7 Accounting Issues That Startups Face

Growing pains are part of the journey when scaling your startup. 

You’ll likely run into funding, culture, and product-related challenges as you expand. One area of your business that often gets neglected as you grow is accounting.    

Without proper accounting guardrails, you may put yourself in sticky situations. These include running out of cash, regulatory fines, and difficulty attracting investors. 

This article delves into the seven most common accounting problems for startups and provides solutions to overcome them.

The Impact Of Great Accounting Practices On Startups

Accounting is much more than just crunching numbers. When done right, it clarifies your financial health for enhanced strategic planning and decision-making.

Great accounting practices can impact startups in several ways:

• Make financial decisions faster – Accurate and timely financial reports enable startups to monitor cash flow, understand financial obligations, and measure performance against industry benchmarks or projected targets.
• Enhance investor confidence – Well-maintained financial reports provide the transparency investors look for when deciding to invest.
• Ensure regulatory compliance – Proper accounting practices ensure compliance with regulations. This reduces risk and helps prevent legal issues and potential fines.

With an effective accounting system, you can better monitor your company's performance, identify and solve financial problems, and grow your operations sustainably.

Accounting Challenges For Startups

Startups (especially SaaS startups) often face unique accounting challenges compared to other businesses. 

Rapid growth, limited resources, and evolving business models can create accounting hurdles that are hard to navigate without the right knowledge and strategies. 

Here are the seven most common accounting challenges for startups and how to overcome them:

1. Record-Keeping And Financial Statements

Problem:

Record-keeping is hard to squeeze in when you’re heads-down with business growth and product development. But when you don’t stay up to date on your finances, receipts get lost, transactions are not recorded promptly, and inconsistencies crop up in financial reports. 

Not having a close eye on your finances can make reviewing and analyzing statements confusing and a longer process than anticipated. Without solid financial records, you can easily make poor decisions, fail to attract investors, and have issues with audits and legal compliance.

Solution: 

A robust accounting system can provide a complete and accurate record of your financial performance — including your purchases, sales, receipts, and proof of payments.

Cloud-based accounting software can automate transaction recording, categorize your expenses, and generate comprehensive financial reports, such as profit and loss statements or earnings reports. 

These digital tools minimize human errors and provide real-time financial insights so you can see where you're doing well and where you need to improve. An accountant or financial advisor can also interpret these financial statements and give additional guidance.

2. Cash Flow Management

Problem:

Startups often need help to maintain a healthy cash flow, especially during the costly initial stages of growth. 

You might be profitable on paper, but if cash outflows exceed cash inflows, you can quickly run out of money to cover day-to-day operations.

Solution:

Your startup should develop a detailed cash flow forecast to anticipate future cash inflows and outflows based on your past performance. 

One metric in particular that startups should monitor is the cash burn rate, or the speed at which you're exhausting your cash reserves before becoming profitable.

Implement strict credit controls, timely invoicing, and efficient inventory management to reduce cash outflows. Arranging for an emergency line of credit can also act as a buffer in lean periods, though this may be better as a last resort.

3. Budgeting, Forecasting, And Business Planning

Problem: 

Early-stage startup founders often lack the financial data and expertise for comprehensive business planning. 

Inaccurate forecasts and inefficient budgets can result in overspending, lack of funds for critical growth opportunities, or even financial collapse.

Solution:

Gather as much data as possible, and do market research to understand what your competitors are doing. 

Use this information to build the best financial models you can — hiring a fractional CFO and using forecasting software can help.

Adopt a conservative approach while forecasting revenues and a liberal one when estimating costs.

4. Tax Complexities

Problem:  

An unclear understanding of your tax obligations, deadlines, and how to calculate everything correctly can lead to hefty fines, penalties, or even legal complications. 

You could also overlook potential tax benefits and credits you're eligible for, leading to overpayment.

Solution: 

Tax professionals can provide guidance on tax planning, assist with tax filings, and ensure your startup realizes all the applicable tax deductions, credits, and incentives.

Additionally, using tax software can help automate and streamline this process.

5. Payroll And Employee Benefits

Problem:

Staying on top of payroll and benefits is much more than paying salaries on time. Startups also need to withhold the right amount of money for taxes, contribute to employee benefits packages, and process bonuses and commissions. 

Mishandling employee payroll could lead to employee dissatisfaction, high turnover, and potential legal complications.

Solution: 

Startups should work with a payroll service provider who can guide them on employee benefits, tax withholdings, and other related matters. 

By ensuring a streamlined payroll process, your startup can maintain employee morale and stay aligned with local regulations.

6. Moving From Cash-Based To Accrual Accounting

Problem:

Most startups begin with cash-based accounting, as recording income as its received is the most straightforward and easy to understand. 

However, this method only works for so long and can cause problems for startups as they grow, such as limited financial insight and distorted sales performance. Not to mention it doesn’t meet the reporting requirements for businesses with a revenue of more than $25 million over three consecutive years. 

Transitioning to accrual accounting can be tricky, though. It requires a good understanding of concepts like accounts receivable, accounts payable, deferred revenue, and accrued expenses. 

Solution:

Using accounting software that supports both cash and accrual-based accounting can simplify the process. 

Engaging a professional accountant can also help ensure that your financial reporting remains accurate and compliant with standards.

7. Accounting Software And Bookkeeping

Problem:

Without a structured bookkeeping process, startups can struggle with inaccurate records, delayed financial reporting, and inefficient financial management. 

What's more, countless accounting software options are available, so choosing the one that best suits your company's unique needs can be overwhelming.

Solution:  

Any software you choose should be scalable to grow with your business. It should also integrate seamlessly with other business systems like your customer relationship management software, inventory management programs, and payroll services. 

Then, regularly update your books, reconcile bank statements, and review your financial reports.

Overcoming Accounting Hurdles For Startups

Scaling your startup is supposed to be an exciting time, not a daunting one.

With the right accounting processes and systems in place, you can feel confident about your financial health and grow with ease. A positive mindset, resources, and a modern approach can help you turn these challenges into growth opportunities.

Stay ahead of the curve by familiarizing yourself with the right solutions before you grow, including diligent financial reporting, comprehensive accounting software, and internal workflow optimization.

Effective accounting is not merely a compliance requirement — it's a tool for business success. See how a modern approach to accounting can make all the difference and transform your startup's financial management today.