Accounting Basics for Startups

A major reason why many startups do not succeed as per their expectation is due to lack of focus on financial and money matters. Ignoring basic accounting and finance may sound insignificant, but are strong enough parameters to put off a startup business right away from its course of becoming a successful business entity.

So if you are starting out on your own, adopt the following accounting basics to ensure your startup maintains a minimum accounting decorum.

Opening a bank account

The first account etiquette for startups involves opening of a current account in the name of the company. Many startup founders spend initial capital either in cash from their savings or from a personal bank account. Having a dedicated bank account offers an easy way to keep a track on all company related expenses.

Every payment in the future like vendor payments, tax receipts etc could be routed through the same bank account resulting in a financial transparency from the very beginning. Compare bank account charges and facilities before choosing the right bank for your startup’s current account.

Tracking all expenses

While major expenses are usually accounted for, many startups do not have system in place to track for all expenses. No matter how big or small, having a system in place that tracks all company expenses should be adopted.

Usually a lot of expenses are bracketed under miscellaneous and not dedicated under their various categories like food, travel etc. Having a documentation process for each expense can help the startup to ascertain their expenses vis-a-vis their growth.

Developing an appropriate book keeping mechanism

A booking mechanism maintaining day- to- day records of all financial transactions is a gateway to good financial planning. Book keeping helps in reconciliation of accounts with the bank accounts whole categorizing the various financial transactions into appropriate heads.

Depending on the quantum of finances and the team at hand, startups could choose between adopting a DIY approach or outsource the book keeping process. For example, software like Quickbooks, Tally and the like are some of the popular book keeping essentials used by various companies. Hiring a freelancer or an in-house accountant could also be warranted if the startup team is not qualified to handle the day to day financial records.

Adopting appropriate accounting system

Startups must adopt and identify a methodology used for all their accounting purposes. A method once adopted should be persisted to ensure consistency in accounts. Startups could either choose cash method wherein income and expenses are recognized at the time of payment or when received. Another method to choose is the accrual method of accounting where income and expenses are recognized at the time of transaction with or without any cash transaction at the time.

Taxation tracking

Accounting does not mean just maintaining records alone and taxation obligations must also be tracked periodically. Depending on the applicable taxes applicable like service tax, sales tax etc, the taxation obligations and periodic deadline for tax payment structures should all be tracked.

In what other ways do you think startups could become more savvy financially? Please share your views.