A startup requires solid accounting practices allowing its founders, business leaders, and financial managers real-time visibility to an accurate picture of its financial health.

Because of the unpredictable nature of startups, access to accurate accounting information is vital to allow for nimble analyses that can identify opportunities for improvement and growth, and provide strategic decision-making insights.

This article will take an in-depth look at what solid accounting practices look like, the different types and methods of accounting, and what’s involved in keeping accurate accounting records. We’ll provide best practices tips every step of the way and illustrate why efficient accounting is vital for your startup.

 

Learn why startups love Zeni’s “stress-free accounting” solution: Book a demo.

What is Accounting?

Accounting is the method by which your business records, organizes, and understands its financial information. Accounting processes include reporting, summarizing, analyzing, and projecting business transactions using financial statements. 

Financial statements provide a concise summary of your financial transactions over a specified accounting period and illustrate your startup's cash flow and operations' status, providing an accurate picture of your startup's financial health for both internal and external regulators.

What credentials does an accountant need?

Accountants have a bachelor’s degree (usually) in accounting, and many hold a Certified Public Accountant (CPA) license in the United States. Before an accountant can sit for the CPA license exam, they must have a bachelor’s degree with at least 150 credit hours of coursework and between 120-150 hours of study, depending on state-level requirements. 

Other countries have CPA equivalents; in the United Kingdom and India, for example, professional accountants must hold a Chartered Accountant (CA) license to achieve this level of certification. 

Why is accounting so important?

Accounting provides entrepreneurs with a clear picture of their business’ level of success. Because startups have to keep accurate records of all their financial transactions for tax and legal purposes, a solid accounting system is crucial. Proper accounting will help you stay organized, determine profitability, and save you time and money. 

Types of accounting

There are many accounting systems available for startups. We’ll look at some to help you get a better idea of which type would work best for your business.

  • Financial accounting: This type of accounting summarizes the financial transactions from a business’s accounting period into financial statements, such as P&L statements (or, income statements), cash flow statements, and balance sheets. At larger businesses, these documents are typically audited by an external regulator and act as a measure of your company's economic performance. At startups, these statements are shared with key external stakeholders such as your investors and board of directors.
  • Managerial accounting: Using the same accounting processes as financial accounting, managerial accounting (also referred to as management accounting) records financial information intended solely for your internal stakeholders, who use this information to make informed decisions in pursuit of your business's goals.
  • Tax accounting: The purpose of tax accounting is to track incoming and outgoing funds associated with your startup's operations concerning their effect on your tax burden. The Internal Revenue Service (IRS) regulates tax accounting.
  • Cost accounting: This type of accounting records financial information related to the costs for producing your service(s) or product(s). Startups use this information to budget, make predictions, and analyze business performance.

See also: How to Calculate Startup Burn Rate: Cash Burn vs Gross Burn vs Net Burn

Accounting vs. bookkeeping

Bookkeepers generally focus on completing day-to-day tasks like financial data entry, while accountants focus more on ensuring data accuracy and compliance with correct formatting. 

Accountants are responsible for preparing reports on the business's financial health for both internal and external interests.

See also: Bookkeeper Vs. Accountant: What's The Difference?


Accounting methods

  • Accrual basis accounting: This accounting method records revenues and expenses when their related transactions occur regardless of when actual funds change hands. By including anticipated accounts receivable and accounts payable, this commonly used method provides an accurate picture of a startup’s financial health, allows for strategic decision-making, and can prepare your business to scale.
  • Cash basis accounting: The cash basis accounting method creates a more immediate recognition of revenues and expenses by recording them only once funds for a transaction have been exchanged. While this method can be more straightforward and portray an accurate picture of how much cash is on hand, it can be misleading in accurately representing your business's health and growth.


See also: Startup Bookkeeping: Common Mistakes VC-Backed Startups Make and How We're Solving Them


Generally accepted accounting principles (GAAP)

GAAP is a commonly used set of rules, regulations, standards, and procedures created by the Financial Accounting Standards Board (FASB) to develop financial reporting consistency across industries. 

As a private company, your startup doesn't have to comply with GAAP guidelines. However, if you're looking to raise venture capital or take out a business loan, your financial reports will have to follow GAAP to fulfill the requirements dictated by financial institutions. Because of this consistency, using the GAAP system can make it easier for your startup to compare its performance to other businesses in your industry.

For businesses with operations headquartered in another country, including Canada, Australia, the United Kingdom, and Mexico, you'll follow a different system called International Financial Reporting Standards (IFRS).

See also: 4 Reasons Startups Should Follow GAAP Accounting (and 2 Reason Why Some Delay) 

Financial records: what to keep and for how long

Financial records will help you identify income sources, keep track of deductible expenses, monitor your business's progress, prepare financial statements and your tax returns, and act as back-up for items reported on your tax returns.

For most startups, you must keep financial records for at least three years for auditing purposes. While private companies are exempt from annual audits, several scenarios might require a startup to undergo an audit, such as securing a bank loan or line of credit or other fundraising activities.

To help ensure your startup is well-prepared for a financial audit, make sure you hold onto supporting documents such as:

  • Sales receipts
  • Bank account statements
  • Credit card receipts and statements
  • Proof of EFT payment slips or canceled checks
  • Paid bills
  • Invoices
  • Financial statements from your bookkeeper
  • Previous tax returns
  • W2 and 1099 forms
  • Real estate closing statements


Accounting processes and tasks

The accounting process involves several procedures that collect, process, record, summarize, analyze and communicate financial information. 

Maintain accounting software 

Your accounting software will serve as your business's ultimate financial record. Every transaction must be recorded in detail and categorized within the software, which organizes the data to enable accurate reporting and analysis. 


Sometimes accountants manage the accounting software directly, but most times a bookkeeper will enter the bulk of the data into your accounting software and your accountant will ensure accuracy and completeness.


See also: 9 Advantages Of Accounting Software For Startups 


Reconcile bank accounts

Bank account reconciliation is an essential accounting process for your startup. Typically done once you receive your bank statement at the end of each month, this arduous task involves comparing the bank's transactions and balances with your recorded business transactions and balances. This process allows you to catch any errors from either your or the bank's record keeping.


Prepare financial statements

  • A profit and loss statement (P&L) or income statement summarizes the expenses, revenue, cost of sales, and gross margin that your company has incurred during a specified accounting period. The P&L is the most common financial statement for businesses of every size and is the report analyzed by potential investors.
  • A balance sheet provides a snapshot of the things your company owes and owns at a specific point in time, such as your liabilities, assets, and shareholders' equity. This report is used as a basis for computing rates of return and evaluating your capital structure.
  • A cash flow statement summarizes the amount of cash and cash equivalents coming in and out of your business in much more detail than a P&L statement. The cash flow statement demonstrates how well your startup generates cash to pay its debts and fund its operating expenses.


Financial planning & analysis

One of the most significant contributors to a startup's success is a sound business plan that includes meaningful financial projections. Financial planning and analysis (FP&A) go beyond the record-keeping and financial reporting of accounting by analyzing your business's financial statements and other financial and operational data.

FP&A professionals undertake the following processes to help align and measure your financial health and business strategies with your financial goals, including budgeting, forecasting, and analytics.

See also: What Every Founder Should Know About Building A Startup Financial Model


Why accounting matters for your startup

Planning for growth

For your startup to grow and scale, you'll likely need capital. For external funding, expertly prepared financial statements and projections can help convince investors and lenders that your business will be profitable and offer them a good return on investment.

See also: How To Create A Cash Flow Projection For Your Startup


Raising funding from investors or selling your business

As mentioned earlier in this article, if you're looking to take out a business loan, line of credit, or raise venture capital, your financial reports will have to follow GAAP. Experienced accountants understand the GAAP system, which uses the accrual accounting method, and can prepare you for exit scenarios such as mergers, acquisitions, or initial public offerings. 

See also: How To Raise Pre-Seed Funding For Your Startup


Collecting money due to your business

Accounts receivable (A/R) represents the money your business expects to receive from customers for the goods or services you’ve provided. The efficient collection of your A/R is essential to your business's cash flow. These figures are a necessary factor in calculating your profitability and provide the most precise gauge of your startup's income. 

See also: How To Manage SaaS Revenue Recognition For Your Startup 


Remaining compliant

Whether you’re at the beginning stages of building your startup or planning for future growth, using a GAAP compliant accounting system will help prepare your business to scale to any size. From properly categorizing and storing financial records, to establishing clear controls and approval workflows, every effort counts when it comes to staying ahead of potential future audits (which are more common than startups may think!). A fundraising round, due diligence for an acquisition, or applying for a bank loan or line of credit could require a startup to undergo an audit of its finances.

See also: How To Make Sure Your Startup is Audit Ready (And What To Do If You’re Audited)


Paying taxes

A solid accounting system managed by experts will make tax return preparation all that much easier and more accurate. It will also ensure you’re able to maximize your tax deduction opportunities, like the R&D tax credit (or, Research & Experimentation Tax Credit as it's formally known), which offers additional tax credit incentive for companies pursuing innovation. If your accounts are not in order, you’ll likely miss out on maximizing this serious tax benefit for startups.


See also: 2021 Startup Taxes: A Complete Guide to Filing Small Business Tax Returns


Why Zeni is the ideal accounting partner for startups

Zeni is a full-service finance firm that handles all the bookkeeping, accounting, yearly tax, and CFO needs of startups with speed and accuracy.


With Zeni, startups get accurate, GAAP-compliant books, and access to finance concierge that is 10 times faster than other accounting options thanks to Zeni’s AI-powered processes. The Zeni Dashboard gives founders 24/7 access to real-time financial data and key startup metrics, including your net burn, cash on hand, and cash zero date, so you can get the insights you need instantly and at no extra cost. 

Most bookkeeping firms charge at an hourly rate, which can end up being an expensive surprise each month depending on the number of transactions, complexity, and overall business needs. With Zeni, you’ll pay a set monthly fee based on the amount you spend to run your business, so it’s easier to budget for your bookkeeping costs, even as your business grows.


Interested in a deeper look into Zeni’s modern accounting solution for startups? Schedule a demo.