Has your startup sprung to life on a self-funded shoestring? Or are you relying on equity funding, bank loans, or grants to start and grow your business? Either way, paying close attention to some basic accounting advice for startups will help you manage your funds properly so you don’t run out of cash.
Here are 6 fundamental accounting and bookkeeping tips you can use to get and keep your cash flow management under control.
Tip 1: Keep personal and business expenses separate
Keeping business expenses separate from personal expenditures is one of the simplest ways to set your accounting system up for success.
Not only will opening a separate bank account for your startup make your everyday bookkeeping easier, it allows business owners to:
- Avoid plowing through months of mixed receipts and bank statements to separate the expenses for their tax returns
- Easily figure out how much they owe in business taxes
- Secure important visibility into their cash flow
- Generate a clear audit trail
Equally important is that, if or when you do decide to raise funds, you’ll have a distinct set of financial records to show potential investors.
Tip 2: Choose the right accounting software
While it’s tempting, you should avoid using a program like Excel to track business expenses and prepare financial reports. Spreadsheet-based startup accounting is prone to human error. And most investors will find it tough to trust numbers generated by a manual system.
A good accounting software, on the other hand—one that’s cloud-based, user-friendly, and capable of growing alongside your business will:
- Encrypt and back up your financial data automatically
- Give you and your team access to your data anytime, anywhere (a real plus if your team is remote)
- Conveniently connect your bank feed to your accounts while integrating with other accounting applications that can streamline the flow of your data
At Enkel, we recommend QuickBooks Online (QBO) as a great choice for directing and staying on top of your company’s financial health.
Tip 3: Streamline bookkeeping operations by going digital
Once you’ve set up your accounting software, you can integrate time-saving digital tools like Dext Prepare, Plooto, and Expensify to streamline your bookkeeping process.
Dext Prepare reduces manual data entry and document management by letting you take photos of your receipts and invoices, extracting the financial data they contain, categorizing your financial transactions, and publishing them to your QBO software.
Plooto helps automate your accounts payable by pulling unpaid invoices, letting you choose which ones to pay, making the payments electronically, and reconciling paid invoices in your accounting system.
Depending on your business needs, you’ll find plenty of other tools that can help automate various accounting methods.
- SaaS startups, for example, can take advantage of dedicated apps that conveniently manage subscriptions
- eCommerce startups can use entirely different apps to help manage their inventory
If you’re confused about which tools your startup needs—or how to use them to streamline your bookkeeping operations—our team at Enkel can help you identify the right digital add-ons for your business, customize your accounting process, and keep your books up to date.
Tip 4: Keep a close eye on cash flow
One of the best reasons to take accounting advice for startups to heart is the fact that research suggests 82% of businesses fail as a result of cash flow problems.
If your startup is in the pre-revenue stage, it’s especially important that you understand your company’s:
- Cash burn rate (how quickly you’re spending your funds)
- Cash runway (the amount of time remaining before you run out of money)
You should also create a financial forecast to see what expenses you can expect to incur while bringing your product or service to market.
If your startup has already begun generating revenue, you’ll need to keep a close eye on your expenses and accounts receivable as well by:
- Creating a budget for different expense categories and tracking any budget-to-actual discrepancies
- Ensuring your receivables are followed up and collected promptly
Ultimately, keeping an up-to-date set of books is the surest route to timely and effective cash flow management. By recording your transactions as they occur, you’ll gain ongoing visibility into your cash flow so you can identify areas where expenses might be reduced if necessary.
Tip 5: Hire a professional to manage your books
Accurate, up-to-date books are critical to the long-term sustainability of your business. If your company lacks the resources to hire a professional in-house bookkeeper, outsourcing is a great way to go.
Early-stage startups, for example, might start out hiring an accountant for help setting up their chart of accounts and to get educated about accounting requirements.
But because keeping an accountant on retainer can get expensive, it’s typically more cost-effective to hire an outsourced bookkeeper who can:
- Manage your day-to-day bookkeeping
- Prepare your balance sheets, income statements, and cash flow statements
- Liaise with your accountant at year-end to share your financial information and answer questions
Growing startups that are seeking external funding, meanwhile, may also want to hire a fractional controller for help with:
- Creating financial forecasts
- Preparing the financial reports requested by prospective investors
- Reviewing funder documentation before it gets signed
Tip 6: Know your tax credits
Some startups may be eligible to apply for special credits or incentives to reduce the income taxes they pay.
The Scientific Research and Experimental Development (SR&ED) tax incentive, for example, was created by the Canadian government to promote research and innovation. If your startup qualifies for this credit, you’ll need to set up your chart of accounts to separately track SR&ED expenses.
SR&ED is just one of many federal and provincial tax credits available to startups in Canada.
Your business might also qualify for tax incentives related to apprenticeship, co-operative education, eBusiness, film, video and television production, game development, green technology, and more.
Running a startup is no easy feat. Not only does it require finding ways to generate demand for your product or service, it means keeping your numbers in check at the same time.
That’s why the single most important piece of accounting advice for startups is to establish a solid bookkeeping foundation that can help ensure the future success of your business.
Looking for a way to take the stress and complexity out of your bookkeeping? We can help.
At Enkel, we provide bookkeeping, payroll management and other back office accounting services to startups across Canada. Contact us today to learn how we can help manage your startup's bookkeeping!
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We thoroughly research and test the apps we include in our regular workflow for Client bookkeeping services. After deciding on criteria for evaluating the software and then researching the app itself, we tested the app, noting its strengths and weaknesses. We then work with the app for at least a few weeks before deciding whether to recommend it to our readers. We use the software as it was designed for its intended tasks. For a detailed walk-through of how we select and evaluate software, please see the details of our process.
