Launching a startup is an exciting yet demanding endeavour. Along with conceptualizing an innovative product or service, recruiting talent, and establishing operations, startup founders need to build a solid financial foundation right from the outset.
This is where implementing essential accounting practices for startups becomes critical. In this article, we will explore essential accounting practices that every startup should know, with a focus on leveraging CA services for optimal results.
What is Accounting for Startups?
Financial management and reporting for startups covers financial processes that new ventures need to set up from the beginning to ensure business success. It entails documenting, and evaluating all financial activities in order to see into the financial condition and the performance of the newborn organisation.
Some key aspects of accounting for startups include:
- Bookkeeping – Entry of daily financial transactions into the system like sales, purchases, receipts, payments, expenses etc. This gives the raw data for accounting.
- Cash flow management – Forecasting, monitoring, and improving cash in/outflows to ensure liquidity. This is especially important as the majority of startups have very little cash available.
- Financial planning and budgeting – Creation of short-term and long-term financial plans and budgets based on forecasts of revenue and costs. This enables allocation of resources optimally.
- Compliance – Following regulations pertaining to accounting standards, taxation, and relevant laws. Compliance is needed to prevent legal problems.
- Reporting and analysis – Generating financial statements and analysing financial performance, ratios, metrics etc. to support strategic decisions & derive actionable insights.
- Payroll – Involves payroll activities such as salary computations, deductions, disbursals and managing employee taxes.
- Accounts payable/receivable – Recording and managing the amounts of money owed to the startup’s supplier and the amounts of money owed by the startup to its customers.
- Auditing – Performing audits to substantiate the accuracy and reliability of the financial statements. Beneficial to the startups looking for investment.
Essential Accounting Practices for Startups in India
Accounting seems tough compared to the excitement of creating a new app or technology. Yet, careful financial administration and reporting are necessary for startups to build investor confidence, comply with laws and make data-driven decisions. Following essential accounting principles creates foundation for financial literacy which in turn facilitates profitability and growth.
Here are some of the key accounting practices for startups needs to be aware of:
Establish Strong Bookkeeping Procedures
Bookkeeping is recording daily transactions through making statements, and covers the necessary preparations of an accountant for financial accounting. From the first day onwards, startups need to devise operations revolving around bookkeeping that correspond with their business model and the volume of their dealings.
Cloud-based accounting platforms such as Xero and QuickBooks Online support the easy remote collaboration between founders and bookkeepers. Automation of recurring tasks enables startups to scale operations without the financial department becoming a constraint.
Develop Realistic Financial Plans and Budgets
Creating comprehensive budgets and financial plans is instrumental for startups during the initial phases and is one of the accounting practices. With professional guidance from accountants, founders can develop achievable budgets aligned with their strategic goals.
Effective financial planning accounts for expected costs like inventory, equipment, marketing, human resources, taxes, etc. It also enables startups to secure funding by determining how much capital they need based on projections.
Optimise Cash Flow Strategies
Cash flow management is one of the important accounting practices. It directly impacts the day-to-day viability of any new business. Startups need to accurately forecast cash flow needs, synchronise cash inflows from customers and outflows for expenses, and maintain optimal liquidity by reducing idle cash balances.
Monitor Accounts Receivable and Payable
Efficiently managing accounts receivable and accounts payable is essential for startups to ensure timely payment collection from customers and fulfil obligations to vendors. Lean accounting practices like issuing early invoice reminders, providing payment terms to clients, and taking vendor discounts can improve account receivables and payables. Automated reconciliations also help startups match open invoices and prevent discrepancies.
Comply with Tax Requirements
Tax compliance should be a top priority focus area for startups so as to prevent penalties due to mistakes and oversights. Tax compliance by startups covers corporate taxes, GST and TDS. Creating a tax calendar, registering for taxes timely, appropriately computing tax liabilities, and filing returns before deadlines are some ways of staying compliant for startups.
Conduct Regular Financial Analysis
Financial analysis is a necessity for startups to track performance and take actions whenever required. The key analysis such as profitability ratios, burn rate, customer metrics and operational benchmarks instruct startups about what’s going on well and what has to be improved.
Dashboards and financial modelling reveal trends and opportunities for startups allowing them to make the best way out when it comes to strategies formulation.
Implement Strong Internal Controls
Strong internal controls and processes safeguard startups against potential accounting frauds or inaccuracies. Segregation of duties, managerial reviews, system controls, documentation, and limited access are some best accounting practices for startups to incorporate checks and balances. External audits can also help startups identify control weaknesses.
Build Financial Literacy Within Your Team
Making accounting accessible and understandable to the entire startup team is worthwhile. Conducting basic accounting training and setting up Self-Service reporting enables employees to make data-driven decisions aligned with financial targets. As startups scale, establishing strong accounting processes and financial acumen across the organisation becomes crucial.
Outsource to Accounting Experts
Despite the best efforts, startup founders may not possess the accounting flair and expertise needed as the business grows. Professional accountants offer invaluable guidance when establishing accounting systems, staying tax compliant, managing payroll, preparing complex financial statements, and advising on transactions like mergers and acquisitions. Outsourcing accounting activities to experts like StartupFino provides startups with specialist support.
Create Financial Visibility for Investors
To attract investors and funding, startups must demonstrate financial viability and growth potential and it is one of the most common accounting practices. Accurate and timely accounting helps startups develop polished decks with five-year financial projections. Audited statements also provide credibility and transparency to investors. Ongoing financial reporting and analysis enables startups to monitor performance post-funding.
Prioritise Accounting From Day One
In the initial rush of kickstarting operations, accounting often takes a back seat. But postponing core accounting activities can strain cash flows, lead to tax troubles, insufficient funding, and poor decisions. Making accounting a priority early on, even if it means outsourcing to experts, provides startups with the financial visibility required for sustainable growth.
Final Thoughts
Accounting is essential for startups to gain investor confidence, manage costs, track financial health, comply with regulations, and scale efficiently. With adoption of accounting practices tailored to their business model and operational maturity, startups can build resilience, scale boldly, and accomplish ambitious missions.
Sound financial management is a vital fit for startups to thrive. Partnering with accounting professionals provides founders with the support and guidance required to make their startup dreams a reality.
