Essential accounting practices for startups

Running your startup is exciting. You've developed a product, a business strategy, and you're building something big. If you're like 69% of startup owners, you've done it all from home.

But there’s one headache all startup owners face: It’s often difficult to manage company finances if you’re not already an accountant or other financial tradesperson.

At some point in your startup's growth, loans or investments will come in handy. You'll need accurate financial statements (balance sheets, income statements, and cash flow statements) to get approval for financing. Moreover, quality accounting and financial reporting give you the insights you need to reach your goals of growing your business.

The role of accounting in a startup

There are several reasons to have efficient accounting functions in your startup, whether managed by you or an accounting team.

• Financial Management: You'll need to understand your startup's accounts to manage its finances properly.
• Planning And Forecasting: Effective accounting makes it possible to forecast accurately and plan for hurdles and opportunities.
• Compliance: Maintaining compliance is critical for several reasons, so your accounting function should help you with PCI and GDPR compliance.
• Cash Flow Management: Accounting tells you in which seasons your business will likely ebb or flow. Along with other data, this helps you better manage your cash flows.
• KPI Tracking: Most startup KPIs are financial. Therefore, effective accounting will better equip you to track and manage your performance indicators.  

Best accounting practices for any startup

Regardless of the type of startup you operate, there are certain accounting practices you should follow. Doing so results in better financial management and more opportunity for growth.

Set up a solid accounting foundation with accurate and timely bookkeeping

The first thing you should do is set up your accounting process. This may mean setting yourself up with the tools necessary to handle your accounting independently or hiring a team of accounting experts.

During this step, you will also want to determine your accounting cycles. You'll then set up a procedure for accurate and timely bookkeeping. For example, one possibility is to establish rules for how and when to track receipts and log transactions.

Separate business and personal finances

The financial operations of your business should be completely separate from your personal finances. That means you will need business and personal accounts while keeping transactions apart. Mixing the two can lead to significant headaches and tax issues.

Comply with generally accepted accounting principles (GAAP)

GAAP standards are a set of accounting rules designed to eliminate misleading accounting and financial reporting practices. Following GAAP standards results in consistent and reliable financial reports.  

When you follow GAAP accounting rules, you'll not only find it less difficult to access capital from investors. Your reports will also give you an accurate depiction of your company's financial standing. This means you'll have more reliable opportunities to optimize and grow.

Develop a comprehensive financial plan and budget

Starting a business without a financial plan and budget is never wise. After all, it costs money to make money. Without a budget and financial plan, poor cash flow management could result in failure before your startup has a chance to thrive.

Think about the cash you have on hand, the income you can expect to generate, and the cost of doing business. Considering this, create a comprehensive financial plan and budget to give your startup the best opportunity to grow.

Monitor, track, and manage expenses

Expense tracking is one of the most critical aspects of an effective accounting process. As a startup owner, you want to make sure you use the money you and your investors put into your company in the most efficient way possible.

Keep track of every expense your company covers, both in terms of electronic and cash accounting. Then dive into your documents regularly to form a detailed understanding of where your startup's money is going. In doing so, you'll likely find opportunities to optimize your cash flow management.

Regularly reconcile bank and credit card statements

Occasionally, balances in your accounting software may not align with your financial accounts. This could become a significant headache if you let it go on for too long, so it's best to regularly reconcile bank and credit card statements to ensure everything is in order.

There are two ways to do this. One option is to manually comb through your company's accounting transactions to look for matching records in your financial accounts. Alternatively, you can take advantage of a software solution that does this for you automatically.

Implement internal controls and fraud prevention

It's crucial to reasonably assure your startup won't be the next victim of fraud. This means you should implement internal controls that limit employee, vendor, and third-party access to your financial resources. Moreover, implement security technologies to keep your and the customer's data safe.

Scale accounting processes for growth

Now that you have your entire accounting function built out, it's time for the fun part – growing your startup.

As your work pays off and your startup grows, scale up your accounting process to match. This may mean bringing new members to the team or incorporating more powerful software.

Nonetheless, as your business grows, its finances will become more complex. Be sure you prepare for that complexity by upgrading your accounting process as needed.

Leverage technology for streamlined startup accounting

Your accounting department can be a source of headaches, or it could run like a well-oiled machine. In many cases, the difference is in the technology you tap into.

The best financial solutions for startups use artificial intelligence to manage mundane financial tasks, freeing you to focus on your startup’s growth. You'll eliminate the risk of human error while seeing your company's data in a brand new light.

Consider automating your accounting and bookkeeping responsibilities to improve efficiency and increase accuracy.

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