Startup Accounting: Essential Steps for Launching a Successful Business

Starting your own business is an exciting and rewarding process, but it can also be overwhelming, especially when managing your finances. However, following established best practices, such as choosing the right accounting software, can help you handle your funds appropriately.

Here are seven accounting tips you can use to help you launch a successful business.

Separate Your Business and Personal Expenses

One of the most important things you can do as a small business owner is to keep your personal expenses separate from your business funds. If you’re a sole proprietor, you can do this by opening a business bank account using your Employer Identification Number (EIN) or Social Security number. Business bank accounts provide many advantages over personal ones since it allows you to:

  • Easily track and substantiate business expenses for your tax returns
  • Determine how much you owe in business taxes
  • Secure important visibility into your cash flow
  • Create a clear audit trail
  • Get personal liability protection by keeping your business and personal funds separate
  • Obtain a line of credit that you can use to cover cash gaps
  • Establish a set of financial records to show potential investors

You’ll want to set up a checking, savings, credit card, and merchant account, which allows your business to accept credit and debit card transactions from customers.

Choose the Right Accounting Software for Startups

While you can use spreadsheets to track business expenses and prepare financial statements, it’s best to avoid this method because it’s time-consuming and susceptible to human error. Plus, many investors may trust numbers generated by manual spreadsheets.

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When starting your business, it’s worth investing in user-friendly, cloud-based accounting software. When you choose the right small business accounting software, you can:

  • Utilize a receipt and expense tracker so you never lose sight of your business expenses
  • Automatically encrypt and back up your financial information
  • Use invoice software to create custom invoices and get paid faster
  • Access your data anytime, anywhere
  • Connect your bank feed to your accounts
  • Integrate other applications, such as payroll, to streamline your data flow

Develop a Budget

Creating a budget is one of the most critical steps for building your startup. A startup budget lets you see your business’s expected revenue, expenses, and cash needs for current and future months, quarters, and years. When preparing to launch your startup, you won’t have past financial data to reference, so you must make realistic projections using market research and your best estimates. Without this preparation, you might run out of funds too early or spend cash ineffectively. Take advantage of Accounting Software USA, financial modeling tools, or guidance from a financial professional to help you craft the perfect startup budget.

Pick an Accounting Method

Before filing your first business tax return, you must choose between two accounting methods: cash basis account or accrual basis accounting.

Cash basis accounting is the simplest form of accounting because income is recorded when payments are received. Additionally, expenses are deducted when funds leave your company’s account.

Accrual basis accounting records revenue and expenses when transactions happen but before the money is received or dispersed. This accounting method is more complex than cash basis accounting, but it provides a more accurate view of your company’s financial health by including accounts payable and accounts receivable. This can be beneficial when reporting to investors or making rapid scaling decisions.

Streamline Your Bookkeeping Process

While bookkeeping and accounting are often used interchangeably, they’re not the same. Bookkeeping is the process of recording all financial information, predominantly income and expenses. On the other hand, accounting is the analysis and review of your financial data, allowing you to see the bigger picture of your business’s financial health and direction.

Both bookkeeping and accounting are important for your business’s success, but bookkeeping is more of a day-to-day responsibility, which can be time-consuming for a business owner. If you lack the resources to hire an in-house bookkeeper, you may want to consider outsourcing your bookkeeping. You can automate your bookkeeping to handle large volumes of transactions efficiently, ensuring accurate data entry and enhanced productivity.

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With an outsourced bookkeeper, they can help:

  • Manage your day-to-day bookkeeping
  • Prepare balance sheets, income statements, and cash flow statements
  • Reconcile your bank statements every month
  • File or digitize receipts
  • Manage accounts payable and accounts receivable
  • Pay attention to certain high-cost expenses

Labor costs and inventory are two of the largest expenses for many small businesses. When it comes to reducing labor expenses, you may want to outsource that work to hourly contractors since they don’t require benefits like a salaried employee. Regarding inventory, you can help minimize these expenses by tracking inventory carrying costs, the amount lost to obsolete inventory, the inventory turnover ratio, and other important metrics. Additionally, utilizing time-tracking software can help you understand how much certain tasks cost your business, allowing you to budget better and manage these costs.

Use Financial Statements to Evaluate Your Business’s Performance

As mentioned before, accounting involves examining the big picture of your business’s financial health. One way you can do this is by analyzing three essential financial statements: an income statement, a balance sheet, and a cash flow statement.

  • Income statement — This statement helps determine your business’s profitability or lack thereof.
  • Balance sheet — A balance sheet reports your business’s assets, liabilities, and shareholder equity at a certain point in time.
  • Cash flow statement — This statement shows how much money enters and leaves your business in a given period. When combined with a balance sheet, the cash flow statement can tell you whether your business has sufficient funds to meet your current obligations.

Additionally, banks and investors require these three statements to secure financing or funding.

Launching a startup is challenging. It takes time, effort, and perseverance, but following these accounting tips can help you set up your small business for success. Once you’re operational, stay focused and organized to continue growing your business.

Jeremy Edwards
Jeremy Edwards
On Chain Analysis Data Engineer. Lives in sunny Perth, Australia. Investing and writing about Crypto since 2014.

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