Startups often struggle with setting up their accounting system. You might be in a similar predicament, which is probably the reason you’re here.
This post aims to assist all startups by equipping them with the necessary information to create a well-rounded accounting system using expense management software and managing their finances wisely.
Guide to Setting Up an Accounting System.
Before you go ahead and choose an expense management software, here are a few things you need to get right:
Know The Two Types Of Accounting Methods.
It is essential to learn about the two types of accounting methods – cash and accrual accounting.
Cash accounting is the method of recording every transaction only after the money changes hands. So an income is recorded only when you actually receive the money (by any method, including card or check, it doesn’t always have to be cash.) Expenses are recorded only after you have paid the other party.
Accrual accounting is when you record transactions as soon as they occur, even if money doesn’t change hands right away. Incomes are recorded as soon as you send out an invoice to a client or customer, and expenses are recorded when you receive an invoice for some goods or services.
Cash accounting is fast and straightforward, so it’s suitable for small businesses. Accrual accounting gives a clearer picture of the financial condition of the business at any given time and is suitable for larger businesses (in fact, it’s mandatory by law for businesses making more than $5 million in sales) as well as for small and medium businesses that make many credit-based transactions, i.e., exchange of goods and services which are to be paid for some time later.
Methods of Record Keeping.
There are different ways you can record transactions on a daily or regular basis. The simplest way is to maintain a ledger and write down every transaction. But it’s an outdated method that makes your work harder in the long run. It’s not worth considering unless your business is tiny with no immediate plans to expand.
Suppose you want to save money at the expense of putting in more effort yourself. In that case, you can record transactions digitally using simple tools like a spreadsheet. But to maintain the accounts yourself, you have to gain some knowledge of accounting through self-study and research.
Suppose you want to save your efforts and are willing to shell out some money instead. In that case, you can either use an expense management software or hire a professional accountant. But you still need a bit of work – enter the required data into the program regularly. Hiring an accountant will cost you more money, but it takes away the entire effort from your hands, and you just need to oversee things every once in a while.
Based on how much money or effort you are willing to put in, you must decide which of these record-keeping methods is suitable for your startup.
Compliance With Financial Regulations.
So you have decided what accounting method you will use and how you will record all transactions. The first thing you need for a basic knowledge of the accounting system is to comply with financial regulations. Businesses must provide financial statements and tax audits to federal or state authorities, usually annually. You can research what rules you must fulfill for your business and what documents you need to file regularly.
And just like record keeping, you get to choose from three options again. First is to file such documents yourself. And if you don’t know how to do so, you might need to research and educate yourself on it. You have to do all the work, but you save money.
The second option is to use third-party software or service that automatically generates financial reports and makes your work easier. An expense management solution can prove to be of use here. Although an expense management solution will not replace accountants, it will eliminate manual data entry, verification, validation, and processing from the entire expense management process.
That said, an expense management solution has emerged as a necessity in 2021 in this automated world. An expense management system not only keeps your books clean and taxes sorted, it also leads to higher employee satisfaction. Your employees no longer need to invest time in manual data entry, receipt keeping, and end-of-month expense reporting, as an expense management tool takes care of these tasks effortlessly. The tool, also, further helps you get deeper insights into organization-wide spends, thus strategizing your financial growth.