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09.06.2022

Startup accounting: software or old school?

Have you ever thought of sacrificing your CEO’s salary to get a CFO that would get your invoices in order and advise on where to cut the funds? Maybe getting a CFO at the start of your journey does not seem possible, so at least get yourself someone who will hold your hand while counting how much cash flow you will have next quarter.

Records of financial transactions and accurate track of your finances can help you specify the directions of your business’s growth.

Before you choose to hire an accountant or search for accounting software, you need to understand the basics of startup accounting.

To control expenses and identify possible risks and opportunities for the business, you will have to answer these questions:

  • Why do you need to obsess over accounting? 
  • Google, what are the Basics of Bookkeeping?
  • How Do You Do Accounting for a New Business?

Why Is Accounting Important for the Startup?

Can you take tax deductions at the end of a year if you have not tracked your expenses? 

Here is a short list of things to determine before your startup journey.

  • Select your business structure
  • Open a separate bank account for your SME/startup
  • Choose an accounting software application that you’re comfortable with (don’t freak out yet)
  • Establish a bookkeeping system for your business

You’re almost ready to start managing financial transactions for your small business.

How Does Bookkeeping Differ From Accounting?

Bookkeeping comes before the accounting phase. A bookkeeper yells at everyone to get the documentation for each financial transaction, documents the transactions in the accounting journal, classifies them according to debits or more credits, and organizes the transactions matching the firm’s chart of account.

The financial transactions are tracked and summarized at the end of specific periods. FYI, some firms require quarterly reports. Other smaller firms may need reports only at the end of the year in preparation for doing taxes. Or, if you get money from a donor, be ready for a random audit date.

The accountants also prepare year-end financial statements that must comply with Generally Accepted Accounting Principles (GAAP).

Bookkeeping 101

Before starting a new business, you have to decide how you will tackle the financial records.

Every startup needs to have a sustainable approach to bookkeeping which entails recording the money coming in and out of your business. The system will assist you in monitoring income and expenditures, tracking budgets, and taking immediate action if problems occur.

Check out the basics of bookkeeping that every startup owner should know are weekly and monthly bookkeeping tasks.

Bookkeeping Tasks to do weekly

Document all transactions into your bookkeeping software or Excel spreadsheet

Document everything, including any cash transactions, when integrating your financial accounts with software.

Tag your transactions

Was that trip to buy coffee sticks for your IT guy or money for FB promo? These two actions are categorized differently on your tax return, so record the category while transactions are fresh in your mind. 

File or digitize receipts (scan everything on your iPhone if needed)

File your receipts and old invoices weekly. Otherwise, your assistant might lose them and you will not be able to verify certain payment premises if you get audited.

We do not underestimate the hardcore manual labor, but you’d do better using an accounting software application. 

Most newbie applications on the market today are designed for people just like you: business owners with your-grandma-on-tik-tok experience in bookkeeping and accounting basics. As a result, you are most likely to find the one that will match your budget. 

If you’re unsure whether something needs tracking, always assume that it does. The following financial items need to be taken care of in all cases. 

Bookkeeping tasks to do monthly

Reconcile your bank accounts

This step is crucial since it safeguards you against any income or expenses slipping through your fingers. However, bank reconciliations can be tricky until you get into the habit. 

Do it monthly to ensure your financial statements are accurate. If the amounts in the bank statement and internal records do not match, adjusting entries might modify account balances to reflect the actual situation more accurately at the end of an accounting period.

In general, adjusting entries are unrecorded expenses and revenues associated with continuous transactions.

Prepare and send (nudes) invoices (if applicable)

Be annoying about sending invoices as soon as you can.

Pay agents and other bills

Just do it. Otherwise, you gamble, giving your agents free money in late cost interest. Remember that late payments could also mess up your business credit score.

Analyzing Business Transactions

The bookkeeping involves tracking business transactions and making entries to needed accounts. Then, the accounting system lists bills that document the charges and the account categories. For instance, post all sales to income accounts and cash outflows to expenses accounts.

Reporting Journal Entries

Your journal should keep a chronological record of all transactions. Sales receipts, purchase orders, and invoices conclude your journal entries. 

Each transaction corresponds to a specific account using journal entries, and the changes in the statements are recorded using debits and credits.

Posting to Ledger Accounts

A ledger is a compilation of related statements that comprise accounts payable, accounts receivable, and general ledger. When a journal entry sees a change in the statement list, the account balances change into the appropriate ledger accounts.

You then get chronologically summarized information in the ledger on an account-by-account basis.

Trial Balances

Do not be lazy to make trial balances occasionally. A trial balance shows you that the ledger accounts’ debit and credit balances are matched and will score the date soon. If they don’t match, update your Tinder profile picture or rerun it.

Finale Accounts

Most businesses have interim revenue and expense accounts that provide information for the company’s income statement. However, the moment the accounting cycle ends, these accounts are closed, which shows that the balance of the temporary funds is reduced to zero.

You might want to set up an account called Profit and Loss. It will track the net revenue or loss for a specific accounting period.

Mastering your bookkeeping skills makes it possible for entrepreneurs to make accurate alterations to their business before they lose too much money. 

Unagi: Key Takeaways to keep in mind

  • Bookkeeping is writing down every financial transaction made by a business firm.
  • Accounting analyzes, reviews, interprets and reports financial data for the business. The accountant also gets year-end financial statements done and the proper accounts for the firm.
  •  You also record your transaction when cash changes hands. Using accrual accounting, you register acquisitions or sales instantly, even if the money doesn’t change hands until later.
  • Understand the firm’s basic accounts. The company’s chart of accounts is made up of these accounts and their subaccounts.
  • The big six basic accounts include assets, Liabilities, Equity, Revenue, Expenses, and Costs.

To track or not to track: ten things you need to follow (by mojo)

  1. Bank statements

The start of online banking made bulky bank statements a distant memory. However, reconciling your bank account is still your priority. This monthly action allows you to balance your general ledger balance to your bank balance and account for any bank fees.

  1. Credit card statements

It is what it is. And in fact, it is as essential as the previous one. Credit card fraud can creep up on you with many small payments to see if you’re paying attention. And, sike, you usually do not. Be ready to back up every number on your credit card statement. Especially, if you have a company credit card that multiple employees use.

  1. Payroll

If you have not hired any employees yet, you don’t have to stress about payroll. (you should worry about the amount of work you have to do lol) However, if you have managed to find your assistant, you’ll need to track their payroll properly. Properly includes everything from managing employee personnel records to keeping employee time records and the whole package with all related payroll forms like 941s and W-2s, and 1099s. You could ditch the paperwork and subscribe to a payroll service that does it better than you. But even if you decide to DIY this, you’re still liable for holding payroll records appropriately.

  1. Invoices

Lesson one, learn how to create an invoice. After all, how long can you stay afloat if your customers aren’t invoiced for your services?

Similarly, any estimation software application you buy will include an invoicing component with receivable tracking. So if you want to get that coin, regularly invoice and follow up on those invoices.

  1. Send proofs.

Your agent dawns on you that they won’t be sending any products until you pay your bill. The issue here is that you mailed them a check three weeks ago. Even if your assistant threw away the physical checks, be sure that you keep your bank statements handy to determine if a check has cleared and, if so, request a copy of the bill to give your agent.

Are you not using checks? Keep proof of your payment together with the bill if the payment info goes missing.

  1. Startup costs

IRS says you can deduct up to $5,000 in startup and organizational costs when your business becomes operational. Any fees surpassing the deduction will need to be amortized.

  1. Payments received

Anytime a client gives you $ is a reason to throw a partay. Ensure that payments received from these beloved customers are tracked, whether they pay by check, bitcoin, credit card, cash, PayPal, or via ACH transfer. A payment record should be tied to their invoice and filed whenever a customer pays. If you’re too digitalized, just save the payment history to their file.

  1. Bills (not a Destiny Child song)

As a new player in the game, you must demonstrate good credit with your vendors. That implies paying your bills when they’re due, even if it means not lunch for (jk). 

After entering your bills in accounts payable, stalk them weekly to ensure they’re paid on time. Get ready to pay late fees, interest charges, or both if they’re not.

Keep track of those more minor expenses such as parking fees, delivery, and printing. Tracking business expenses will guarantee that your year-end deductions are valid and that you have the documentation to confirm it.

  1. Tax returns

If you’re a brand-new business, do not read the following sentence, you will not get it. However, once you are old enough, those returns must be filed away and kept for at least three years, although keeping them longer may be suitable. 

  1. Financial statements

Print a set of financial statements weekly, monthly, or quarterly, depending on the type of your business. Accounting software makes running financial statements at almost no time, but the details in those reports can spill the tea about your business.

Suppose you close your financial statements at the end of the month. In that case, your bank reconciliation should be included with the financial statements to confirm that your general ledger balance and bank balance match.

If you are too lazy to read everything above, just read this:

Open a separate bank account for the business to keep your business finances separate from personal accounts.

Track your expenses regularly, including receipts, bills, invoices, proof of payments, financial statements, and tax returns.

Based on your business structure and accounting needs, establish a bookkeeping system for your business by either DIY, outsourcing it, or hiring an in-house bookkeeper.

Understand your tax obligations.

Use the balance sheet and other documents to evaluate your business’s financial health regularly.

Your record-keeping system will become more complex as your startup grows and starts making more revenue. So start smart with a well-organized system as you run your business. 

The final question remains, what should you do considering managing your company’s accounting? You can cry over excel, hire five people who will work different google sheets and even paint expanses columns in rainbow colors, or subscribe to the software that will provide you with a helicopter view of the financial records of your startup. And while you are looking for a digital accountant, you might also check out the digital CFO that fuel.finance offers. 

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