Accounting for Startups: A Guide for New Entrepreneurs - Las Vegas Edition

Setting Up Your Accounting System

This is a must for every startup: set up an accounting system. The heart of this task is to track all the monetary transactions coming in and out, and what you are owed or owe to others. This will include income, expenses, assets, and liabilities.

Pick Your Accounting Method: Choose between cash basis and accrual basis accounting. A cash basis accounting records transactions when the money exchanges hands. An accrual basis accounting records a transaction when it actually happens, even if the money won’t come in or leave the books until later. Almost every startup begins with a cash basis accounting system because it’s the easier one to follow. But as your business grows, you might outgrow cash basis and switch to accrual basis for a more accurate representation of the financials.

Pick Accounting Software: Today’s software allows you to manage your books, create reports, and prepare tax returns for your small business – all from one place, with many tools at your side. Some of the most common ones you’ll see are QuickBooks, Xero, FreshBooks, etc. Consider these aspects when making your choice: convenience and intuitiveness in design, integrations with other tools, and the ability to scale.

Set Up a Chart of Accounts: The chart of accounts is a list of all accounts  you will use to record your business transactions. This is essentially a list of sections where you categorize your transactions into, such as income, expenses, assets, liabilities, and equity. Having a clear and concise chart of accounts will help you to track your monetary activities better, and also assist you in generating reports.

Set up a Business Bank Account: For tax and legal purposes – or even just your own ease – you should never mix your personal and business finances. Opening a business bank account makes it easier to track your business expenses and will simplify things when it comes time to file your taxes.

Tracking Income and Expenses

Accounting records income and expenses so you can see how profitable you are; this allows you to make decisions about your finances.

Record All Income: As soon as your business earns money – meaning, whenever income hits your business bank account – record it in your accounting system. Sales revenue, interest from a business checking account, a rare profit from an investment – it all goes into your income account.

Track expenses carefully: keep track of everything you spend money on – rents, utilities, marketing, payroll and more. Keep detailed records of your expenses so you can see what is and is not working, allowing you to become more profitable.

Watch your cash flow: Cash flow is the lifeblood of any business. It is critical to monitor your cash flow on a regular basis to make sure you have enough cash to pay your bills. If you have a positive cash flow, then you are in a position where more money is coming in than it is going out, and your business is healthy.

Understanding Financial Statements

Your business’s financial statements present a record of where it stands financially. As a startup founder, you can expect to be asked about three main financial statements: the income statement, the balance sheet and the cash flow statement.

Income Statement: The income statement is another name for a profit and how much revenue you make and how much you spend during a certain period of time. It can help you figure out if your business is profitable, or if you need to make changes.

Balance sheet: Your balance sheet is your go-to starting point to understand what your business owns and owes at a specific point in time. Including your current assets, liabilities, and equity.

Cash Flow Statement: The cash flow statement shows your business’ cash flows over a period of time. It helps you identify whether your business is generating enough cash to pay its debts and fund ongoing operations.

Planning for Taxes

Taxes are complicated, but startups need to plan for them. Knowledge of your financials, coupled with a detailed bookkeeping system can help lower your tax bill and keep you out of trouble.

Learn Your Taxes: The taxes you are liable to pay will depend on your structure and location, but as a general rule income tax, payroll tax and sales tax are the common taxes for startups.

Maintain Records: Good record-keeping is critical for preparing your taxes. You should keep your receipts, invoices, and other financial documentation. You will need this when you do your taxes, and it can help prove you are telling the truth if it’s an issue of being audited.

Hire Someone to Deal with Taxes: Taxes are complicated, especially the taxes associated with running your startup. If you do your own taxes, you could accidentally show up on the IRS’s radar, which is not something you want to do. If you just have just a basic corporation, you can probably do your taxes on your own, but if you’re doing more complicated business, you should really hire someone to deal with taxes. For example, if you’re going to sell your company or bring in a lot of capital, you’re going to want to eliminate as many tax burdens as possible. A tax professional may advise a certain strategy or suggest certain tax credits or loopholes helping with deductions.

Budgeting and Forecasting

Although it is helpful to forecast your startup from the pen to paper, you must have a budget in place to assure a financially healthy state of affairs.

Set a Budget: A budget is a financial plan showing your projected income and expenses over a period of time. Budgeting helps you make the most of your money, stay within your limits and avoid spending more than you can manage. A budget can also help you to determine your financial goals and monitor your progress.

Predict Your Financial Behavior: Financially speaking, a prediction evaluates your future revenue, expenses and cash flow based on previous data and market trends. Using a forecast, you can predict upcoming needs and make smart decisions to keep your business afloat.

Review Regularly: Your budget and forecast are not set in stone. Regular review and adjustment of your financial performance and your budget and forecast will optimize your cash flows and management of working capital, enabling you to react to changes in the business environment, maintain control, and hit the ground running.