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Startup Accounting: How to do it right from the beginning

Of all the seemingly endless tasks a business owner has to perform and oversee to ensure his or her startup will survive, accounting should be at the top of the list. One simple misstep can take down a fledgling company.

For example, a lack of cash flow is a common reason why many startups fail. And what causes cash flow problems? You guessed it: lack of visibility that can be caused by faulty accounting.

This is a key reason why accounting for startups should never be done in a sloppy or haphazard manner. Nor should it be done by those without any accounting knowledge. A DIY attempt at accounting could crush your dream before it ever gets off the ground.

To help steer you in the right direction, we’ve created a startup accounting checklist:

  1. Hire a pro

If you need a root canal, you wouldn’t do it yourself, right? Unless an entrepreneur is a qualified CPA or someone with substantial accounting experience, he or she should avoid handling the accounting responsibilities. Just as a startup founder will seek out legal advice from an attorney when it comes to setting up the business entity, the same reasoning should apply to startup accounting.

And when you do seek out an expert, make sure you find someone who specializes in providing accounting for startups. Don’t think of it as a necessary evil; think of it as a potentially business-saving solution that can help you sleep at night.

Why is hiring a pro who specializes in accounting for startups so key?

  • Startups are messy and accounting can’t be, so the right accountant will help you bridge that gap — how to make order out of the chaos of startups!
  • The right startup accountant will help you understand your expenses and manage your cash burn, with the clear recognition that cash is king and that P&L statements can be very different than cash flows.
  • He or she will understand your cash runway and the number of months of operations left based on current cash on hand.
  • And, last but not least, he or she will be there to explain your options to you and offer you guidance when the going gets tough. And it will. That’s startup life.

When should you hire an accountant?

As early as possible, but certainly as or just after you raise significant funding for your startup.

What if you’re too financially strapped to afford an accountant?

To alleviate expenses, you can hire an accountant on a part-time basis. Allocate enough in your budget to outsource the accounting duties to a qualified professional, even if it’s not full-time. This is an important resource you cannot afford to cut corners on. A smart accountant can also serve as an advisor to your company in its early phase. And, if you need a little added relief, remember that accountants are generally much cheaper than lawyers.

  1. Use accounting software

Probably one of the best and most reliable examples is QuickBooks. Implement accounting software on day one of your operations and connect it to your bank account(s). Don’t use a spreadsheet or a Google Doc with the intention of using an accounting platform later. Use accrual accounting, which records revenues and expenses incurred without cash actually being exchanged (although sometimes they are simultaneous). Do this early in the process. Don’t let your tax preparer tell you to account for your revenue and expenses in cash.

  1. Identify key metrics/key performance indicators (KPI)

To better track your business cash flow via a dashboard, it’s imperative that you zero in on the key metrics that are critical to your fiscal operations. Some commonly used metrics that influence cash flow are: accounts receivable days (how long it takes customers to pay you), accounts payable days (how long it takes you to pay suppliers), and cost of goods sold versus inventory ratio. Tracking new customers, average contract values, renewal rates, and more can all help you to better understand where your money is coming from and why.  Set goals and track them monthly on a business dashboard.

  1. Be accurate with your data

There’s nothing that will wreck accounting for startups more than entering estimated, incorrect or outdated information into your dashboard. Attention to detail is paramount. Always be vigilant and careful when entering data. Make sure that wherever you’ll pulling the data from, you’re looking at the true numbers.

  1. Increase the speed of money flowing into the company and slow down the speed coming out of it

For instance, founders might want to set their accounts receivable days down to 30 days or lower within six months. This will push customers to pay you sooner and increase the speed at which the money comes in. At the same time, you might want to enhance this faster infusion of cash by negotiating with your vendors to increase the time in which you pay your expenses.

  1. Track cash flow from day one

Don’t wait until a few months after you launch your business to gauge how much money is flowing in and out, just because you expect to operate at a loss for the first few months and would rather not focus on the bloodletting. Do it immediately after you set up shop, otherwise all the passion and hard work that you’ve invested in your startup will be wasted.

To remedy this, founders should review their business dashboards on a daily, weekly, monthly, and quarterly basis. By doing this, they can see which areas are the profit magnets and adjust accordingly.  They will also be better equipped to size up revenue goals and see how they compare with their desired target.

Other questions founders should ask themselves while tracking their cash flow are: Where are we with expenses and cash flow? Who owes money and how much? And, who do we owe and how much?

  1. Build yourself a cushion

Whether it’s the season or the economy, almost every business goes through an up-and-down cash cycle. During periods when your cash flow is booming, don’t get complacent and risk your business with extravagant or unnecessary expenses. (Remember Bachmanity, Silicon Valley fans?) Be ruthless in your cost-cutting and prudent in your spending. And, start saving for those periods when money might not be flowing like Veuve in Aspen.

  1. Compare vs your budget

You should have a budget built, however rough, for your business.  Every month, and sometimes more frequently, you should compare how you are doing versus that budget.  Better yet, your budget should include cash forecasts with assumptions about how quickly (or slowly) you will get paid and when you will pay your expenses.  Compare your actual payment timing and cash flows to the budget assumptions and tweak the forecast so you always have an eye on your actual and projected cash balances.

Startup accounting can be complicated and frustrating at times.  However, if founders adhere to the above best practices, their businesses will definitely be on the right track with the right visibility and management insights to stay that way.

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