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 six fundamental accounting and bookkeeping tips you can use to get and keep your cash flow management under control.
This post is our third installment in this series on bookkeeping for startups. It provides guidance on accounting advice and best practices for startups. This post follows the two prior installments in this series: what startup founders should consider after they successfully raise the money to get their company off the ground and our guide on fundraising for startups.
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.
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.
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, extract the financial data they contain, categorize your financial transactions, and publish 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.
Plenty of other tools can help automate various accounting methods depending on your business needs.
- 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.
Keep a close eye on cash flow
One of the best reasons to take accounting advice for startups to heart is that research suggests 82% of businesses fail due to cash flow problems.
If your startup is in the pre-revenue stage, you must 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 estimate your expenses 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 to identify areas where expenses might be reduced if necessary.
Hire a professional to manage your books
Accurate, up-to-date books are critical to a business's long-term sustainability. If your company lacks the resources to hire a professional in-house bookkeeper, outsourcing is a great option.
Early-stage startups, for example, might hire an accountant to help set up their chart of accounts and educate them 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
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 track SR&ED expenses separately.
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, cooperative education, 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, but it also means keeping your numbers in check.
That’s why the 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.
Four Tips for Startup Financial Management
Get visibility into your startup’s financials
It’s tough to become profitable in the long term if you don’t know how much working capital it takes to operate your startup over the short term. Keeping your accounting up to date is essential for seeing where your costs are coming from and where your funds are going.
By monitoring your cash inflows and outflows, for example, you can measure how well your startup is doing at:
- Generating cash
- Meeting its financial obligations
- Funding current and future operating expenses
Accurate, timely bookkeeping provides ongoing visibility into your startup’s revenues, expenses, and cash flow so you can manage your business finances more efficiently.
Manage your burn rate
When it comes to startups, new business owners often have to spend some cash to make things happen. But you should be prepared to reduce your spending if you’re too quickly consuming the funds in your bank account.
Your burn rate measures how fast you’re “burning through” your startup capital each month.
To keep your burn rate low, you should aim to:
- Limit your monthly spending to no more than 10% of your initial funding
- Align spending, people, and processes realistically to reach your objectives
- Adopt a goal-setting methodology that uses OKRs (objectives & key results) to pair revenue goals with measurable outcomes
It’s also a good idea to track expenses in real time as part of your startup’s financial management so you can compare your spending against your competitors'.
Create cash flow projections
Proper cash flow management is critical to your startup’s financial health.
If you deplete your funds too quickly, you may need to raise additional capital, which could delay your profitability and put you in a negative position with investors, partners, and employees.
If you’re too conservative with your spending, you could have trouble achieving the necessary growth to impress investors, reducing your chances of securing future funding.
To optimize your financial management, consider:
- Creating cash flow forecasts and other financial projections to ensure your business can continue to operate and grow at a suitable pace
- Using the LTV: CAC ratio to help determine when and where to accelerate your spending
- Measuring your efforts regularly to check that your spending is yielding the results that you want
Using cloud-based accounting software and/or hiring a part-time bookkeeper will ensure you’re making healthy financial decisions that will help keep your startup alive.
Build a priority-based budget
When you start a business, it’s easy to overspend in subtle ways. Your startup could be overspending, for example, by hiring a CFO to prepare financial statements when you only need an experienced bookkeeper.
To make your startup financial management more efficient:
- Start by identifying your top spending priorities
- Use financial modelling to create a budget centred around those costs
- Funnel any remaining funds into the areas most likely to provide a return on your investment
While spending money on marginal returns is unwise, being overly frugal can be equally damaging to your growth. Avoid settling for mediocre equipment or refusing a critical hire just to save money.
Outsource Your Payroll
Every second and penny counts, and finding efficient ways to manage operational tasks can be a game-changer for a startup. One such task is payroll management, a complex and time-consuming process that involves more than just calculating wages. As startups strive to scale efficiently, many are turning to payroll services to streamline their operations and unlock cost-saving potentials. Let’s dive into how these services can be a financial boon for organizations just getting started.
Streamlining Efficiency
For startups, efficiency is not just a buzzword; it's a survival strategy. Payroll services offer automated solutions that eliminate manual data entry and reduce the likelihood of errors. This automation means that payroll can be processed much quicker and with fewer resources than traditional methods. By reducing the time spent on payroll, startups can redirect their focus and resources toward core business activities that drive growth and innovation.
Reducing Overhead Costs
One of the most significant advantages of payroll services is their ability to reduce overhead costs. Hiring an in-house team to manage payroll requires a substantial investment in human resources, including salaries, benefits, and training costs. Payroll services, on the other hand, operate on a subscription model, offering scalable solutions that grow with your company. This flexibility allows startups to manage their expenses more effectively, avoiding the fixed costs associated with full-time employees.
Avoiding Compliance Penalties
Tax laws and employment regulations are constantly evolving, and keeping up with these changes can be daunting for startups. Non-compliance can result in hefty fines and penalties, not to mention damage to a company’s reputation. Payroll services stay abreast of these regulations, ensuring that your startup remains compliant. This saves money that would otherwise be spent on penalties and provides peace of mind, knowing that your payroll is in expert hands.
Access to Expertise
When startups choose a reputable payroll service, they gain access to a wealth of knowledge and expertise. These services employ professionals who specialize in payroll and are well-versed in the best practices of the industry. This expertise can be invaluable for startups that may not have in-depth knowledge of payroll processes. Additionally, payroll services often offer support and advice on a range of HR issues, providing startups with a comprehensive resource for their employment needs.
Enhancing Employee Satisfaction
Timely and accurate payment of wages is the foundation for employee satisfaction. Payroll services ensure that employees are paid on time and that their payslips are accurate, reflecting the correct deductions and allowances. This reliability can enhance employee trust and satisfaction, which is critical for startups looking to build a loyal and motivated team.
Leveraging Technological Advancements
Finally, payroll services leverage the latest technology to offer innovative solutions, such as mobile apps for timesheet submission and payroll access. These technological advancements provide startups with a competitive edge, enabling them to offer modern and convenient payroll solutions to their employees.
Final Thoughts
The cost-saving potential of payroll services for startups is significant. By streamlining efficiency, reducing overhead costs, avoiding compliance penalties, accessing expert knowledge, enhancing employee satisfaction, and leveraging technological advancements, payroll services offer a compelling solution for startups looking to optimize their operations. As startups continue to navigate the challenges of growth and scalability, embracing payroll services may well be a strategic move toward financial efficiency and operational excellence.
Enkel's payroll services stand out as a beacon for startups seeking not only to alleviate the burden of payroll management but also to unlock the full potential of their founders and teams. With Enkel, startups gain more than a service provider; they gain a partner dedicated to ensuring compliance and efficiency and, most importantly, freeing up the invaluable time of founders so they can focus on what truly matters—innovating, growing, and leading their business into the future. Enkel's commitment to leveraging technology, expertise, and personalized support makes it an ideal choice for startups ready to transcend the traditional bounds of payroll management and embrace a future where every resource is optimized for success.
Looking for a way to take the stress and complexity out of your bookkeeping? We can help. 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!
