When you think of a start-up company, what comes to mind?
For me, it’s a small company with people who are passionate about getting their idea off the ground. Launching a new idea takes intense focus. From product development to building a team, there’s much to be done on a daily basis.
Of course, all of this buzz and innovation is performed with an eye fixed intently on the future. So, why would such an in-the-moment, forward moving enterprise care anything about the rear-view mirror that is accounting?
Well, it’s hard to know where you’re going if you can’t tell where you’ve been.
When you’re at the helm of a budding enterprise, having a good accounting system capture, categorize and report your financial health can be an invaluable tool — a tool you can use every day for things like managing the cash flow of the business.
Watch Your Cash Flow
Many start-up companies focus on at least one accounting-related metric in the early days without even realizing it: cash burn rate.
Fancy name, but the essence of that metric is fairly simple. It answers the question, “how much longer can this business exist based on the current bank account balance?”
Fortunately, determining your cash burn rate is fairly straightforward. It’s simply the amount of cash in the bank divided by the monthly expenses. This sounds easy enough, since the bank balance is pretty easy to find with a quick login to your bank’s website. But, how do you determine the monthly expenses?
You could go through your bank account and add up each payment you made to vendors, contractors, etc. However, that is very time consuming. Wouldn’t it be nice if you could quickly access a report that shows the expenses you typically have in a month?
This is where having an accounting system in place can really help, even in the early start-up phase of your business. Having your books set up and ready to go from day one (or two) will make answering questions like this a breeze.
With accurate accounting records, you are equipping yourself with the tools necessary to make informed decisions, such as “should we spend money or should we not spend money today?”
Keep in mind that as start-ups grow, there may come a time when you need a more sophisticated system to report key financial information to others, such as banks or investors.
Take Care of Other People’s Money
It’s likely that in the very early days of your business, you could find yourself in the position of being a trusted custodian for other people’s money. Maybe it is a grandparent, a parent or your closest friend that has invested in you and your idea. With their investment comes responsibility. Having an accounting system in place will help you keep your investors up-to-date on the financial health of your business.
As your business outgrows your initial investor’s money, you may want to approach larger investors. You will look professional and responsible if your presentation to potential investors includes clean, timely accounting records. Plus, who wants to spend hours scrambling to produce good financial statements the day before a huge venture capital meeting?
Save yourself this frustration and start tracking your financial data in an accounting system like QuickBooks or Xero early on in your business venture. Consider saving yourself the time and expense of tracking your financial data by hiring a professional to help clean up the books.
Don’t Forget About Taxes
Implementing a good accounting system in the beginning stages of your start-up can reduce the time required to pull everything together during tax season.
Setting aside even an hour a week to ensure your books are up to date may save you from having to clear your calendar to dive into the spreadsheets every April.
Get Started Now
The advantage of being a small company is that you likely don’t have the transaction volume now that you will when your company flourishes. In the early stages of starting a business, it can be difficult to take time away from market testing, product development and other analytics. However, it may take less time than you think to process a handful of transactions per week, and the insights you gain may be huge.
Consult with your trusted advisor to discuss the benefits, setup and implementation of an accounting system early in the life cycle of your business. Having a system in place from day one will make tracking the financial aspects of your business as it grows a breeze.
John Hatcher, CPA