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Oftentimes, accounting for startups is left to whoever is best at managing data in the company – or if no one – one more job for the founder. However, a lack of accounting experience and knowledge can be a hindrance, especially for startups which need to be agile and primed for rapid growth.
If your startup is relying on the person who’s best at numbers for your accounting, you can be setting yourself up for failure like:
- Misinterpreting cash flows
- Getting into legal troubles
- Holding back your growth
- Losing out on funding or contracts
- Wrong or missing data for the big decisions
Becoming a certified public accountant (CPA) takes years of higher education (150 credit hours) and success in an exam as well as continuing education requirements.
Accountants’ specialized knowledge can support your startup business in many ways. We’ll cover the various services startups need from accountants and the things accountants look out for while doing their work.
There are many good reasons for the way things work – GAAP (generally accepted accounting principles) has been honed for decades. Why do you care? Well investors care, for starters. A big reason is to help compare one investment to another. Even if you think youn’t aren’t ready for investors – you still may need a bank, a line of credit, even a credit card – and you are going to need to produce industry standard (and correct) sets of financial metrics.
By the end of this post, you’ll better understand what a startup accountant should do, so when the time comes to hire one, you’ll know all the right questions to ask.
What Makes Accounting Services for Startups Different?
When it comes to number of employees, sales, and market share, startups look an awful lot like small businesses. The numbers are just small. Or worse. Negative. While it’s true that startups and small businesses operate at the same scale, a startup has its sights set on larger horizons than a small business – with big implications
Because of this difference, the administration and financing strategies of startups and small businesses are very different.
Growth Focused: Big Businesses in Infancy
Unlike small businesses, startups are built with rapid growth in mind. Because of this, much of their operational structures are designed to scale the organization and its revenues quickly. Startups are tying to become big busiensses. To go public. Or another large outcome. As a result, startup accounting can be a bit more complex than a small business in the same industry.
Because of this added complexity, it’s important for startups to equip themselves with the right tools out of the gate–such as software and access to professionals. Like all businesses, a startup will need to manage internal data and workflows, almost to the same level of scrutiny that a public company would use – if you want to attract the level of investors that go along with that path.
Looking to Grow? You’re Gonna Need Funds
Our Startup Founder’s Guide to Fundraising will tell you everything you need to know about securing investments for your next stage of growth
For instance, a small business might manage their financial data with a simple accounting software like QuickBooks and their staffing with a simple scheduling software like Homebase.
More complex enterprise resource planning softwaresuch as Oracle Netsuite, may even make sense for your startup if you are in the right industry and depending on where your aspirations take you. .
Startups are also more likely than other small businesses to have distributed teams. Unlike a small business, startups rarely focus marketing efforts on a specific geographic area and will not be bound to a single location. Thus, many startups are finding that maintaining a headquarters is overhead they don’t need, opening them up to employees from anywhere.
With teams in different jurisdictions, there will be different tax and labor laws you will need to follow. Accounting management gets messy as your team and clientele spread across the country or globe.
Startups are usually in breakout industries or innovating in existing industries with new technology. Because of this, startups end up having different needs that a typical business might have.
One example is the burgeoning Software as a Service (SaaS) space. In Saas, income is generated from subscriptions rather than one-off sales. Because of this, there are deferred revenue components that you have to include in your financial reports to boost your profile with investors or banks. This requires accrual accounting rather than the simple cash-basis. A qualified accountant can help you make calculations that maximize the value and attractiveness of your business.
Credit: Jason Goodman
Another example of industry-specific differences for startups is eCommerce. While a small business might want to focus on a single channel to keep things manageable, eCommerce startups usually maximize availability of their products by operating on multiple platforms .
Because of this, eCommerce startup businesses will need software integrations to unify the transactional data coming from multiple channels. While an accountant usually won’t be able to engineer these integrations themselves, they can walk you through the available solutions and help you choose a consultant to deploy them.
Why Is Accounting Important for Startups?
Now we know there are various aspects to the trajectory of a startup that require unique accounting needs. But what accounting services does a startup need? Below we’ll dive into more specific accounting topics for startups.
Managing the Chart of Accounts
The most obvious role of an accountant is developing the right chart of accounts (COA). The COA lays out all of your assets and liabilities and provides a comprehensive picture of the financial health of your business.
Cash vs. Accrual Accounting
Calculating and itemizing all the assets and liabilities can be a tricky endeavor. While cash accounting (calculating the money you have on hand and the money you owe) is relatively straightforward, it isn’t the method of accounting preferred by investors and banks.
Accrual accounting, the preferred method for startup accounting, looks to future payments to get a clearer picture of what your business can be valued at once all current transactions have cleared.
This method of accounting isn’t straightforward, especially when it comes to recurring payments like subscriptions and rent. A certified accountant will be able to manage your chart of accounts with accrual accounting to position your business in the best light for those investing or lending you money.
The Right Chart of Accounts
A startup accountant needs to manage financial data coming from multiple streams to put together your chart of accounts. Your chart of accounts is the main reference point for your financial position. Items on the chart of accounts include:
- Cash on Hand/Savings – When we talk about a business’s cash on hand, we don’t mean the physical dollar bills the business has in its possession (though it may include that). Rather it is the total value of assets the business owns that can be converted to cash without requiring a sale (e.g. checking, savings, and money market accounts).
- Accounts Receivable/Payable – AR and AP are crucial to accrual accounting. They represent the total money owed either to the organization (receivable) or to its vendors (payable).
- Assets/Liabilities – Assets and liabilities are the total amount of positive (assets) and negative (liabilities) line items in calculating your business’s value. Accrual accounting includes accounts payable and receivable in these calculations.
|Check out these other blogs with tips on how to grow your startup:
- Equity/Debt – Equity and debt are hugely important to startups as they are a large part of where financing for investment and expansion come from. Equity is ownership stake in the company itself whereas debt is ownership stake in the proceeds of the company. In the event of bankruptcy, debt is paid before equity.
With this information, your accountant can also dig down a little deeper into your operations with unit economics. Your accountant will combine your financial data with inventory and operations data to determine per unit values for each of these and other indicators. This can help you identify areas where you can optimize your product offerings to meet and exceed your goals.
Company Credit Cards
By keeping an eye on your cash flow, your accountant can help you figure out how to better manage company credit cards. They will be able to tell you whose jobs need the immediate purchasing power of a credit card, and how best to delegate authority to balance agility with security.
Issuing company credit cards can be a risky endeavor for a startup. With a constantly shifting financial position, it’s easy for team members to get carried away with company purchases whether it’s for equipment or business travel expenses. An accountant can help you develop best practices for managing company credit cards.
Although we’d like to believe that our businesses are creditworthy on their own, banks will require a personal guarantee for startups. Building up business credit to the point where creditors no longer seek to put officers personally on the hook for credit card debt takes years of strategic borrowing and timely repayments. Your accountant can help you manage your finances to reach that goal.
Budgeting and Future Cash Flow Planning
A good accountant can tell you where your business is financially. A great accountant can help chart a path for your business’s financial future.
With the help of advanced financial modeling tools, your accountant can determine where your profit centers are and relieve financial pressure points in your budget. With an organization as fast-moving as a startup, it’s important to plan for all contingencies, and your accountant should help you do that.
When it comes to raising capital, your accountant has some expertise to bring to the table. While they will not go out and secure the funds or represent you in the negotiation process, your accountant will be aware of the kinds of things that funders look for when making investments in startups.
One of the biggest contributing factors to successfully financing your startup is having clean and tidy books. An accountant will produce financial documents and set you up with accrual accounting which investors take more seriously when making a startup valuation.
An accountant for startups will also be familiar with the funding cycle, and what investors like to see at each stage. They can notice trends and help you set goals to get to the next stage. Although the criteria for each funding round is not so clear cut, here is an example of when your startup might seek its rounds of funding.:
- Seed: In this round of funding, you’ve developed a business plan, perhaps some prototypes, and are ready to get your business off the ground. There may not be a proof of concept yet, so the funding may come from those willing to take on riskier bets. Incubators, angel investors and often friends and family who know you, are the ones willing to inject startup capital. These investors will expect some sort of equity stake, debt repayment, or a combination, so having an accountant that can demonstrate your ability to manage finances and investment capital is crucial.
- Series A: a startup aims to grow the customer base, often at the expense of revenues. InSeries A, investors are looking for a solid business plan to turn a great product or service into a great revenue stream. This round will likely have you talking to more established private equity and venture capital firms. Your accountant can support this effort by modeling your current and prospective customer base for monetization.
Credit: Austin Distel
- Series B: Series B funding typically comes in when the startup hits a growth plateau, and needs to scale its offering and resources in order to meet customer demand. Your accountant may be able to help advise on financial strategies for scaling your business and expanding operations to demonstrate the viability of the business to continue growth and expansion.
- Series C: Continued growth brings the need for additional financing rounds. Some may raise additional capital to fund new product development and marketing or for scaling into new territories or industries.
Again, the impetus for these funding rounds differs for every business. The common thread among all funding rounds is that the business needs money to reach its next stage of growth. An accountant can help you prepare your books to put your best foot forward for investors.
Distributing Equity and Managing Debt
Investors fund startups because they believe that the financial obligations startups take on will be manageable when the startup reaches maturity. Although there are many other kinds of funding arrangements, the most common are equity and debt.
Equity gives an investor a percentage claim on your business’s value. Debt gives an investor a stream of interest bearing repayments for the life of a loan. In both cases, investors expect to make more later than the amount they initially put in.
In addition, there are more exotic investment arrangements such as convertible debt notes and simple agreements for future equity which are both ways of offering equity in the future for capital today. Both of these funding arrangements have become increasingly common among startups.
|Learn more about funding your startup in our blog:
Because of all the financial obligations and often multiple interested parties, startup accounting is much more complicated than small businesses where financing pursuits grow in proportion to sales and usually rely on more traditional sources of financing such as banks. A startup accountant can help you organize these obligations, so you can better plan for future growth.
Picking the Right Tools
A 21st century startup is a digital startup. There is simply too much to keep track of to try to rely on paper records.
Your startup is going to want the power of a software suite made specifically for accounting. This will streamline your data entry process, help minimize errors, and give you valuable insights into your financial operations. Your accountant can help you decide on the right software solution for your business.
There are several software options designed specifically for accounting. Accounting software not only keeps your books balanced, but also allows you to organize invoices and other documents.
Some of the leading accounting software options include:
- Sage 50cloud
As with most things, you get what you pay for, so be sure to balance the cost with the features. Your accountant will be able to help you do this cost-benefit analysis and help you make this decision.
As a nascent big business, you’re likely going to want an accounting software solution that will be able to scale with your business. For this reason, some startups choose to adopt enterprise resource planning (ERP) software.
ERP software is supercharged accounting software that allows you not only to keep track of your finances, but also other aspects and operations in your business. With all of this data in one place, you can begin generating insights into your business operations to allow you to use your resources most cost-effectively. Some of the leading ERP software options include:
- Sage 100cloud
- Microsoft Dynamics
|Interested in getting software for your startup? Here are some helpful guides to get started:
Software and App Integrations
In addition to supporting accounting and planning functions, most ERPs come ready to integrate with other software and apps that generate data about your business. Whether you have a CRM solution like HubSpot, Salesforce, etc. or a WMS solution like Softeon, you can likely feed data from your software and apps into your ERP.
By integrating the software, you can connect your finances to the vital data on customers, inventory, and other aspects of your business. This is especially important for eCommerce startups who have transactions on a multitude of channels. An ERP is a great way to centralize the data coming in from different online marketplaces.
Your startup accountant can help you choose an ERP that integrates with the software that you already use, or replaces it altogether. While your accountant may not be able to integrate your software for you, they can likely recommend an ERP consultant who can.
If you’ve been in business for any amount of time as a startup, you know that you don’t start out profitable. As a result, the first few years may see negative returns, and hence no income tax liability.
However, this doesn’t mean you shouldn’t concern yourself with taxes. First of all, there are many other taxes – such as payroll tax, property tax, sales tax, and excise tax – to worry about. All of these should be managed and handled by your accountant.
Deferred Tax Credits
When it comes to income taxes, you can still take advantage of certain tax credits even when your business has no taxable income. Finding opportunities to defer tax credits can help save you money down the line.
The Credit for Increasing Research Activities, more commonly known as the R&D tax credit, allows you to carry forward the value of the credit into your future, profitable years. This is designed to incentivize businesses to prioritize long term research and business growth even though a return on investment isn’t immediate or guaranteed.
The R&D tax credit has applications in almost every industry, and there are many activities you may already be doing that qualify. Although many online calculators exist to estimate your potential credits, nothing will compare to a trained accountant going through your books and determining the highest tax credit possible.
One of the more confusing aspects of employing staff is determining who is an employee vs. an independent contractor. Although the rules seem pretty straightforward, accepted examples that appear to violate it are everywhere across industries.
An independent contractor is technically a business entity rather than an employee. In theory, an independent contractor is someone who is in control of the conditions of their employment and is paid for the product of their services that are produced independently.
In practice, this neat separation between contractor and employer might not always exist. In many industries it is common for contractors to work with in-house teams, receive company-specific training, and bill hourly.
Your accountant will know what practices are common for your industry, so you can take full advantage of the independent contractor relationship while staying on the right side of the law.
Credit: Austin Diste
There are several benefits to hiring independent contractors vs. employees, but they must be weighed against the risk of misclassifying them as an employee and being subject to a tax penalty. With an independent contractor, an employer no longer has to worry about expenses for:
- Payroll taxes
- Equipment costs
- Training expenses
- Unemployment insurance
- Employment-related legal liability
In addition, independent contractors do not have the special privileges regular employees do with respect to concerted action and collective bargaining. By the same token, terminating the employment relationship is easier and less costly.
In light of all of these benefits, it’s important to ensure that you are in compliance with the law when it comes to hiring an independent contractor. Although an accountant can’t offer you legal advice, they can tell you what common practices exist in your industry.
Another issue you may run into as a startup, particularly if you operate with a remote team, is complying with tax laws across multiple jurisdictions. The more places you find employees, vendors, and clients, the more likely you are to run into disparate state and local tax laws.
While you may find accounting or ERP software that manages this for you, you’ll still want the eye of an accountant to confirm that you are always in compliance. Your accountant will know where to find information about the relevant jurisdictions you operate in and keep your system always accurate. If you can find an accountant certified in multiple jurisdictions, even better.
There are also administrative considerations that will factor into your accounting. You will need to manage human resources, mitigate risks, and satisfy employees, all of which will cost you money.
Your accountant can help you determine how to put together a roster of services to carry out the administrative side of your business. They will have a working knowledge of the cost of various options to help you arrive at a solution that fits your business plan and your budget.
The people who make things run are the lifeblood of any business. In the tumultuous world of a startup, you will need an HR solution that works with changes in fortune. You will want a solution that is not only scalable, but something that can be drawn down if necessary,
While many startups opt for an in-house HR manager, having in-house staff is not the only option. Your accountant can let you know what your options are for HR, and the likely costs associated with each.
One attractive option for startups is to outsource your HR to a professional employment organization (PEO). This serves two purposes. First, you can scale services up and down as your business needs. Second, if you do have distributed teams, they will handle the headaches of paperwork that come with that.
Protecting your business from risk is one of the simplest cost aversion strategies out there. Where you might pay a premium for insurance now, it usually does not compare to the cost you would have had were you not able to file a claim.
It’s Time to Get Serious About Your Taxes
Our Entrepreneur’s Business Tax Pack eBook will tell you all you need to know about making the most of your tax filings at your startup.
Your accountant can help advise you on what types of insurance are standard in your industry. These might include:
- Commercial liability insurance
- Errors & omissions insurance
- Auto rider insurance
- Confidential information insurance
- Directors & officers insurance
- HIPAA insurance (in healthcare)
- Employment practices liability insurance
Ensuring you are fully covered in the event of a costly misfortune will make sure that you don’t end up taking a hit to your business that you can’t recover from.
Offering a competitive benefits package will be the key to drawing in quality talent to staff your startup. Knowing what benefits to offer is an often tricky calculus of weighing competitor offerings, costs to you, and costs to employees.
Your accountant can help you sort through your options for benefits and help you navigate the sometimes confusing terms of each. Some benefits you might consider offering include:
- Health insurance
- Dental insurance
- Vision insurance
- 401k, IRA, or other retirement plans
- Employee equity or stock options
- Paid time off
In addition to helping you go through your options, your accountant will also help to keep track of all of these benefits with your accounting or ERP software.
The Financial Team
While accountants usually have a broad range of knowledge when it comes to finances, they are by no means authorities nor specialize in all areas of financial management. There are a few other roles you will want to consider when developing your financial team.
Throughout this article, we’ve said that your accountant is able to give you advice on lots of things. This is certainly true. Through their experience, your accountant will have seen lots of different arrangements around financing, accounting methods, startup strategies and more.
But at the end of the day, your accountant’s job is to organize your finances and keep you tax compliant. An accountant is not a financial strategist. That’s the job of a CFO.
Credit: Jason Goodman
A CFO, or chief financial officer, is an executive-level position in charge of financial strategy. Whether it’s budget planning, product expansion, or service adjustments your CFO will lay out your options and their likely consequences, so you can make informed financial and strategic decisions.
It’s important to note that your CFO is not an accountant. Although many CFOs have trained and worked as accountants, your accountant takes care of generating your business’s financial numbers to enable your CFO to analyze and propose strategy.
A role that is sometimes overlooked is that of the controller or comptroller. This officer takes the work of the accountant to generate reports both for the sake of financial compliance as well as strategy.
Administratively, there is no difference between a controller and a comptroller. A controller is the person in this role in the private sector, while a comptroller is the same in the public sector and some non-profits. When it comes to a comptroller, they will often take the role of a CFO as public bodies do not usually have one.
A controller will help take a lot of the administrative burden off of your accountant. With a controller generating your financial statements and reports, the accountant can focus their efforts on making sure you have clean books.
Whereas an accountant comes in to go through your books to help you file taxes and prepare for audits and funding rounds, a bookkeeper does the day-to-day tasks of keeping your books up-to-date. In the same way your accountant provides your controller with useful financial information, your bookkeeper sets up your accountant for success.
In some businesses, the bookkeeper sometimes also acts as an accountant. However, your mileage may vary with this approach as most people who are hired for bookkeeping positions do not have the qualifications to serve as an accountant.
Unlike a bookkeeper, a certified public accountant (CPA) can represent your business in a tax audit if your CPA is also an Enrolled Agent (EA) with the IRS. Further, a bookkeeper will generally not be able to help you when it comes to assessing the cost of your operations and finding areas for savings. It’s also an accountant, not a bookkeeper, who would generally conduct internal financial audits.
|Your accountant will not be able to manage your finances on their own. Learn about the other elements of a complete finance team in our blog:
- Which Financial Professionals Do You Need When Fundraising?
- CFO Services for Startups
- Controller vs. Comptroller vs. CFO
While your bookkeeper might provide the accountant with year-end financials and tax documents, your accountant would be the one responsible for preparing the tax return(s), finding opportunities for savings, and filing it for you.
How to Select the Right Startup Accountant
Knowing your startup needs an accountant is half the game. The other half is actually finding one that you can rely on to serve your accounting needs at the rapid pace of a startup. You will want to make sure you find the right fit for your goals, your industry, and your culture. Here are the things to look out for when looking for an accountant for startups.
First and foremost, you will want an accountant that is forward-looking and aims for growth, growth, growth! They should be able to tell you about businesses they have worked with through numerous stages of fundraising.
An accountant should also be able to tell you the secret to their success. What key performance indicators do they instruct their clients to watch out for? They should be able to explain the reasoning behind each one that they use.
Accounting Best Practices
More than just being good with the numbers, an accountant must also stick to best practices in their profession. In particular, you will want someone who is well versed in the Generally Accepted Accounting Principles (GAAP).
GAAP is a set of accounting rules established by two private professional organizations overseen by the Financial Accounting Foundation. These principles of accounting not only ensure completeness in your accountant’s work, but are also expected by funders who review your books.
You will want to make sure your accountant is experienced. This means not only in terms of how long they have been a practicing accountant, but also the volume of their work and how close it comes to your business.
First and foremost, you will want an accountant experienced with startups. A startup is different from other kinds of businesses. No other kind of business is guaranteed to be as tumultuous as a startup. An accountant should be familiar with the general level of risk startups take and be comfortable managing that risk.
They should also be competent with accounting for distributed teams. This will mean being experienced with managing payroll, vendors, and clients across different tax jurisdictions, as well as being proficient with regional excise, property taxes and tax credits.
Credit: David Schultz
Your accountant will have to be comfortable with modern day technology. While it might seem quaint to have an accountant managing the books with pen and paper or carefully designed spreadsheets, you will need the power of accounting software or an ERP. Your accountant should be comfortable with a variety of software to ensure you can choose the best option for your business.
Last, a startup accountant should have some knowledge or experience with your industry. There is a learning curve to accounting for a new industry, and your startup does not have the time to wait while your accountant gets their bearings with the unique needs of your industry. You need someone who can hit the ground running because they need to be part of the team leading your startup’s growth, not following behind it.
Fit with Team
Make sure that your startup accountant is a good fit with your existing team. Company culture is very important to productivity, so you want to make sure you have someone that can contribute to the cohesion of your team.
Your accountant will be working with a lot of your team members in preparing and presenting their reports. They will need to work with HR to keep track of payroll. They will need to interact with any of the other finance team members like the bookkeeper, controller, or CFO. Most importantly, they will need to be able to work well with you!
It might seem a bit strange to use this as a metric because you want to judge candidates on their qualifications, but you need to make sure that everyone likes your accountant as a person and a personality within your company. If you can’t get along with each other and if interactions are awkward, combative or one-sided, then you won’t be able to establish a beneficial working relationship to push your startup forward.
Getting Started with Startup Accounting
You didn’t go into business so that you could sit around doing accounting all day. You did it because you are passionate about your offerings and a vision that can have an impact on the world.
Having a team of experts – not just accountants, but also lawyers, HR managers, and senior executives – will protect your company as it grows. These are not areas to slack in.
Book a Meeting with One of Our Experts Today
Running a startup means you will have to make a lot of tradeoffs to stretch a fluctuating budget for continuous growth. A startup accountant has the expertise to know where you can and can’t make these sacrifices. With the right financial team on your side, you can navigate the constraints of the startup stage to scale into the business of your dreams.
indinero has been providing businesses like yours with expert financial operations services for over a decade. With our team of accountants, CPAs, CFOs, and tax advisors, we’ve brought startups from their infancy to nationwide success. Reach out today to see how we can help your startup!