keep an eye on the health of your company's finances, you should check a few key metrics on a regular basis, including:
- Gross margin (revenue minus cost of goods sold)
- Net margin (net income/revenue multiplied by 100)
- Flow of funds (how much cash is flowing in and out of your business)
Step 5: Install a payroll system.
If you plan on hiring people, you'll need a payroll system. When you hire your first employee, having payroll in place will help you ensure that they are paid on time and accurately, which will benefit you both. If you don't know how to set up payroll, don't worry; you can follow our step-by-step guide or sign up for our flexible payroll services.
Step 6: Contract out your bookkeeping and accounting to a reputable company.
Your time as a startup founder is limited. And if you're not particularly knowledgeable about business finances, handling bookkeeping and accounting on your own can not only be time-consuming, but it also puts you at risk of making costly and detrimental mistakes to the growth of your startup.
Instead, find a professional service on which you can rely to handle these important responsibilities. Make sure you do your homework before deciding on a provider. If you're going to use an outsourced provider, you want to know that your company's finances are in good hands.
Cloud-based accounting and bookkeeping services, like many other business resources, are the preferred option for many modern businesses. Many business owners prefer cloud-based accounting and bookkeeping services, as well as other tools, because it ensures that their records are always up to date, they don't have to worry about losing important data, and it is simple to scale and change as their startup grows.
Step 7: Understand your tax obligations.
When you're setting up your company's accounting, you should also look into tax obligations to see how your decisions will affect you when taxes are due. For example, you may be required to pay sales and use taxes, and failure to do so may result in IRS penalties. Being familiar with small business taxes, on the other hand, can help you take advantage of certain tax credits and deductions, which can help you save money.
Take a long vacation while best accountants in Gatwick handle your accounts correctly. If you live near the sea, make your way to Gatwick. And if you want some expert accountants to help you grow your business, come to our office. We possess all of the skills required of an accountant. They have it all, whether it's analytical skills or detail-oriented revenue generation. To name a few, consider critical thinking, interpersonal communication, adaptability, time management, industry knowledge, and spreadsheet proficiency. Yes, we have in-house accountants!
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