When you’re getting a startup off the ground, it’s easy to get so caught up in the fun and creative aspects, like marketing, branding and product development, that you neglect the less-sexy (yet integral) components, like accounting. But what a mistake this can be!
The significance of strong accounting
For many of us, accounting is probably one of the least enjoyable (yet most essential!) functions a startup must handle. Good accounting can promote transparency and create positive visibility for your company; poor accounting can impede growth and create serious problems later on.
Whether you fail to stay on top of receivables, neglect to record cash expenses, leave off expense reports, suffer poor communication, or commit any number of other errors, mistakes can erode the integrity of your startup.
Get a grip on the situation immediately and prioritize strategic accounting as you scale.
4 helpful tips for scaling a startup
If you understand the vital significance of solid accounting, you will shift your attention toward developing a strategic strategy, and establish a strong foundation for future growth. Here are some of the principles your competitors are undoubtedly using:
- Stay on top of expenses
“The foundation of solid business record keeping is learning to track your expenses effectively,” Kendra Murphy, accounting expert, said. “It’s a crucial step that allows you to monitor the growth of your business, build financial statements, keep track of deductible expenses, prepare tax returns and support what you report on your tax return.”
A mistake some startups make is that they neglect to record every expense from the beginning. Often too focused on moving ahead with the business, they put off serious procedures until a few months into operation, which muddies the waters and could be costly from a tax perspective.
- Hire an expert
Any entrepreneur who has a basic understanding of how to balance the books and record expenses can survive. But your objective shouldn’t be to “just get by.” If that’s your mindset, then you’d be wise to reach out and hire an expert to handle your accounting for you.
“Time is money, and accountants will save you time, money and possibly your sanity,” entrepreneur Bryce Welker said. “There are a lot of different duties and constraints to face when starting a new business. Hiring an accountant will take the stressful financial tasks off your plate. Delegating these fiscal responsibilities to a reliable specialist leaves you with more time to handle other areas in your business, leaving finances in the best of hands.”
- Automate what you can
Certain functions must be handled manually in order to ensure accuracy and consistency, of course, but you shouldn’t fall into the assumption that everything must be hands on. You can enhance efficiency by being willing to automate whatever you can.
Believe it or not, good resources and applications are available online for this purpose. For example, accounts payable automation software can integrate with your accounting system, save time and prevent costly manual errors.
Not only will this reduce your chances of getting in trouble with the IRS, but it will also ensure ongoing peace of mind.
- Choose a method
American firms typically use one or the other of two styles of accounting: cash or accrual. The difference is based on when the company recognizes revenues and expenses. Cash accounting is by far the most common approach.
“In cash accounting, all that really matters is the actual flow of money,” Cam Merritt, finance expert, explained. “Revenue only goes on the books when money comes into the company; expenses are recorded only when money goes out of the company.”
Under accrual accounting, money is recorded when it’s earned (not necessarily when it comes in).
“The Internal Revenue Service requires certain businesses to use accrual accounting,” Merritt noted. “Any business with sales of more than $5 million a year generally must use the accrual method. Businesses that maintain an inventory of items they sell to the public and that have gross receipts of at least $1 million a year also must use accrual.”
Publicly held companies are also required to use accrual accounting. The average startup is typically able to get by with cash accounting, however. You may or may not have a choice, but choose the one that suits your operations best if you do have an option.
Get ahead of accounting
Accounting is something you don’t want to fall behind on, as you’re setting yourself up for a struggle to succeed if you do. If you don’t feel like you have the time or skills to handle accounting properly in-house, then you should seek opportunities to outsource or work with a partner. There are lots of ways to handle this task; just make sure you don’t overlook it.