During the unpredictable early stages of a business, accounting can help startups gain financial clarity. By carefully tracking income, expenses, assets, and liabilities, startups can make smart decisions about growth and investments. By keeping detailed and accurate financial records, startups can show potential investors that the startup is reliable and has strong growth potential. Good accounting also assists with the management of cash flow and ensures that startups comply with financial regulations and tax laws – helping them avoid penalties and legal issues.

Cash flow problems are a major reason why nearly half of startups fail within the first five years, which highlights the importance of accurate accounting processes. Ultimately, accounting is a strategic tool that supports sustainability and growth, providing insights that steer startups toward success. Below, we’ll explain accounting basics, how to start accounting for a new business, accounting software, and accounting costs.

What’s in this article?

• Accounting basics every startup should track
  
• Do startups need accountants?
  
• How to start accounting for a new business
  
• Accounting software for startups
  
• Accounting costs for startups
  

Accounting basics every startup should track

Every startup should track these accounting basics:

• Bank and credit card statements: Reconcile these statements regularly to catch any errors or discrepancies.

• Income and expenses: Track all the money coming in (e.g. sales, investments) and all the money going out (e.g. rent, salaries, supplies).

• Invoices and receipts: Keep a record of all the invoices you send out and all the receipts you receive.

• Payroll records: If you have employees, keep track of their wages, taxes, and any other benefits you provide.

• Assets and liabilities: Keep a list of everything your startup owns (assets) and everything it owes (liabilities). This will give you a snapshot of your overall financial position.

Do startups need accountants?

An accountant can offer startups major benefits. Although some founders might handle basic accounting tasks at first, professional accountants bring a high level of expertise and efficiency, especially as the business grows. Here are some reasons why startups might find accountants helpful.

• Financial expertise: Accountants have specialised knowledge in financial management, tax laws, and regulatory requirements. They can provide insights and advice that go beyond basic book-keeping.

• Time-saving: Running a startup demands a lot of time and energy. By outsourcing accounting tasks, founders can focus on core business activities such as product development, marketing, and customer engagement.

• Accuracy and compliance: Accountants ensure that financial records are accurate and comply with all relevant laws and regulations. This reduces the risk of errors that could lead to financial penalties or legal issues.

• Tax optimisation: Accountants are well-versed in tax laws and can identify opportunities for tax savings. They can also ensure that businesses meet all tax obligations promptly, avoiding penalties for late or incorrect filings.

• Financial planning and strategy: Accountants can assist with financial planning, budgeting, and forecasting. They help startups set realistic financial goals and develop strategies to achieve them.

• Investor relations: Accurate and professionally prepared financial statements help attract and retain investors. Accountants can prepare the necessary documents and reports to demonstrate a startup’s financial health and growth potential.

• Internal controls and fraud prevention: Accountants can establish internal controls that protect the startup’s assets and reduce the risk of fraud. This is particularly important as the business scales and financial transactions become more complex.

• Scalability: As a startup grows, its financial operations become more complex. Accountants can help manage this growth by setting up scalable accounting systems and processes that adapt to the changing needs of the business.

• Business valuation and exit strategy: For startups considering selling, merging, or going public, accountants provide valuable services in business valuation and preparing for due diligence processes.

How to start accounting for a new business

Follow these steps to start up your accounting processes for a new business.

• Separate business and personal finances: Open a separate bank account and credit card specifically for your business transactions. This makes it much easier to track income and expenses, and it simplifies tax preparation.

• Choose an accounting method: Choose between cash accounting – which records income when received and expenses when paid – or accrual accounting, which records income when earned and expenses when incurred. Cash accounting is simpler, but it does not provide as accurate a picture of a business’s finances as accrual accounting.

• Set up a chart of accounts: Create a list of categories for your income and expenses such as “Sales”, “Rent”, or “Salaries”. This helps organise your financial data and generate reports.

• Track income and expenses: Record every transaction, no matter how small. Use accounting software or a spreadsheet to keep everything organised. Make sure you categorise each transaction correctly in your chart of accounts.

• Reconcile bank statements: Regularly compare your bank statements to your accounting records to catch any errors and ensure everything matches up.

• Prepare financial statements: The following basic financial statements are an important part of accounting for any business.

  • Income statement: This shows your income and expenses over a specific period, revealing your profit or loss.
    
  • Balance sheet: This shows your assets, liabilities, and equity at a specific point in time – giving a snapshot of your financial position.
    
  • Cash flow statement: This shows the flow of cash in and out of your business, tracking your liquidity.
    

Accounting software for startups

Accounting software can be a great way for a startup to improve its accounting. This software automates tasks such as invoicing, expense tracking, and financial reporting – freeing up valuable time for other priorities. It reduces the risk of human error in calculations and data entry and keeps financial data organised and accessible in one place. It also generates reports and dashboards that can help you understand your financial performance and make informed decisions.

Here are some popular accounting software options for startups.

• QuickBooks Online: QuickBooks is user-friendly, comprehensive, and integrates with many other business systems. It’s an effective solution for most startups.

• Xero: Xero is known for its clean interface and comprehensive features. It’s a good option for startups that want a more modern and intuitive experience.

• Zoho Books: Zoho Books is a budget-friendly option that still offers key accounting features. It’s a good choice for early-stage startups with limited resources.

• FreshBooks: FreshBooks is geared toward freelancers and small businesses. Its strengths are invoicing and expense tracking.

• Wave: Wave is a free option with basic accounting features. It’s a good starting point for very early-stage startups with minimal transactions.

Consider the following factors to determine which software is the best fit for your startup.

• Business needs: What features do you need? For example, do you need invoicing, expense tracking, inventory management, or project accounting? Make a list of your must-haves and nice-to-haves.

• Budget: Accounting software prices vary widely. Determine how much you’re willing to spend and look for options within your budget.

• Ease of use: Choose software that is easy for you and your team to use. A user-friendly interface will save you time and frustration.

• Integrations: Does the software integrate with other systems you use such as your bank, payment processor, or customer relationship management (CRM)?

• Scalability: Will the software grow with your business? Choose a solution that can handle your needs as your business expands.

• Customer support: Look for software with responsive customer support in case you encounter any issues.

Accounting costs for startups

Accounting costs for startups vary widely depending on several factors, including the size and complexity of the business, the chosen accounting method (DIY, outsourcing, or hiring an in-house accountant), the stage of the business, and the specific accounting needs.

If you have a small business and simple finances, consider handling your own book-keeping initially, as this is typically the most cost-effective option. Many free online courses and resources can help you learn accounting basics, and investing in good accounting software can automate tasks and save you money on book-keeping services in the long run. If you do want to work with experts, negotiate with accountants and bookkeepers to get the best possible rates.

Here’s a breakdown of expected costs depending on your accounting approach.

DIY accounting

• Accounting software: This is often the biggest expense for startups that do their own accounting. Prices can range from free (for basic plans) to hundreds of dollars per month for more advanced features.

• Training and resources: You might need to invest in online courses, books, or webinars to learn accounting basics. These costs vary depending on the resources you choose.

Outsourced accounting

• Book-keeping services: These typically range from $100 to $500 per month, depending on the number of transactions and the complexity of your books.

• Accounting services: For more advanced tasks such as financial statement preparation, tax filings, and advisory services, expect to pay anywhere from $500 to several thousand dollars per month.

• Virtual CFO services: For strategic financial guidance and high-level decision-making support, a virtual CFO can cost $1,000 to $5,000 per month.

In-house accountant

• Salary: Salaries vary depending on experience, location, and the size of the company.

• Benefits: You’ll also need to factor in the cost of benefits such as health insurance, retirement contributions, and paid time off.

• Overhead: Additional costs might include office space, equipment, and software.

Additional costs

• Tax preparation: If you’re not comfortable filing your own taxes, you’ll need to hire a tax professional. Costs vary depending on the complexity of your tax situation.

• Audit fees: If your startup grows to a certain size or receives funding, you might be required to undergo an audit, which comes with associated fees.

• Consulting fees: If you need specialised financial advice, you might need to hire a consultant for specific projects.