Attention: This is a site-wide announcement, so look here for a minute.

Accounting for Startups: A Beginner's Guide

Accounting for Startups: A Beginner's Guide

When you're a startup, the details matter. Every little thing counts. But when many little things happen all at once, it can be hard to prioritize tasks. The money coming in matters because there's burn rate, and good talent is expensive.

And then there's trying to raise money, working on the pitch deck, meeting investors, meeting people in your industry who want to get involved, and you've still got to order stand-up desks and a new pool table for "casual meetings."

One thing that should be on that list is keeping clean books. While it's not the sexiest thing to keep top of mind, it's essential. Accounting and bookkeeping are the heartbeats to keeping the business afloat, whether the company is thriving and cash is coming by the fistful.

If you're a young startup founder, this 101 How-To Accounting guide is for you. We wanted to create something tangible that you could refer back to, but also give you something to think about should you need some pros to work with to keep the books tidy.

First Things First: Accounting vs. Bookkeeping

Let's get this out of the way: accounting and bookkeeping are not the same thing.

Bookkeeping tracks financial records (income and expenses).

Accounting is interpreting financial records, from paying taxes to making strategic decisions based on your profitability.

Each of these practices matter, and each should be taken seriously. The better your records look, the easier making moves will be. Investors want financial reports, and if you're after a loan, you'll need transparent financials. As we said, they'll want to see every little thing and how you spend money.

Let's Talk Business Structure

How you set up your business determines everything. If you pick a certain entity, it affects everything from taxes to how you get paid.

The five big business entities are:

  • C-corporation
  • Limited liability company
  • Sole proprietorship
  • S-corporation
  • Partnership

Choose Wisely: What's Your Accounting Method?

One of a new company's most critical structural points is deciding how your accounting processes will work. You're a startup, so every dollar matters, so pick wisely.

Cash basis accounting

Cash basis accounting tracks money when received and expenses when they're paid. Pretty simple and straightforward.

Accrual basis accounting

Accrual basis accounting counts money when you've struck a deal on a big client or sent an invoice rather than cash in hand. This method allows for tracking a long-term picture of the business —helpful when investors report to investors or scale-up.

Either method works. It depends on how fluid your business model is and your long-term goals.

Financial Records Matter. Big Time.

Ok, we've covered the business entity part. But what kind of records will you need to keep a detailed ledger to keep the books moving along with no egregious errors? Uh, a lot.

The best way is to track everything. If it's income, expenses, credits, whatever, log it. And keep everything organized. Even when taxes are done, keep this information ready should you get audited.

Include things like:

  • Bills
  • Receipts
  • W2 and 1099 forms
  • Canceled checks
  • Bank and credit card statements
  • Previous tax returns
  • Proof of payments
  • Invoices
  • Financial statements from your bookkeeper
  • Anything supporting income, deduction, or credit shown on tax returns

The Startup Bookkeeping Checklist

Follow these rules, and you're off to the financial races.

Enter all transactions into bookkeeping software or, yes, even Excel

Spend the money and get bookkeeping software. There's a bunch on the market that are specifically made for startups. Excel sheets work, but one mistake and everything will go out of whack when problems begin. Plus, investors generally do not want to see Excel if you're asking for big money.

Categorize transactions

Break stuff down. If you bought a new iPad, was it for you or for the business to use out in the field? These things matter, and they need to be marked appropriately regarding tax write-off time.

Digitize receipts

Chances are, if you're a startup, you know tech. Like the bookkeeping software, there are many options out there for snapping a receipt photo on your phone instead of cramming it into your pocket and forgetting about it later.

Get your invoices out and pay vendors

Just do it. The longer you wait on paying someone, the longer someone will wait to pay you. Don't pay people late. And there are fees, and late payments could affect your business credit. If someone hasn't paid you, follow up. Sometimes, an email does fall through the cracks.

Reconcile bank accounts

This step safeguards against income or expenses going MIA. Make sure you've got enough cash to keep operating by reviewing your statements regularly. Know how money is moving in and out. When you're aware of what that looks like, it makes decision-making a lot easier when it comes to growth.

Financial statements: A Startup's Secret Weapon

Just like digitizing receipts or deciding on what kind of accounting you will land on – investing the time and effort into clear accounting practices matters. If your books are clean, you'll be able to make moves, plan for the future, or, at worst, know how to stop the bleeding should something go wrong. You'll only have these Yoda-like powers by taking accounting seriously. And most of them are pretty self-explanatory.

Learn how runway works

Runway is one of the most fundamental startup metrics: how much cash do you have on hand vs. how much you're spending monthly. If it costs $10,000 a month to keep the business moving and you've got $100,000 in the bank, you're solvent for almost the next year, even if you don't make any money.

On the flipside, the burn rate lets you know how long you've got till you need to start making money rather than depending on what's in the bank. Burn rate should always be what's monitored first rather than looking at runway.

Are you someone's best customer?

What products or services are you using? Can you reach out to salespeople and see if there's a discount? It never hurts to ask because no business wants to lose customers, especially when you're spending thousands. If you can do small things like this, it's an easy way to reduce costs.

Understand what the net profit margin ratio is

Yes, the term "profit margin" lets you know what your profits for each dollar of revenue count toward, but this also works to show if you're overspending. If you need to cut spending or price something differently, the net profit margin is the litmus test because it lets you know if you're making an actual profit.

This is one of those times where we can most definitely help. Because there's a fundamental question coming up:

Do you go DIY (and keep costs low by doing the accounting yourself), or do you hire a professional accountant?

We know bootstrapping is critical in the early days. Time is money, and money is, well, money—every expense matters when you're a startup. Hear us out on this one.

Don't wait. Work with an accountant.

Because you're in the early stages of growth, founders must get comfortable working with accountants (or cool companies that know a lot about things like the R&D Tax Credit, which can save you TONS of money ahem ahem.)

Because they know things like when it's time to file taxes, what can be written off, and general good practices. Remember when we were talking about picking an accounting method? An accountant (or cool tech company who loves working with young founders to see their vision) can help you choose a suitable way for your business.

And then there's the obvious: tax time. Business taxes are not like personal taxes, and there are multiple write-offs and different deadlines and extensions. A knowledgeable accountant will know how to get the most out of your return rather than trying to navigate Turbo Tax at the kitchen table.

Gearing up for a fundraise? Read our guide on how to get your books ready for raising capital.

TaxTaker Official Logo