If you ever found a successful startup today, you will be surprised that they wouldn’t be successful without solid bedrock of innovative ideas and sound financial practices. While the accounting part of building a business is not always as exciting as other aspects like product development or marketing, it is one part that determines the long-term viability of ant startup.
Keeping your finances in order has a lot of benefits it can offer your company. Not only is it important for the smooth operation of the company, it also plays a crucial role in attracting potential investors. However, accounting is not always a simple terrain to tread in business. So, how can you figure out that part for your startup? What are the steps you need to take to get things right down there?
In this post, we will be showing you the essential steps every startup needs to follow to get the accounting part of their business sorted out. Just keep reading.
Why is Accounting Important for Startups
Before we go into the details of what you should do to help your accounting, let’s first see the reason why this is important to your startup in the first place. Like we said earlier, effective accounting has a wide range of benefits to offer startups. From helping you monitor your revenue to controlling costs and complying with regulatory requirements, your accounting is one part you cannot handle with levity.
But accounting is not what anyone can delve into. You need to have enough knowledge about it to properly figure it out. That is why many startup owners would prefer to either hire a professional account or leverage some accounting software for the job.
Yes, the two options will cost you extra money. But it will help you be on the safer side while helping you handle many tasks such as tracking finances and sorting taxes so you don’t have to do them yourself. However, even if you are going to go that route, you will still need to put some things in place for your startup for the best results.
So, in the next section, we will show you some essential steps you need to follow to get started with your accounting.
Getting Started With Accounting: What Are the Steps to Take?
#1: Open a business bank account
If you ask many business owners, most of them started their businesses to be their own boss and manage all operations themselves. They go as far as having just one bank account for their business and personal finance. Well, that is not always a good way to go.
When starting a company, it is important that you separate your personal and business finances. And that starts with opening a business account for your startup. That is the first step in your startup’s accounting journey.
When you do this, it will be easier for you to take care of some important tasks like record keeping and tax filing. It will also help you have a clear understanding of the financial status of your company.
#2: Choose the right accounting method
There are basically two accounting methods startup owners can choose from for their business. They can either choose cash-based accounting or accrual accounting. Of course, the two are different.
While cash-based accounting records income and expenses when cash is received or paid, accrual accounting records transactions when they are incurred, regardless of when the cash exchange happens. Even though cash-based accounting may seem to be simpler, accrual accounting offers a more accurate financial picture in the long run.
#3: Familiarize yourself with basic financial statements
- Income Statement
This is also what’s called Profit and Loss statement. The income statement is a document that provides a detailed summary of a company’s revenues, costs, and expenses during a particular period – usually over a year period.
It provides crucial insights into a company’s profitability. That means it shows a business’s ability to generate profit by increasing revenue or reducing costs. Beyond just stating figures, the income statement can help pinpoint specific areas for cost reduction and potential opportunities for revenue optimization. So, it plays a huge role in helping startups make strategic decisions concerning their finance.
- Balance Sheet
The balance sheet serves as a financial snapshot at a specific point in time. It is an organized breakdown of your company’s assets, liabilities, and shareholders’ equity. It plays a huge role in helping you understand the net worth of your business.
This financial statement is not just for investors and creditors, but it’s also an essential tool to help you know how well you are using your resources to generate profits.
- Cash Flow Statement
The cash flow statement is a document that gives you a clear insight into how changes in balance sheet accounts and income can affect your company’s cash and cash equivalents. The cash flow statement categorizes cash flow into three activities: operating, investing, and financing.
By tracking these activities, you will be able to understand your liquidity better and how well you generate cash to meet debts and finance future growth.
#4: Hire an Accountant or Do it Yourself
While it’s possible for business owners to handle accounting tasks themselves, as the business grows, it may be more efficient and less risky to hire a professional accountant. Accountants can help with complicated tasks such as tax filing, financial forecasting, and compliance with financial regulations, including payments on account self assessment.
If your startup is still at the initial stage, it’s reasonable to want to take up this task yourself, but as you grow, you will need to consider hiring a professional for the job. That comes with a lot of benefits, including allowing you more time to concentrate on other important aspects of growing your business.
#5: Regular Review and Audit
Regularly reviewing financial statements can reveal much about a business’s financial health. It can identify trends, pinpoint problem areas, and provide an opportunity to address issues before they become serious.
An annual audit by an independent party can also be helpful in providing an unbiased review of the company’s financial health.
Bottom Line
For many startups today, accounting might not always command top attention. However, maintaining robust accounting practices can bring about a host of benefits for your business. We already highlighted some important steps you can take to get a hang of your account.
If you are able to take advantage of them for your business, your startup will not only be keeping its finances in order but also journey towards sustained growth and success.
