If you’ve just started a new business, you should understand why financial management and accounting for startups is a necessity you can’t ignore. You may be a sole “employee” working for yourself or you could be part of a small bootstrapped team where each person wears many hats. That is the nature of starting a business venture. Paying your dues is expected. Like many new businesses, you’ll probably have to start small, and may have to scrimp on some aspect of your operation as you get it running and generating revenue. Aspects of your business you should definitely not scrimp on are accounting, bookkeeping and financial planning.
While having a “we can make do” attitude is prudent at the beginning, making due without tracking finances, having meaningful financial analytics, and a financial plan, could cause huge problems both in the short term and long term. Hiring an accounting firm, like Elite Accounting Solutions, can ensure that you start off right and stay the course.
Benefits of Accounting for Startups
If you are tentative about whether your startup business needs financial planning and monitoring, an accounting system or the services of an accountant, consider the the 2005 research by Davila and Foster — funded by Stanford’s Center for Entrepreneurial Studies. The study revealed that companies that quickly instituted mechanisms such as budgets and financial monitoring to measure profitability, customer acquisition costs, variance from budget, etc, had higher growth rates (in both revenue and head count) and more rapid increases in valuation. See the Stanford Graduate School of Business article “Smart Startups Don’t Wait to Set up Accounting Systems” for more details.
There are many ways new businesses benefit from accounting and financial management, including:
- Organization of financial data.
Organization is key in good financial management. Having financial data available at your fingertips ensures that that you’ll examine the effect of business decisions on your bottom line. A good, all-in-one bookkeeping, accounting and financial management system – set up by a professional – serves many functions from simple organization to budgeting, financial analysis and reporting.
- Professional bookkeeping practices.
Hiring an accounting outsourcing firm to maintain your bookkeeping system, enter transactions, reconcile accounts and run meaningful financial reports not only ensures that you have up-to-date and compliant books, but also ensures you have meaningful financial data that can guide business decisions.
If you don’t aim for a target, you certainly can’t hit it! Budgeting is how businesses set and achieve explicitly-stated goals. Without a budget, you are taking pot shots in the dark. By creating a budget and comparing budget vs. actual, you can check progress, analyze, and adjust. Budgeting helps businesses plan for profit.
- Cash flow analysis.
Poor cash flow can put your business in jeopardy. If you run out of cash or are low on cash and can’t pay some expenses, you may forced to “rob Peter to pay Paul” (as the saying goes). Accounting and financial monitoring can inform you of cash flow problems before they get out of hand. Financial analysis can help determine both the cause and the solution.
- Expense tracking and analysis.
It nearly goes without saying that knowing what you spend and when you spend it can help you identify wasteful expenditures or over-spending that depletes cash flow and reduces profit. New businesses would be wise to track and monitor expenses from the start.
- Revenue tracking and analysis.
New businesses should know exactly how much they earn in a given time period. Tracking revenue closely will help you identify revenue trends: by time period, season, product or service.
- Customer-value tracking.
Knowing which customers bring the most value can help you concentrate on those services/products and relationships that earn the most.
- Financial monitoring.
Financial reports are like an early warning system. The truth about your business’s financial health are in the numbers. Balance sheet, profit and loss, cash flow reports, revenue, expense and tax reports can help you (and your accountant) monitor business performance and then take action to improve financial performance when required. Without the insight provided by financial reports, you are driving your business while wearing a blindfold.
- Tax advantage.
At tax time, you’ll be glad you have an accounting and finance system in place and have hired the services of an accountant/bookkeeper. There will be no end-of-fiscal-year scramble. It will all be there, in the the accounting system and at the ready. There will be no guessing about income, allowable deductions, or taxes owing, and no anxiety. You’ll have an advantage over businesses who are doing their own bookkeeping, or neglecting it (as the case may be). Your tax filing will be accurate and on time.
New Business? Receive a Free Startup Accounting Consultation
If you are considering starting a new business or have just done so, contact Elite AS and request a free consultation. Our experts are always happy to answer questions. You may also want to check out our accounting services and packages.