Burning the midnight oil is a commonality with entrepreneurs, but you don’t want to burn the candle at both ends.
Learning accounting for startups will help ensure that you know where you are and where you need to improve. If you don’t know where your money is going, you won’t be able to spot problem areas or areas that are responsible for your growth.
Continue reading this article to learn more about startup accounting.
Accounting for Startups 101
Instead of learning lessons the hard way, this article will help you as you’re setting up your business. Many entrepreneurs are visionaries but fail to get the accounting right and this causes serious problems — and even failures in business.
Understand Bookkeeping vs. Accounting
Bookkeeping and accounting are often confused but they are not the same.
Bookkeeping tracks your numbers. The most important numbers tracked by bookkeeping is income and expenses.
Accounting, on the other hand, translates those numbers into usable information. Accounts use these numbers to determine how much taxes you need to pay each year, what business decisions will be financially wise for you and more.
While bookkeeping and accounting are both important, you need to pay special attention to keeping track of your numbers through bookkeeping.
Most startups still need help from investors and have to keep them happy. The best way to keep investors happy is to be very detailed with your bookkeeping and show them how their investment is coming together.
Not Started Yet?
If you haven’t started your business yet — great! Here are some things you can do to make your life easier before you even get started.
Setting your business up properly in the first place makes life moving forward all the more simple.
Choosing a Business Entity
As you’re getting started you need to choose a business entity. There are five main types of business entities which are:
- Partnership
- Sole Proprietorship
- S Corp
- C Corp
- LLC (Limited Liability Company)
And before you can do anything else, you need to know which one you’re going to choose. If you aren’t sure, this might be a good time for us to have a conversation.
Which Accounting Method Will You Choose?
Before you start accounting, you’ll need to choose the method you’re going to use. You’ll need to make a choice on this before you’re able to file your first business tax return.
If you want to keep it simple then you can use the cash basis accounting method. This method tracks income and expenses when they actually happen.
A little more complicated method is known as accrual basis accounting. This method tracks money when it is earned vs. when it is received and the same goes for when your company has expenditures.
The accrual basis accounting method might be more complicated but it can be helpful when painting a picture of the future.
A CPA can help with understanding accounting methods and what might be the best option for your company.
Keeping Financial Records
If you’re trying to do the minimum on tracking — no good. You want to track everything — and I mean — everything!
The things you should track are including but not limited to the following:
- Receipts
- Invoices
- Bills
- Canceled Checks
- W2 Forms
- 1099 Forms
- Previous Tax Returns
If you have any documentation that shows your income and expenses, you need to file it. If the IRS comes knocking at your door, you want to have the best documentation possible.
Keep most of these records even after tax time so you can have them if needed in the future. You should keep them for at least 3 years and possibly even longer in some situations.
Things to Remember When Doing Bookkeeping
When your business is just getting off the ground, you’re putting every minute of your life into it and finding time for bookkeeping might not be a top priority. You need to make it a top priority. Instead of opening the books only when you need information, you should know exactly what is going on because you’re keeping a close track on it.
- Enter all business transactions into your accounting software or other tracking systems on a weekly basis.
- Categorize your income and expenses so it is easy to find transactions at a later date.
- Digitize your files and receipts on a weekly basis so they don’t go missing.
- Reconcile your bank accounts on a monthly basis so you don’t miss any important transactions.
- Send any necessary invoices immediately.
- Pay vendors and bills immediately.
- Review & remind clients about any unpaid invoices.
- Review your financial standing each month.
Continuing Education
Tax laws can change which means your bookkeeping and accounting practices may need to change slightly.
If you’re the one that is handling accounting and bookkeeping, you need to stay up to date on all of the latest information. Attend conferences, take courses and do any other necessary work to make sure that you aren’t blindsided by new laws and practices you need to implement.
Ready to Launch Your Startup?
There’s a difference between launching your startup and starting your startup. If you want to have true success you NEED to launch your business.
Learning accounting for startups is a good first step but there are many other intricacies to making sure your business is off on the right foot. Let’s connect today and see how we can work together to take your business to the next level.
