Accounting assistance is crucial for start-ups to manage their finances effectively. Lack of experience and resources can make it a daunting task. In this blog, we will discuss the importance of accounting assistance for start-ups and how it can provide necessary support and guidance for financial stability and growth.
What is Accounting for a Startup?
Accounting is the way your business gathers, sorts, and makes sense of its financial data. Accounting can be thought of as a big machine where you put records of all your company’s transactions, projections, taxes, etc., and out comes a story about the financial health of your business.
It tells you about your company’s current assets and debts, your cash flow, whether you’re making a profit, and which parts of your business are bringing in more money.
Also Read: 43 Life Events That May Affect Your Taxes and Accounting
Accounting Types
Startups can choose from a number of accounting tools. We’ll look at a few of them below to help you figure out which one is best for your business.
Financial accounting: is the process of putting together financial statements, such as profit-and-loss statements, cash flow statements, and balance sheets, that show the financial activities of a business during its accounting period. At bigger businesses, these documents are usually checked by an outside regulator. They show how well your business is doing financially. At startups, these statements are open to investors and the board of directors, two of the most important outside groups.
Managerial accounting: Also called “management accounting,” this type of accounting uses the same methods as financial accounting and only keeps track of financial information for internal users. They use this knowledge to make decisions about your business that are smart and well-informed.
Tax accounting: is the process of keeping track of how the money that comes in and goes out of your business affects your taxes. The Internal Revenue Service (IRS) is in charge of keeping track of taxes.
Cost accounting: is the process of keeping track of the money you spend on making your service(s) or product(s). Startups use this data to make budgets, make estimates, and look at how their businesses are doing.
Methods of Accounting
Accrual accounting: means that income and expenses are recorded when the linked transactions happen, not when the money changes hands. By including expected accounts receivable and accounts payable, this common way gives an accurate picture of a startup’s financial health, lets you make strategic decisions, and can help your business get ready to grow.
Cash basis accounting: records income and expenses only after money has been exchanged for a transaction. This makes it easier to see income and expenses right away. This way can be easier to understand and show how much cash is on hand, but it can be misleading about the health and growth of your business.
GAAP Stands for Generally Accepted Accounting Principles
GAAP is a common set of rules, regulations, standards, and procedures made by the Financial Accounting Standards Board (FASB) to make financial reporting consistent across businesses.
GAAP rules are not something that private companies have to follow. But if you want to get venture capital or a business loan, your financial reports will have to follow GAAP to meet the standards of financial institutions. Because of this consistency, using the GAAP system can make it easier for your startup to compare its performance to that of other companies in your industry.
International Financial Reporting Standards (IFRS) is a different system that companies with operations in Canada, Australia, the United Kingdom, and Mexico that have their headquarters in another country will use
Also Read: Small business tax and accounting year-end checklist of 39 items
What Financial Records Should You Keep and How Long Should You Keep Them?
Financial records will help you find sources of income, keep track of tax-deductible expenses, track the growth of your business, make financial statements and tax returns, and act as a backup for items on your tax returns.
For auditing reasons, most startups must keep their financial records for at least three years. Private companies don’t have to go through yearly audits, but a startup might have to if it wants to get a bank loan, or line of credit, or do other things to raise money.
4 Simple Accounting Tasks and Processes
Several steps are used to gather, process, record, summarize, analyze, and share financial information as part of the accounting process.
1. Keeping Accounting Tools up-to-date
Your accounting software will be the most important financial record for your business. Every transaction must be entered in detail and put into a category in the software. This organizes the data so that reports and analyses can be done correctly.
Sometimes accountants handle the software directly, but most of the time, a bookkeeper will enter most of the data into your software, and your accountant will make sure it is correct and complete.
2. Reconciling Bank Accounts
As a start-up owner, it is crucial to carry out the process of bank account reconciliation at the end of each month. This process involves comparing your business transactions and balances with the transactions and balances recorded by the bank. By doing so, you can identify any errors that might have occurred in either your or the bank’s record keeping, ensuring accuracy in your financial statements. Despite being an arduous task, bank account reconciliation is a necessary accounting process for your start-up’s financial health.
3. Preparing Financial Statements
- A profit and loss statement (P&L) or income statement is a summary of your company’s spending, income, cost of sales, and gross margin over a certain period of time. The P&L is the most common type of financial statement for businesses of all sizes, and possible investors look at this report.
- A balance sheet shows what a company pays and what it owns, including its liabilities, assets, and shareholders’ equity. This report is used to figure out return rates and evaluate the capital structure.
- A cash flow statement gives a much more detailed summary of how much cash and cash equivalents come into and leave a business than a profit and loss statement. The cash flow statement shows how well a new business is able to make money to pay off its debts and cover its running costs.
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4. Planning and Analyzing Finances
A sound business plan that includes meaningful financial projections is one of the most significant contributors to a startup’s success. Financial planning and analysis (FP&A) go beyond the record-keeping and financial reporting of accounting by analyzing your business’s financial statements and other financial and operational data.
FP&A professionals undertake the following processes to help align and measure your financial health and business strategies with your financial goals, including budgeting, forecasting, and analytics.
Benefits of Accounting for Startups in the Initial Stage
Estimating the Financial Future
To get money from banks, investors, or lenders, every startup needs to give them information about how much money it thinks it will need. Accounting helps a business make a business plan that includes an estimate of monthly costs, a forecast of the economy, and a prediction of how fast the business will grow. This knowledge is really important for a Startup to get more and more investors to invest in their idea. The investors also make sure that the owner has a good idea of how much money the business will make.
Determine Profitability
Accounting helps a business owner figure out how profitable his or her business will be in the future. It helps keep track of how the company is doing and makes it possible to make changes when needed. Through accounting, business owners will learn how to make the most money out of their assets. An entrepreneur also needs to give investors information about the business’s finances so that the investors know they will be paid on time. A balance sheet and an income statement are two types of monthly statements that show if a business is doing well or not. These statements help figure out how profitable a business is in general.
Budget Expenses
Accounting helps a business owner set up a budget for spending on all the different parts of a startup. Accounting helps keep track of how much money comes in and out of a business. Money is used to pay workers, advertise, buy inventory, and buy small items. A budget helps a business cut back on spending on things that aren’t as important and save money for later.
Also Read: 7 Essential Qualities Of A Good Bookkeeper For A Small Business
Accounting for Payroll
Accounting for startups helps a business owner keep track of how much his or her workers earn in salaries, bonuses, commissions, and any other way. It also keeps track of the health insurance premiums, Social Security taxes, and paid holidays that workers pay for. This makes a list of all of the company’s workers that can be used as a database. During the process of incorporating a business, entrepreneurs must talk to accountants. This is a must for entrepreneurs since hiring a trained professional to help with outsourcing will help a business grow much faster. Outsourcing helps in many ways such as:
Tax Specialization
Taxes are a big reason why a startup might have trouble in addition to getting money and collecting funds. Here, trained workers like Chartered Accountants are very important to the growth of the Startup. A trained professional who knows the tax rules, whether it’s direct tax, indirect tax, or any other kind of tax, will help the business run more smoothly. One of the most important parts of Accounting for Startups is clear and well-managed taxes.
Think about business
An accountant helps a business owner by taking care of the money so they can focus on their goods. With the help of an accountant, the business owner can make partnerships, build relationships, and sell its product. It will give the business important information that will help it grow and make money. An accountant will also help cover the costs and cut the company’s costs.
Secretarial Duties
Since accountants are experts in company law, they can also do the work of a company secretary. They also make sure that the company follows the rules set out in the Company Act, 2013. Start-ups must follow these rules to the letter from the very beginning, or the business could fail.
Valuable Business Partner
Outsourcing accounting is very important for start-ups because the companies that do it have people with a wide range of skills working for them. This help from these firms will be very helpful for the Startup because they have a lot more experience with things like getting money, planning money, and reporting money. Getting help with money from trained professionals at the beginning of a startup is better because it helps the business grow and develop faster. Many businesses don’t know much about accounting and often make bad accounting decisions. This is a bad thing for accounting for startups.
Conclusion
In conclusion, accounting assistance is crucial for start-ups. It helps entrepreneurs manage their finances effectively, avoid costly mistakes, and make informed business decisions. By outsourcing their accounting tasks to professionals or using accounting software, start-ups can save time and focus on growing their businesses. Moreover, accurate financial records can help start-ups secure funding, comply with tax regulations, and build a solid reputation. Thus, it’s essential for start-ups to prioritize accounting and seek expert guidance to achieve long-term success.
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