Every business relies on good accounting to thrive, break-even, and start making profits. Startups can be culprits of poor accounting due to a lack of information and improper financial habits.
Whether you can afford to pay a high-end accountant or not, businesses need to acquaint themselves with the most vital aspects of this service if they want to grow. Before you get your company up and running, here are vital things to know about accounting for startups.
By law, every business should invoice its clients for the goods and services rendered. An invoice is a legally binding document that provides proof of your services and what you’re owed. Learning how to invoice saves you trouble, especially regarding payments.
Aside from giving a breakdown of the services and how much you charge plus any taxes added, it’s an effortless way to ascertain you get paid in good time since most clients want to avoid late payment fees and interests.
And if you don’t receive the payment as agreed, you’re free to take legal steps to ensure you get your money. For most people, this can be daunting, so getting a startup accounting service to do the work on your behalf works wonders.
Open a Bank Account for the Business
One of the mistakes startups make is merging personal and business accounts. This creates confusion that is challenging to detangle. A separate bank account is a requirement for all startups in the US and around the globe. Consequently, it is advisable to open a separate account for the business apart from the personal one.
This allows you to differentiate between personal and business transactions, effortlessly track your expenses, and determine if you’re making progress. You’ll come off as professional and won’t have to become a detective to differentiate between personal and business transactions when it’s time to pay taxes.
Choose an Accounting Method
Two accounting methods rule the account’s world; cash and accrual basis accounting. Cash basis is a straightforward method that tracks expenses once they hit the account or are deducted as paid-out amounts. This is a simple method that’s handy for new businesses.
On the other hand, the accrual method tracks expenses in real time once they’ve been billed or paid. It provides a realistic foresight of your accounts, helping you leverage with investors.
Track All Your Expenses
Bookkeeping is a niche-specific term for tracking your expenses. This allows your accountant to quickly analyze the information to aid you in making accurate and informed decisions. Find a bookkeeping software that’s within your financial ability.
Create a chart of accounts, determine your terms of operation (whether you will provide services for credit or cash), and keep an account of all transactions you procure daily. As a thumb rule, record these transactions as they take place to avoid a backlog of work.
Prepare Your Payroll
Whether you have one employee or are responsible for the livelihood of hundreds of people, you must prepare a payroll. You must have a record of all employees in your business and their details, including their SSN, wages, and working hours. Getting acquainted with W-2, 941, and 1099 forms will be a weekly affair.
Acquaint Yourself with Employment Taxes
As an employer, you must keep yourself informed regarding the multiple taxes that the government requires you to withhold from your employee’s salaries. These include:
- Federal income tax
- Social security tax
- Medicare tax
- Federal unemployment tax
- Self-employment tax.
Where applicable, you should withhold the right amount of money each time you pay your employees. This includes funds required from you as a self-employed business owner.
Learn More About Important Financial Statements
A company’s accounting system is built on three critical financial statements: the balance sheet, cash flow statement, and income statement. An in-depth understanding of these statements will make it easier for you to track discrepancies and understand how your business is performing.
It may be impossible or challenging for most employers without an accounting background to learn these and tabulate them in accounting terms. If this is your state, you shouldn’t worry about taking an accounting course to understand its meaning and how to work around them.
At the very least, you must learn what each means and how they interrelate. This will give you a clear understanding of vital financial reporting, and you don’t have to wait for an accountant to break it down for you.
As a startup business, you must take hold of your accounting details to help you stay abreast with financial statements and your company’s progress. Aside from ascertaining you’re not left in the dark, you also find out other benefits that startup companies can enjoy and how to claim them.