Startups crop up by the thousand in the UK every year – and dwindle at an almost similar rate. The sad part? Most of the time, it is not because the ideas were not viable or because the team was not committed enough.
It is because the zealous minds behind the startups got caught up in the coolness of the idea and the product or service and the marketing of it, while forgetting the not-so-cool part – getting their startup’s finances in order.
We get it, accounts are not fun. But it is even less fun when your hard work goes bust because of a poorly planned cash flow or compliance issues with HMRC.
That is why we have put together this no-fuss guide to accounting for startups so that you can give yourself the best running start possible, even if you do not have any experience with accounting. Of course, hiring a professional accountant like Birdfynn always helps but for now, here is what you know:
1. Have a solid business plan
This is the blueprint for the foundation of your startup. It includes your goals, how you plan to reach them, how you want to structure your business, what operations will look like and so on. Invest as much time as you need to craft an airtight business plan – this is the first thing potential investors will look at, so you need to get it right!
2. Get your business registered
Paperwork may not be fun, but it is necessary. You will need to legally register your business as a sole trading venture, a partnership or a limited company. Get an accountant on board to help you choose the most appropriate structure.
3. Set aside a budget
Your budget sets the tone for what you expect to earn from your sales and what you expect your expenses to look like. It is, therefore, crucial to have clear numbers that you are tracking to – it is extremely easy to overspend as a new business! This is also where you set reasonable prices for your product to achieve the kind of margin you are looking for.
4. Set up a business bank account
This is one of the most important accounting tips for startups. All too often, founders end up using their personal bank account as their business account – only for chaos to ensue when it is time to separate personal and business transactions. Instead, keep things simple by having a separate account.
5. Choose an accounting method
These are the two main methods used to maintain books of accounts:
- Accrual accounting records all transactions in real time, including upcoming revenue that has been billed but not paid and upcoming debt that has been charged but not settled.
- Cash accounting records funds as and when they enter or leave the business.
As you can see, the two are very different in terms of how they record line items. Most small businesses like to start out with cash accounting and then move on to accrual accounting as they grow.
6. Know which financial records to keep
There are three main financial statements you must maintain:
- The balance sheet shows your assets and liabilities. These are further broken down into current assets/liabilities and long-term assets/liabilities. It gives a clear picture of your startup’s liquidity and its ability to meet short-term obligations and generate returns.
- The income statement shows your profit or loss as indicated by revenue minus expenses.
- The cash statement shows how cash is moving in and out of your business during a stipulated time period. It is an important tool to understand how well your startup is handling its cash.
7. Invest in accounting software
There is no need to do everything by yourself anymore. From bookkeeping and payroll to invoicing and inventory management, there are several software options to ease the burden. Do your research on tools that fit your needs and scalability as a startup, and do not forget about the price. We believe in paying for quality tools, but that does not have to mean getting the most expensive option on the market!
8. Perform basic accounting tasks regularly
As a startup founder, being in the know about your books of accounts is vital. We recommend doing the following tasks periodically so your books stay updated and you always know where your finances stand:
I. On a weekly basis:
- Categorise all income and expenses
- Reconcile all business bank transactions (this is easy when you sync your business bank account with your accounting software)
II. On a quarterly basis:
- Calculate your net income so far
- Compare it with the net income for the same quarter last year and try to understand why there are differences, if any
- Sort out your tax documents
III. On a yearly basis:
- Get all expenses in order for claiming
- Follow up on overdue invoices
- Prepare your annual tax return
- Submit statutory accounts to HMRC
- Keep financial records updated (especially if approaching investors for funding)
Hire an accountant
This is the biggest question among startup founders – should we hire an accountant, or should we do our books on our own?
We understand that hiring an accountant can be expensive. And with the right tools, you can in fact perform the basic accounting tasks for your startup. However, given how critical time and money are to startups, hiring an accountant is an investment that goes far beyond just bookkeeping! An accountant can help you:
- Choose the optimal structure for your business
- Complete all the paperwork to set up your business
- Stay on top of HMRC deadlines
- Complete your tax returns accurately and ensure that you are getting all the claims and reliefs you are eligible for
- Offer strategic business advice on how to manage your cash flow for maximum efficiency
- Study your financial statements and suggest tips for long-term business planning
- Prepare for Making Tax Digital (MTD)
Over to you
In other words, a professional accountant can be a critical partner to your startup’s operations, saving you effort and money and ensuring your peace of mind about all things legal. And even if you do not get someone full-time, you can always work with an expert accountancy company like ours.
If you ask us, there is no question about it – treat ‘hiring accounting support’ as a top priority when getting your startup off the ground! Contact us to find out how we can help you.
