5 Best Accounting Tips for Startups
Starting a business entails taking a lot of chances that will determine the future of your company. In fact, business owners will sometimes look back and think, “Why didn’t I know that before?” Then there’s this tiny bit of regret that haunts you during the most stressful times.
Undoing or reconciling something takes a lot more effort than starting the right way. Luckily, our advisors have compiled a list of tips for you! But before we dive right into that, let’s discuss the difference between bookkeeping and accounting.
Bookkeeping vs. Accounting
Wait, they’re not the same thing? Aren’t they both about numbers?
Some people use these words interchangeably and may think that they’re one and the same. Who would blame them? These processes overlap and function together and yes, they’re both numbers-related.
Two words draw the fine line between the two: tracking and interpretation. Bookkeeping is the process of keeping track of and monitoring your income and expenses (i.e. financial records). Meanwhile, accounting is the means by which you analyze and interpret your financial records to support decision making. Thus, bookkeeping is descriptive, while accounting is predictive and prescriptive.
Here are some of the best accounting and bookkeeping practices that will give your startup the boost it needs.
1. Choose an accounting method that suits your business
An accounting method provides for the treatment of your transactions for purposes of bookkeeping, accounting, and reporting. There are three types which you can choose from:
- Cash-Basis Accounting
This is the most basic accounting method which records income and expenses that are actually received and paid, respectively.
- Accrual-Basis Accounting
On the other hand, accrual-basis accounting tracks income earned and expenses incurred, even before the money is actually received and paid. So if a client signs a contract, accrual-basis accounting treats this as income earned, although the client hasn’t paid you yet.
- Hybrid Accounting
Hybrid accounting takes advantage of the benefits of both cash-basis and accrual-basis accounting. In this method, you identify which transactions to treat on cash-basis, and which ones to record on accrual-basis.
2. Separate your personal and business expenses
Keep this in mind: By opening up a business, you are fostering something that is separate and distinct from you. The law treats your company as a person independent from you, your investors, and employees.
This means that your company enjoys separate rights like suing, owning properties, and incurring liabilities in its own name.
Thus, when you organize a business, the properties that you invest will belong to the company. Similarly, its expenses are not part of your personal expenses.
That’s why it’s important to separate the bookkeeping of your company’s expenses from your personal expenses. This gives you a more accurate picture of your business’ cash flow.
3. Invest in an accounting software
Isn’t it too big of an investment at the early stages of my business? Wouldn’t spreadsheet-based accounting be easier and more cost-effective? No. These are both myths.
First, the best time to avail an accounting software is when you’ve just organized your business because you wouldn’t have to go through the nitty-gritty of data migration and backtrack records for integration in the system.
Second, spreadsheet-based accounting and bookkeeping is prone to human error and inaccuracy. Furthermore, the integrity of manually generated numbers is questionable because they can easily be tampered with, and thus, chase away potential investors.
Lastly, going digital can save you more time and resources, and help you focus on other critical tasks.
4. Know your tax credits and identify the tax write-offs you can take advantage of
Know the special tax credits and benefits available to your business like the Employee Retention Tax Credit or ERC (for startups founded after February 15, 2021).
With the regular release of new tax credits, keeping an eye out for tax updates and new laws is key. MBE CPAs is a trusted business and tax information firm that provides timely and valuable industry updates.
Another thing to take advantage of are tax write-offs which are eligible deductions on your gross income. For more information on this, read our blog on the “15 Tax Write-Offs for Small Businesses.”
5. Hire a Professional
Yes. Even if you are an accountant, you must still engage the services of another professional for accounting and bookkeeping. As founder, you have to sit in a variety of business functions like business development, marketing, and operations.
If you dabble in too many areas, you might fail to see the bigger picture when making decisions, as well as overlook some things; and in bookkeeping, neglect can mean improper record keeping, undeposited funds on the books, and overpaid taxes.
Hiring a bookkeeper and accountant can take a weight off your shoulders and improve your efficiency. Furthermore, it provides you with another perspective on your numbers.
Messy room, messy life, they say? This applies even to businesses. Start decluttering now with these accounting and bookkeeping practices to help you clear the way for the best business strategies and decisions.
We’ll help you get on your way to your financial and business goals. Talk to us today!