If your company is in the early stages, now may not be the right time to worry about 409A valuations or top-down financial projections. But it is time to set up a simple accounting function. You don’t want to get too far in the game without establishing an accounting system. And it doesn’t have to be complicated. The key is to establish an accounting infrastructure that will support your company finances and help define your financial strategy as you grow.
Here’s how to set up your startup accounting function, pre-funding days:
1. Set up a simple accounting system
At this point, you can get away with a basic, low-cost accrual-based accounting setup. There are many simple available, such as Mint or InDinero. Technically, these aren’t accounting systems, but they are great for expense monitoring. Quickbooks, which 80% of our clients use, is more professional and robust, but still inexpensive and easy-to-use. While high-end options are certainly available and work very well, at this point, they are overkill in terms of effort and cost.
2. Set up your Chart of Accounts
I covered this in a previous post, Creating Your Chart of Accounts for Your Startup. The bottom line is that your chart of accounts (COA) will be the bedrock of whatever accounting system you use. Your COA is your company’s personalized accounting system. It should align with your financial structure and help you to monitor and report income and expenses.
3. Open a business banking account
A business banking account with online component will help you to eliminate unnecessary manual processes and better manage your cash flow. It should offer automatic customer invoicing and help you to avoid cash shortfalls, by pulling in receivables and stretching out payables. And it should seamlessly integrate with your chosen accounting software.
4. Separate personal and business expenses
Mixing the two is a common mistake I see startups make. So much so that I wrote about in an earlier post: 7 Biggest Tax Mistakes Startups Make. The risk in not keeping these separate is that you open yourself up to personal financial liability in the event your company faces a lawsuit. Your company could even be stripped of its corporate status. This is simply too great of a risk. Set up corporate checking and savings accounts, credit, and debit cards and maintain a separate income statement and balance sheet for your business. Pay all of your business expenses from your business banking account.
5. Hold on to your receipts and invoices
While the IRS stipulates that you keep records of transactions totaling more than $50, I recommend recording all receipts. You can keep physical copies or store them in the cloud, but be sure to keep your records organized so that you avoid a stressful scramble at tax time.
6. Stay on top of your tax obligations
This might come as a surprise, but you need to start thinking about taxes even before you generate revenue. Factor in the tax effects at the outset when you select a legal entity. Do your due diligence to make sure you understand your federal, state, and city tax obligations, including any fees and registration requirements. Don’t forget about deductions for business expenses. Keeping records of all your outlays, as I mentioned in the point above, will make this easier. Stay on top of your payroll taxes and 1099s and pay your quarterly taxes. Find a good tax professional who can help you stay in compliance with your tax obligations and engage in proactive planning to help you minimize the tax bite.
7. Create a payments system
Having a formal accounts payable system helps you maximize cash flow and generate financial reports. Work with a professional to find and set up a tracking system that meets your needs now and can scale with you as your business grows. Once your system is set up, enter all your expenses and establish your invoice A/P schedule. Place vendors on net 30 payment terms and make sure to always pay your bills on time. This will help you build a strong business credit score.
Contact Early Growth Financial Services for help with accounts payable/accounts receivable.
8. Create a payment collection process
Setting up an A/R process will help you improve cash collections, benefitting your cash flow. Whatever system you use should allow you to list all open invoices and balances. Put your payment terms in writing. Establish clear credit guidelines and create a collection timeline so clients know what you expect. Keep payment collection simple to start; you can accept checks or go with Stripe or Paypal for online payments.
9. Select a payroll provider
If you already have employees, you’ll need a payroll provider. You can choose one that offers a la carte services or one that provides a full-service HR solution, including employee benefits. Whichever option you go with, make sure it includes worker’s compensation and payroll taxes as well. These are just too complicated and the penalties for errors too high, to risk trying to handle on your own.
10. Develop a forecast
Projecting anticipated expenses will help you manage your cash burn. Tracking how much runway you have in terms of cash allows you to better anticipate and plan for what you need to do when…including raising funds. (RELATED: How to Manage Your SaaS Startup’s Burn Rate.)
The main take away here is to not approach setting up your accounting function as a DIY project! Seriously, I’ve seen and worked with so many companies that have tried to do their own accounting. It’s not pretty. If you try to go it alone then have to bring someone in to fix mistakes, you will end up paying them to redo work that’s already been done — paying more in the process than if you had outsourced your accounting in the first place. There are many great ways to save money while you’re bootstrapping your startup—cutting costs by doing your own accounting is not one of them.
In the early days, focus on setting up a working system that will help you manage cash flow, stay in tax compliance, and provide visibility into your current financial situation. When you reach the point where your business and finances become more complex and/or you are on the path to raising funds, you will need to graduate to a more sophisticated accounting system.
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