How to Set Up Accounting for Your Startup (and Why It’s Important)

After founding your startup, there are many things to do. Systems to put in place, processes to implement, all to facilitate the smooth running of your business.

You’ll need to develop your product, register your business, develop your marketing strategy and secure capital to grow your startup. SaaS startups can do this with the help of Founderpath, which allows businesses to turn their monthly subscriptions into upfront cash.

Alongside these crucial elements to starting your business, however, you need to consider how to set up accounting for your startup. Thankfully, we’ve made this handy article to help you along your way. So let’s get into it. 

What is Accounting for Startups?

Accounting describes the process of recording, analysing and reporting transactions associated with your startup. Accounting generates a comprehensive record of your startup’s finances, and facilitates the essential reporting of these finances to relevant financial bodies, such as the IRS.

Many people confuse accounting with bookkeeping. While they are similar and work in tandem, bookkeeping refers specifically to recording the transactions associated with your startup on a short-term basis.

This falls under the accounting umbrella, yet accounting for startups comprises much more, including reporting and producing documentation to keep abreast of your startup’s financial situation.

Why is Accounting Essential for Startups?

To keep track of your business transactions.

Accounting allows founders to maintain a comprehensive picture of their startup’s finances.

Not only can this help to guide founders’ financial decisions, but it ensures that no missed payments from customers – or outstanding debts – slip through the cracks.

Plus, it’s crucial for businesses to understand their cash flow. 82% of businesses fail due to poor cash flow management, so make sure your business doesn’t become a part of that statistic by keeping track of all your business transactions.

For compliance purposes.

It’s essential for startups to practise accounting, to comply with the applicable financial laws and regulations.

In other words, accounting is a legal necessity – it’s unavoidable if you want to run a business. 

To pay tax.

Every business is legally required to pay tax, and not doing so – or doing so incorrectly, even if it’s a mistake – can incur serious penalties.

Effective accounting minimizes the risk of making mistakes when you come to pay tax, so you can be sure your startup is paying the right amount. Nobody wants the IRS knocking on their door.

How to Set Up Accounting for Your Startup.

1. Open a bank account.

Once your business has been registered, you should open up a business bank account for your startup.

While some startup founders choose to use their own bank account to manage their business’ capital, this makes accounting far more difficult and much less efficient.

In the time you spend sorting between your personal transactions and those associated with your business, you could be implementing strategies to grow your business. 

Not to mention, when it comes time to do your taxes, having a dedicated business bank account will be a life saver. Plus having a dedicated business account will help to protect your private savings if you’re having financial problems with your business.

2. Select your accounting method.

The accounting method you choose determines how you record and report your startup’s revenue and expenses.

There are two major accounting methods to choose from: cash accounting and accrual accounting.

Cash accounting is the practice of recording revenue and expenses only when the bill has been paid. In other words, when money has either gone into – or out of – your business account.

On the other hand, with accrual accounting you record when revenues or expenses are recognized. For example, when an invoice has been sent or a contract signed. This means that, even if your business is only paid at the end of a project, the incoming revenue will be documented when the project commences. 

The accounting method you should choose depends on your business.

Businesses that work on a project-by-project basis – incurring expenses along the way – should probably use accrual accounting to give a more accurate representation of the business’ financial standing. On the other hand, small businesses that make instant sales might opt to use cash accounting.

If you want to change your accounting method in the future, you’ll need approval from the appropriate financial body. In the US, this is the IRS. So, you’ll want to pick the right accounting method right off the bat to avoid the hassle.

3. Get familiar with the accounting cycle.

The accounting cycle is an eight-step process that makes up the foundation of bookkeeping for startup owners.

These steps include: 

  • the identification of all transactions
  • making a record in a journal, including both sales transactions and expenses (this depends on the accounting method you’ve chosen)
  • transferring records to a general ledger
  • carrying out an unadjusted trial balance at the end of the accounting period
  • adjusting entries based on any errors
  • recording these adjustments in your journal
  • generating the necessary financial statements for your startup, including income and cash flow
  • producing closing statements summarizing the performance of your startup over the accounting period

Then, the cycle begins again.

4. Choose your accounting software.

Though you can complete your accounting manually, you should consider using an accounting software instead.

Accounting software records your startup’s transactions, including revenue, expenses and asset management, among other functionalities. It transfers these records automatically to the general ledger. This means your startup’s financial data can be viewed in real time by key players in your startup, such as your Chief Financial Officer.

What’s more, accounting software usually comes with analytics and reporting, allowing you to gain greater insight into your startup’s performance and guide decisions that boost growth.

When choosing the right accounting software for your startup, you should take into account factors such as: 

  • Your budget
  • The size of your business
  • Whether your business has niche accounting needs
  • Whether the software can be used by users without an accounting background

Then, pick the software that best matches your needs.

Top picks for accounting software:

5. Set up a chart of accounts.

Your chart of accounts (COA) should include every account – a.k.a. any record of a transaction, whether it’s an expense, revenue, asset, liability or equity – in your startup’s general ledger.

For each account, your COA will typically show the name of the account, a short description, an account code and the type of account (whether it’s an expense, asset or revenue etc.).

This COA presents a birds-eye view of the financial activities of your startup. And it aids with financial reporting and makes locating accounts quicker.

6. Set up a payroll system.

The payroll system of a startup refers to the accounting method used to pay the salaries of employees.

The system should include procedures to deduct taxes, take into consideration any benefits, and be able to integrate new employees – and remove old ones – easily. 

An effective payroll system makes it easy to accurately fill out the necessary financial paperwork for each employee – this is essential to stay in good standing with the IRS. 

Using a good payroll software can help your startup achieve this, alongside ensuring your HR staff are fully apprised of the payroll process.

Best payroll systems:

7. Create a payment collection process.

Implementing an effective payment collection – or A/R (accounts receivable) – process is essential for keeping your startup’s cash flow healthy.

Accounts receivable refers to when a sale has been made, but your startup hasn’t yet received payment from the customer. The process you implement to ensure you receive this payment should ensure efficient, effective transfer of funds from your customers to your startup.

An effective payment collection process includes ensuring all sales are recorded efficiently, invoices are generated and sent out quickly, and that your billing process is clear – to both you and your customers.

For SaaS startups, this process is usually automatic, with a monthly subscription fee taken from customers’ bank accounts each month. To increase the capital instantly available to grow your SaaS startup, you can use a platform like Founderpath which provides financing to bootstrapped SaaS founders by turning their monthly subscriptions into upfront cash.

8. Determine your tax obligations.

Once you get your startup up-and-running, it will be liable to pay tax. 

This tax will likely include franchise tax, payroll tax, corporate income tax (when your startup begins to become profitable) and sales tax, though not all of these may apply. There may be more taxes your startup is liable to pay, depending on where your business is based.

Conclusion…

Effective accounting generates a comprehensive overview of your startup’s finances, while ensuring your startup complies with financial laws and regulations.

This makes it essential to set up an accounting system – using the eight steps above – that covers everything from how you record transactions, to how you pay your employees and deal with tax.

Accounting provides an unedited picture of your startup’s finances. If your accounting reveals that your cash flow is waning, yet you need to increase your spending to grow your business – for example, to boost your SaaS marketing strategy – then Founderpath provides a solution.
Founderpath helps bootstrapped SaaS business founders acquire the capital they need to grow their business, by turning their monthly subscriptions into cash that they can use to grow their startup. Try us for free today and see how we can boost your capital!