Nov 12, 2020The Beginner’s Guide to Startup Accounting
You’ve created a product you’re proud of. The service you offer is next-level. You’re spending late nights designing and redesigning your logo. You’re probably not losing sleep over whether your books are balanced. (Wait, what books?)
Accounting and bookkeeping aren’t as urgent as finding a trusty co-founder or finding a niche in the market. But there’s no question that’s it’s foundational to the health of your business. And to be honest, without accounting, you’ll be putting one blind foot in front of the other.
So, if you’re familiarizing yourself with the startup world, this article will guide you through some basic accounting principles, as well as some unexpectedly profitable benefits of thoroughly knowing your numbers.
Accounting vs. Bookkeeping
Sure, both are number-related, but that’s where the similarity ends. Bookkeeping is the process of tracking all financial records--mostly income and expenses. The term dates back to antiquity when people used paper books to track cash flows.
Accounting is the interpreting part of the equation. It involves analyzing financial data, making sure you pay the right amount in taxes, and making strategic business moves based on the messages of the data.
Both bookkeeping and accounting are vital to the health of a business, no question. As a startup, you may have an extra need to monitor income and expenses. Almost no startup has enough capital to begin afresh without external funding. If you try to get a loan or outside investment, stakeholders will require that you provide financial reports during the due-diligence process. No, a printout of your mixed personal and business expenses won’t win you a great rate. Potential investors need clear cut, easy-to-read financials in order to make an informed decision about investing in your vision.
Choose an accounting method
As a new business owner, tax day can sneak up without any semblance of warning. Before filing your first return, you’ll need to choose an accounting method.
- Cash based accounting
This form of accounting involves simply tracking cash in and cash out. It’s a simpler form of accounting, but can be effective for certain types of businesses.
2. Accrual based accounting
This type of accounting is a little more complex, but yields a greater view of the health of the business. It involves tracking money when it is earned, rather than received. This allows you to gauge the value you’re providing on a monthly basis and to make fast-paced scaling decisions.
Types of accounting are taught in accounting 101, but they can get pretty complex. We recommend chatting with a CPA before making any definite decision.
How should a startup organize financial records?
We’ll start by saying this: If you have any method of financial record organization, you’re already doing better than many startups. Why would any startup try to be successful without an organization method? We don’t know, but it happens.
So, what should a startup track? Short answer: everything.
Longer answer: Document anything that shows income, expenses, deductions, and credits shown on your tax returns. This can include:
- Proof of payment
- Previous tax returns
- W2 and 1099 forms
- Bank statements
- Charitable donations
Have you ever wanted to return an item at the store only to realize you had thrown the receipt away? Not a good feeling. Many entrepreneurs have had the same sinking feeling. A good rule of thumb is to keep records for at least three years. (Trust us, you’ll want more than an old shoebox for this.) And who knows, maybe in the future it’ll be a good trip down memory lane.
You can outsource bookkeeping
As you start your business venture, you may wonder whether to outsource or to learn the ropes and keep track of the accounting yourself. Many startups have been successful both ways. Chances are, your budget will be tight and so will your time. Nimbl (that’s us!) offers a free assessment to get you started on the right foot, whether or not outsourcing is your best move.
We were a startup once too.