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Accounting for Startups: The Essentials for Managing Your Finances

Finance
Article
02/25/2015

Accounting for startups is a crucial aspect for every new business plan. On the first day of operations, you may see the need for invoice generation, income and expense recording, and even payroll management. Having a solid accounting plan right out of the gate will make it easier for you to manage your finances, rather than struggling to catch up through retroactive recording once your business is in full swing.

Launching Your Accounting System

Before your launch date, there are a few options to carefully consider in order to adopt the best accounting system for your unique business.

  • Method of Accounting: Which method of accounting will best suit your new business — cash basis, accrual basis, or a hybrid method? In other words, will you record your revenue or expenses when cash is physically exchanged, immediately after a transaction despite payment, or a combination of both?
  • Type of Books: You will need to determine if you’ll require an electronic system to track your finances or if your business is small enough to use a simple handwritten system. Electronic accounting incorporates both desktop software and cloud-based accounting.
  • Accounting Personnel: Determining responsibility for accounting tasks is crucial to any organized accounting system. Some business owners will have the knowledge and time to take care of most financial responsibilities themselves, while others will want to hire an employee to maintain their records. In addition, having an accounting professional on call can be extremely helpful, especially around tax season. Even if your accounting personnel aren’t involved in the day-to-day tasks, your small business will find itself in the position to make risky financial decisions where professional consulting will prove to be an invaluable asset.

Knowing Your Reports

Regardless of the system you choose, your records will need to be accessible and meaningful to help you make important financial decisions. You’ll need to be able to tell if your company is profitable, where your business income is being spent, and if corners can be cut in certain areas. Detailed books will not only aid in reflecting your company’s finances, they will also assist in making these critical decisions. The information recorded in your books will allow you to pull several basic accounting reports. Here a few that every business owner should be familiar with.

  • Cash Flow Report: The cash flow report is critical, allowing you to determine whether your business has enough money available to operate and pay daily expenses.
  • Accounts Payable or Liability Report: The accounts payable/liability report will show you what your business owes — or how much debt you’re in.
  • Aged Receivables Report: The aged receivables report will show you who owes your business money as well as any delinquencies broken down by payment periods of over 30 days, over 60 days, and beyond. This allows you to prioritize your follow-up and stay close to customers notorious for not paying in a timely manner.
  • Profit and Loss Report: The profit and loss report will tell you how your business is performing. If you choose to use the cash basis method of accounting, this report will look much like a cash flow report. However, if you’re using the accrual method, it will show a longer period of your company’s financial health.

Accounting for startups can be tricky, but having a solid plan is critical to launching a thriving new business. As the business owner, you’ll be tasked with making important financial decisions upfront, so educating yourself on the aforementioned accounting basics will prove to be indispensable when it comes to the successful operation of your new startup.

 

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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