What Should a Startup Entrepreneur Know About Accounting?

The life of a startup entrepreneur is not a simple one. You’ll often juggle multiple roles, especially in the early stages. 

One of the most crucial tasks you’ll face is managing your startup’s accounting, which can be challenging but essential to get right.

However, you’re not expected to know absolutely everything, especially as you start out. A few essentials will set you on the right path and allow you to manage your startup’s finances responsibly and efficiently. 

Here’s what we recommend you learn:

Basics of Accounting Every Entrepreneur Should Know

When you first begin delving into accountancy, you’re bombarded with a myriad of terms. It can sometimes feel like you’re learning another language. That’s why you need to begin with the basics.

Let’s cover some of the most common financial terms that every startup founder should know:

• Assets: Everything owned by your business that has a monetary value, such as property, equipment and inventory. 
• Liabilities: Financial obligations your business has to others. For instance, loans, credit card debt and accounts payable.
• Equity: Your share of the company’s value. It’s calculated by subtracting the liabilities from the assets. The leftover value is the equity you have in your startup.
• Revenue: The income that your business generates from making sales or delivering services.
• Profit and loss: These refer to whether your startup is making or losing money. They’re calculated by subtracting all expenses from total revenue. If the result is positive, you’re in profit. If it’s negative, you’re running at a loss.

Importance of Bookkeeping for Startups

Bookkeeping refers to all the essential day-to-day financial management tasks like recording all financial transactions and ensuring that all income and expenses are tracked properly.

You should be recording all transactions on a daily basis. This includes all sales, expenses, payroll and even petty cash expenditures. 

Doing this is absolutely essential because it gives you a clear view of the financial health of your business and how much cash flow you have. 

Moreover, this helps keep your records up-to-date, making your business more attractive to investors when seeking funding. If they can see you handle your finances responsibly, they’re more likely to lend you money.

Thankfully, bookkeeping software like QuickBooks Online and Xero make these tasks relatively straightforward, even for novices, as they can automate much of it.

The Importance of Financial Statements

Financial statements are extremely useful tools to analyze the performance of your startup, spot and rectify problems, and make improvements.

Here are three of the most important financial statements:

Balance Sheet

The balance sheet provides a snapshot of your startup’s financial position at a specific moment.

It summarizes:

• Assets
• Liabilities
• Equity

This information gives you an overview of the value of your company.

Balance sheets are typically required annually for reporting purposes, but it’s good practice to create them monthly or quarterly to monitor your startup’s financial health regularly, especially as you grow.

Income Statement

The income statement shows how your startup has performed financially over a period of time. It’s good for understanding if you have money to spend or if you need to cut back.

It shows:

• Revenue
• Expenses
• Profit and loss

With this information, you’ll know if you need to identify areas to cut costs or boost income.

Income statements can be prepared monthly, quarterly or annually so you can track performance across the whole year. The frequency depends on your startup’s needs and how closely you need to monitor finances.

Cash Flow Statement

As the name suggests, the cash flow statement is for tracking all the cash incoming and outgoing from your business. This is essential for maintaining liquidity and ensuring you have money to spend when required.

The cash flow statement includes:

• Operating activities (all daily transactions)
• Investing activities like asset purchases
• Financial activities such as loan repayments or investments

Like other financial statements, the frequency with which you produce a balance sheet depends on how closely you need to monitor cash flow. For startups, where money can be tight, we recommend producing a monthly statement.

Budgeting and Financial Planning

Startups must pay extra attention to their finances, and successful startup owners need to have a good grasp of budgeting and financial planning skills.

Budgets don’t just include the day-to-day expenditures. They must also account for unplanned expenses and emergencies, as one is bound to crop up sooner or later!

A budget plan should include:

• An estimation of your revenue
• The upcoming fixed and variable costs and liabilities of your business
• How much you need to allocate to cover everything
• Factor in additional funds for savings and unexpected expenses

Financial Forecasting

Financial forecasting is one of your best defenses against running over budget or finding yourself in the red.

This process involves looking at market conditions and other factors and, based on the outcomes, making predictions on what future revenue and expenses will be.

Financial forecasting is extremely beneficial for all types of startups, but particularly for those that are sensitive to market trends and seasonal demand.

Financial forecasting can be complicated. Using accounting software or enlisting the services of an outsourced accounting agency might be helpful.

Tax Obligations and Compliance

We can’t talk about accounting tips for startups without mentioning taxes. Regardless of the industry, every business must know its tax obligations.

Owing money to or being penalized by the IRS is not a fun prospect. You need to get to understand the tax implications for your industry, which include:

• Incomes taxes
• Payroll taxes
• Sales tax
• Local and state taxes

Good knowledge of taxes can even help you save money as a startup. There are plenty of deductions and credits available—such as the R&D tax credit, for example—that you may miss if you’re not up to speed on what you can take advantage of.

Hiring a Tax Professional

We understand that taxes aren’t the easiest or most pleasant thing to navigate, that’s why hiring a tax professional can help greatly.

Outsourced tax accountants for startups, like our team at Finvisor, will make quick work of your taxes and ensure that everything is present and correct. They can also help you take advantage of all deductions and credits and plan appropriately for future liabilities.

Tax is one area that you can’t afford to get wrong, so don’t hesitate to seek professional help if you think you need it.

Financial Tools and Software for Startups

We’ve referenced accounting software throughout this article, but it deserves its own section. 

Software like QuickBooks Online and Xero are tools that can perform all the tasks we’ve talked about and so much more. They usually include features tailored to specific industries, such as inventory management for e-commerce.

The platforms are extremely affordable with different price plans available. You can scale up or down the service depending on the needs of your startup.

Typical core features of most software plans include:

• Invoicing and billing
• Expense tracking
• Financial reporting
• Integration capabilities (such as with payroll or CRM systems)

One of the best things about these platforms is their ability to automate many repetitive day-to-day tasks. Besides saving you a ton of time, automation drastically reduces the likelihood of errors and discrepancies showing up on your financial statements.

Plus, they update in real-time, which means your books will always be up-to-date.

As an extra tip for first-time entrepreneurs, QuickBooks and Xero offer free courses that teach you how to bookkeep and use the software properly.

Tips for Managing Startup Finances

Cash Flow Management

Having cash available enables you to cover your expenses and swiftly deal with unforeseen problems. A good cash flow enables you to invest more in your business—like upgrading equipment or taking on extra staff.

Shrewd cash flow management means you must be diligent about how your startup spends money. Therefore, you should regularly review your cash flow statement to:

• Identify any trends or patterns such as recurring costs or seasonal variations.
• Spot and rectify issues like delayed customer payments or outstanding invoices.
• Plan for upcoming expenses or dips in revenue. Adjust spending accordingly to maintain a good cash flow.

Cost Control

Outgoing costs are always going to eat up a large portion of your revenue but if you don’t monitor them closely, they can easily spiral out of control.

Keep monitoring your financial records to:

• Seek out and put a stop to unnecessary costs.
• Look at how you can reduce costs without compromising quality. You could consider negotiating better terms with vendors or changing suppliers to achieve this.
• Analyze how current spending aligns with your startup’s goals.
• Evaluate whether or not your current expenditures are giving you the desired return on investment (ROI).

Good cost management is also another factor that potential investors look at. They want to know that you can optimize and make the most of your money. Becoming skilled in this area is beneficial in every way.

Building a Financial Team

While it’s always a valuable exercise to learn accounting and bookkeeping basics, nothing beats the expertise of a qualified professional. 

Besides, taking this job off your hands means you can fully focus on scaling your business.

However, we understand that hiring full-time in-house staff costs far more than many startups can afford.

Outsourced financial professionals, like Finvisor, are a flexible, affordable alternative. 

You get access to the necessary expertise without the cost of another full-time salary. Pay only for the services you need and scale it up (or down) as your startup evolves. 

Moreover, when you build an outsourced team, you are not responsible for providing costly office space, equipment or benefits, which helps you save even more money.

From daily bookkeeping to in-depth financial analysis and forecasting, Finvisor specializes in providing financial services and accountants for startups. We have a thorough understanding of the unique needs of new businesses just like yours.

Case Studies to Consider

Although startup financial management is somewhat of a tightrope to walk, we can learn from other startups’ mistakes or successes.

Webvan

Take the home delivery service Webvan, for example.

This company was valued at $1.2 billion in 1999. In only two years it laid off 2,000 employees, closed its doors, and filed for bankruptcy.

Why?

Because it expanded too quickly into new areas without first establishing a solid foundation within its initial market. Startups should only scale once the business model is proven successful and a strong financial foundation is in place.

The failure of Webvan was so monumental that it’s still studied decades later by business schools around the world.

Basecamp

In contrast, software company Basecamp is a great example of how shrewd financial management can lead to success without relying on external funding.

In the initial stages, the company focused on building a profitable business rather than pursuing rapid—and costly—growth.

It also kept costs down by concentrating on creating a scalable software product that didn’t require huge marketing expenditure.

Finally, it placed value on providing high levels of customer service, building a loyal user base.

Above all, Basecamp’s mantra is that it never spends more than it earns and never wastes money on things that don’t matter.

Besides a minor, no-control stake investment from Bezos Expeditions, Basecamp has not taken any further investments and remains a privately held company with an estimated annual revenue of $25 million.

Final Thoughts

Handling finances as a startup entrepreneur is no easy task, but it’s not something to be afraid of. Rest assured that experienced outside help is available if you need it.

Remember, keeping a close eye on your startup’s financials will allow you to build a business with strong foundations that last the long-term. 

A good principle for financial success: review your reports regularly, keep spending under control, and never spend what you don’t have.

For more information about Finvisor’s wide range of services and how outsourcing an accountant can help with your startup business needs, get in touch today.