by Swapnil Shinde, Co-Founder and CEO of Zeni
If you want your business to grow, it’s vital to have the right financial foundation. If your accounting processes aren’t in order, you may not have a complete picture of your startup’s financial health and could be leaving money on the table.
In my 15+ years as a startup founder, investor, and advisor — and now in my role as CEO of a bookkeeping and accounting startup — I’ve come across countless businesses whose accounts aren’t accurate or GAAP-compliant because they’re making the same four mistakes:
- Relying on spreadsheets to track their revenue and expenses
- Not setting up their chart of accounts properly
- Using cash basis accounting
- Working with an accountant who isn’t an industry expert
To avoid these common pitfalls — and set up your finances to support your business as it grows — follow these four accounting tips for startups and small businesses.
1. Don’t rely on spreadsheets to track revenue and expenses; start using accounting tools as soon as possible.
Most businesses use spreadsheet software like Microsoft Excel to track their revenue and expenses when they first start operating, but this system requires a lot of manual data entry, so it can be time-consuming and easy to make mistakes. To streamline your processes, select accounting software tools that fit your business’s needs and budget, and start using them as early as possible. Since financial software pulls the data you need from your bank and credit card accounts automatically, it reduces the time you spend on manual work and also produces professional-looking financial statements and reports with the click of a button.
2. Don’t underestimate the importance of your chart of accounts; invest time in setting it up properly.
Many businesses aren’t setting up their chart of accounts correctly. For example, some startups set up a general ledger account for every new expense, but this makes their chart of accounts messy and difficult to use. If your chart of accounts isn’t structured in the right way, you may end up presenting to board members or investors with financials that aren’t GAAP-compliant or taking weeks to provide the right reports, both of which will give the impression that you don’t have your corporate side in order.
Is your chart of accounts organized using account numbers? Do you categorize your revenue and costs using departments and classes? If not, your chart of accounts needs improvement. The easiest way to make sure it’s set up properly is to work with a reputable finance firm: They’ll build a custom chart of accounts that will scale with your business, so you can provide standardised, GAAP-compliant financials on request.
3. Don’t use cash basis accounting; track revenue and costs on an accrual basis.
There are two accounting methods: cash basis and accrual basis. If you use cash basis for your accounting, you book expenses and income when cash changes hands; with accrual basis, you record income and outgoings when they are earned or due.
Although many businesses begin with the easier cash basis method, my accounting advice for startups is to use the accrual basis instead. Accrual accounting gives a more accurate view of your business’s financial health, so it’s easier to make strategic business decisions. If you’re presenting reports to your board or sharing updates with investors, they’ll expect to see your finances under the accrual method. If your business continues to grow, you’ll need to switch over to the accrual basis eventually — the IRS requires all businesses with more than $5 million in annual revenue to manage their books using accrual accounting, so it makes sense to start with this method as early as possible.
4. Don’t assume every accountant will understand your business’s needs; work with an expert in your industry.
It’s a common misconception that any qualified accountant will be able to handle your business’s finances. In fact, if your accountant isn’t familiar with your vertical, they won’t have an in-depth knowledge of your specific accounting requirements and the guidelines you should be following. For example, without specialized accounting support, your business may be missing out on available tax credits or capitalizing the wrong costs based on outdated industry standards. When you’re selecting an accountant or finance firm, make sure they have a proven track record with your vertical, an existing client base of similar businesses, and experience working with your accounting tools.
Each company will have specific accounting needs based on its revenue model and growth stage, but these four accounting tips for small business owners and startup founders will help you build a solid foundation for your finance processes.
Swapnil Shinde is Co-Founder and CEO of Zeni, the all-in-one finance automation platform for startups. Swapnil is a three-time entrepreneur, angel investor, and startup advisor with 15+ experience building and scaling successful businesses.