Startup Accounting 101: Essentials for Managing Your Business Finances

If you have recently started a new business or have plans to start one soon, a crucial aspect of your business plan may involve your accounting system. Having solid startup accounting procedures right out of the gate can make it easier for you to manage your finances, rather than struggling to catch up through retroactive recording once your business is in full swing.

Startups are constantly on the lookout for ways to gain a competitive edge. Making strategic choices concerning how you track finances can provide certain advantages early in your business life cycle. To help start your business on the right financial foot, review the following primer on startup accounting systems.

Choosing a system

Before your launch date, there are a few things to consider when deciding which is the best bookkeeping system for your unique business.

• Method of accounting: Which method of accounting will best suit your new business — cash basis, accrual basis, or a hybrid method? In other words, will you record your revenue or expenses when cash is physically exchanged, immediately after a transaction despite payment, or a combination of both?
• Type of software: While your business may initially be small enough to track revenue and expenses through a simple handwritten system, this won't last long. Outdated paper-and-pencil accounting systems are fraught with potential for costly mistakes, and paper-based systems also run the risk of losing or destroying valuable accounting data. Do yourself and your business a favor by starting with some form of electronic accounting software from the beginning. There are hundreds of different startup accounting software programs that include standalone suites or cloud-based programs, so it's important to outline what you need in a software program before settling on your chosen system.
• Accounting personnel: Determining responsibility for accounting tasks is crucial to any organized accounting system. Some business owners will have the knowledge and time to take care of most financial responsibilities themselves, while others will want to hire an employee to maintain their records. In addition, having an accounting professional on call can be extremely helpful, especially around tax season. Even if accounting personnel aren't involved in the day-to-day tasks, your small business will find itself in the position to make risky financial decisions where professional consulting will prove to be an invaluable asset.

Educating yourself

Unless your startup is an accounting firm, chances are high that you aren't fully up to date on all the education required to successfully handle every accounting challenge your small business might face. If you opt to manage your accounting in-house, you'll need to familiarize yourself with some basic bookkeeping knowledge to know how to properly categorize and track regular income and expenses. While many accounting programs have manuals or help tools, you'll feel like you are reading another language if you're not starting with a basic understanding of bookkeeping fundamentals.

• Know your reports — Many accounting software programs can generate charts, graphs, and reports, but if you don't know how to read them, you're missing out on a valuable opportunity to stay on top of your finances. Learn more specifics on startup accounting reports below.
• Know your regulations — Your business must stay compliant with federal regulations concerning payroll, taxes, revenue reporting, and several other financial topics. But state regulations will affect your business as well. These regulations can (and do) change from year to year, so it's important to stay well-informed on changes in any and all regulations that may affect your business.

Track your business records

Regardless of the accounting software you choose, your records will need to be accessible and meaningful to help you make important financial decisions. You'll need to be able to tell if your company is profitable, where your business income is being spent, and if corners can be cut in certain areas. Detailed books not only aid in reflecting your company's finances, they will also assist in making these critical decisions. The information recorded in your books will allow you to pull several basic accounting reports. Here a few that every business owner should be familiar with.

• Cash flow report: The cash flow report is critical, allowing you to determine whether your business has enough money available to operate and pay daily expenses.
• Accounts payable or liability report: The accounts payable/liability report will show you what your business owes — or how much debt you're in.
• Aged receivables report: The aged receivables report will show you who owes your business money as well as any delinquencies broken down by payment periods of over 30 days, over 60 days, and beyond. This allows you to prioritize your follow-up and stay close to customers notorious for not paying in a timely manner.
• Profit and loss report: The profit and loss report will tell you how your business is performing. If you choose to use the cash-basis method of accounting, this report will look much like a cash flow report. However, if you're using the accrual method, it will show a longer period of your company's financial health.

Know when to get help: outsourced accounting for startups

Accounting for startups can be tricky, but having a solid plan is critical to launching a thriving new business. As the business owner, you'll be tasked with making important financial decisions upfront, so educating yourself on the accounting basics will prove to be indispensable when it comes to the successful operation of your new startup.