Starting a business is challenging. You are likely the production team, the sales team, the administrative staff, customer service, and of course, the accounting department. While your business might not be ready for a massive hiring spree, you need specific tools in place to help you manage the company’s finances. Accounting software is one of the most critical tools for managing your bookkeeping since, without this type of software in place, you have limited ability to recognize whether your business is profitable or not. Let’s explore why accounting system for startups can save you time and be simple to navigate for a new business owner.
Why Is Accounting Important for Startups?
A startup’s founders, business leaders, and financial managers need real-time visibility of the finances to make decisions and know whether the startup is financially healthy or not. Access to accurate financial information leads to nimble analysis, which can identify opportunities where growth and improvement need to take place.
With the right accounting practices in place, your financials provide the data for strategic decision-making insights. Essentially, the accounting system for startups allows for a concise summary of your financial transaction, demonstrating its cash flow and operations status. For investors, your startup’s financial statements provide an accurate picture of your profitability and overall financial health.
What Are the Types of Accounting Systems for Startups?
Regardless of their size, businesses use accounting software to manage their bookkeeping and keep their financial information organized. Many startups in their early days use DIY spreadsheets, recording their first transactions, but most startups quickly outgrow these simple tools, requiring that they switch to software that can handle their complex accounting needs. Here are three main types of accounting software with various features and services.
Commercial Off-The-Shelf Accounting Software (COTS)
There are many different brands of COTS on the market, but these are focused on recording transactions, organizing financial data, and generating financial statements. However, these do not include tools for functions like supply chain management or e-commerce. This type of software has options to suit a startup budget and is user-friendly enough for new business owners to track their finances.
It is important to note that as your business grows, COTS accounting software might not be advanced enough to handle the complex needs of your business. Plus, you will need additional tools to create a complete financial management system, which could lead to a number of subscription fees.
Enterprise Resource Planning Software (ERP)
ERP software provides a more sophisticated platform that consolidates different functions across multiple departments. You can use this software to manage your accounting tasks but offers tools for warehouse management, customer relationship management, supply chain management, and project management.
As you transition from a startup to a large-scale enterprise, your processes will be more complex, so this software can give you the tools to create a more complete view of your startup’s performance with a wider range of functions available on one platform.
For startups, this software can be a significant investment, which you should only make if you will leverage its full range of functionality. ERP software is not user-friendly, so you will need an accountant who has experience managing the platform you choose.
Custom Accounting Software
When your startup advances to the point where you are dealing with a huge number of transactions, then you might want to consider an accounting software platform that can handle the volume. Most ERPs can provide that level of technicality for your business. But if your business has specific accounting needs or requires a unique CRM platform, then you might want to consider a custom accounting software option.
Unfortunately, this can take longer to develop and is a considerable investment, both to build and maintain. Most businesses end up finding a COTS or ERP platform and then making adjustments to fit their unique needs.
How to Set Up a Simple Accounting System for Your Startups
In the early days of your startup, you just need a low-cost accrual-based accounting system in place to record your expenses (including funds spent to start the business) and income from early sales. These early stages are when you need to establish the structure to support your company’s finances and that will help to define your financial strategy as your business moves out of the startup phase.
Choose the right accounting software
As mentioned above, there are several options for accounting software. Most of the easy-to-use systems are low-cost, fitting the initial budget of your startup. High-end options are available but might be more effort than you want to put out in the early-stage startup.
Set up your chart of accounts
At the core of your accounting system is your chart of accounts (COA). It will be designed for your company and align with your financial structure, helping you to track and report your income and expenses. You should include five essential categories:
- Assets – Everything your company owns
- Liabilities – Everything your company owes
- Owner’s equity – Investments into your business
- Revenue – Sales revenue (your primary source of income)
- Expenses – This category can be divided into multiple subcategories, such as advertising, employee benefits, rent, legal or professional services, inventory, raw materials, and utilities.
Create and send invoices
Your accounting system should provide a way for you to create and send invoices, then track the payments once they are received. This process can help you to record all income instead of missing payments that could lead to inaccurate records.
Record expenses
Working with your bookkeeper, create a process so all receipts and expenses are properly recorded within your accounting software.
Reconcile accounts
Reconciling your accounts maintains their accuracy, as you can verify that all expenses and income have been properly recorded within the general ledger and incorporated into your financial statements.
Generate financial reports
Every month, you should generate your financial reports and use them to get a clear picture of the current financial health of your startup. These reports can also assist you in determining trends in expenses and sales, which could help in creating your long-term financial strategy.
Tips for Using Your Simple Accounting System Effectively
As you put your accounting system into place, there are a few tips you should keep in mind. Following these tips can keep your finances on track as you grow your startup.
Establishing good accounting habits
Create procedures and follow them consistently. Make sure that you stick to your chart of accounts and regularly record every transaction. Determine which of the two primary methods of tracking your income and expenses, either cash basis or accrual basis. While many small businesses opt for cash basis accounting, your startup might benefit from accrual accounting for long-term investments and growth.
Staying organized with your financial records
Working with a bookkeeping service, you can keep your financial records organized and accurate. This is critical for tax filings and to keep your startup compliant with local, state, and federal regulations.
Analyzing your financial data to make better decisions
Regularly reviewing your financial statements can help you to make sound financial decisions that align with your long-term business strategy. Additionally, analyzing your finances can give you the ability to determine what opportunities will work best for your startup because you will have a better understanding of your financial health.
What Are Some Common Mistakes to Avoid?
A startup founder is juggling multiple areas of the business, wearing multiple hats. If they don’t have experience in accounting methods, then they can make some common mistakes. Here is what you want to avoid as you put your accounting system in place for your startup.
Mixing personal and business finances
The accounting system for your startups should only be recording expenses, income, and investments related to the business. That means having a separate account for all business transactions. When you mix your personal and business finances, then you create potential issues later when trying to determine your tax liability.
Not reconciling your accounts regularly
While it is easy to get busy juggling the various aspects of running your startup, you do not want to put off reconciling your finances. Hiring a bookkeeping service could be the best way to assist you in keeping up-to-date with recording transactions.
Failing to backup your data and secure your financial information
Having only one record of your financial information can be devastating if that computer crashes. Making a backup of your finances can keep you from having to recreate your financial records. Wherever you opt to keep your backup, make sure they have security measures in place to keep your data safe.
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
A startup business takes time and effort to build, but if you don’t put an accounting system for your startups in place, then all that effort could be lost. Instead, focus on putting together an accounting system that can grow with your business as it transitions from a startup into its next phase.
