Finance guide: Essential accounting for startups in 2024

Accounting is critical for a startup’s success because it creates the foundation for making informed decisions about its budget, profit margins, and financial forecast. With accounting, you can show proper financial management to potential investors. Lastly, accounting enables proper tax compliance.

Key Highlights:

• Accounting is a process that involves analyzing, interpreting, and communicating a startup’s recorded financial data.
• Good accounting is crucial for startups because it provides financial clarity, enables informed decision-making, and facilitates compliance with legal and tax requirements.
• Accounting helps attract investors and allows for effective cash flow management.

What is accounting?

Bookkeeping vs. accounting

Bookkeeping is the process of documenting transactions, while accounting uses that data for financial analysis, reporting, and advising.

Let’s break that down further with everything you need to know. 

Bookkeeping is like keeping a detailed diary of all the money that comes in and goes out of the business. It involves the basic recording and organization of a business’s financial transactions, including sales, purchases, receipts, and payments. Bookkeeping is a process in which financial data is recorded, classified, and summarized. This can be done manually or with bookkeeping software.

Conversely, accounting is a broader process that involves analyzing, interpreting, and communicating the financial data recorded through bookkeeping. 

Imagine taking all the detailed financial notes (bookkeeping) and turning them into useful information that helps the business understand its financial health and make smart decisions. So, it’s transforming raw data into a clear picture of how the business is doing financially.

Accounting data is used for financial modeling and to prepare financial statement audits, design accounting systems, and develop budgets and forecasts. These provide strategic financial advice and also help to project revenues, costs, and profit margins.

Why does good accounting matter for a startup?

Good accounting is crucial for startups because it provides financial clarity, enables informed decision-making, facilitates compliance with legal and tax requirements, helps attract investors, and allows for effective cash flow management. 

What’s more, by maintaining accurate financial records, tracking expenses, preparing budgets and forecasts, and generating timely financial statements, startups can monitor their financial health, control costs, identify growth opportunities, and make data-driven choices that drive their success and sustainability. 

Also, essential accounting helps startups manage their financial obligations to the IRS effectively and avoid potential legal and financial pitfalls.

The bottom line is that proper accounting practices from the outset establish credibility, build trust with stakeholders, and lay the foundation for scalable financial operations as the business grows.

Do startups need accountants?

Startups can greatly benefit from accountants. Here’s why: 

Accountants provide expertise in areas such as financial management, tax planning, regulatory compliance, budgeting, cash flow forecasting, and fundraising. They help maintain accurate financial records, minimize tax liabilities, make informed business decisions, and establish credibility with stakeholders.

In other words, using an accountant allows startups to focus on core operations while ensuring proper financial oversight, avoiding costly mistakes, and laying a solid foundation for sustainable growth. This is all key to a startup’s success.

What financial records does a startup need?

Financial records allow startups to make informed, data-driven decisions about their future while ensuring compliance with tax and legal requirements. 

Let’s briefly go through each financial record a startup needs.

Bank Statements

A bank statement is a document that shows all transactions in a bank account over a specific period, usually a month. Regularly reviewing and reconciling bank statements helps track income and expenses, identify errors or fraudulent activity, facilitate budgeting and financial planning, and provide documentation for loan applications or taxes.

Credit Card Statements

A credit card statement is a monthly summary of all transactions made using a credit card, including purchases, payments, feeds, and interest charges. 

While you may be familiar with these from your personal experience, it is important for a startup to consistently review their credit card statements to track expenses, monitor cash flow, reconcile accounts, identify unauthorized charges, and make informed financial decisions to effectively manage credit card debt.

Bills & Invoices

A bill is an itemized statement of money owed for goods or services received. An invoice is a document issued by a business to a client or customer requesting payment for goods or services provided. 

Managing your startup’s bills and invoices will enable expense tracking, maintenance of accurate financial records, timely payments to vendors and suppliers, and effective cash flow management, especially during the critical early stages of a business. 

For startups, bills and invoices can serve as legal records of business transactions, help track income and expenses, facilitate timely payments from customers, and enable proper accounting and tax compliance.

Receipts 

Similar to a bill, a receipt is a written or digital document that serves as proof of a financial transaction. Receipts allow startups to accurately track the pricing of goods and services, income and expenses, maintain proper accounting records, substantiate tax deductions, and facilitate returns or exchanges if needed.

Financial Statements

A financial statement is a formal record that summarizes the financial activities of a business over a specific period. Financial statements provide insight into a startup’s financial health, enable data-driven decision-making, facilitate fundraising, and ensure compliance with legal and tax requirements. 

Tax Forms

A tax form is an official document required by tax authorities to report a business's financial information and calculate its tax liability. Filing the correct tax forms is vital to ensure compliance with tax laws, avoid penalties, and enable the startup to claim eligible deductions and credits that can provide valuable financial benefits. 

Tax Returns and Supporting Documents

A tax return is a set of forms filed with tax authorities to report a business's income, expenses, and tax liability. Supporting documents like receipts, invoices, and financial statements provide evidence for the information reported on the tax return. 

Take note that for startups, proper tax filing  with accurate supporting documentation is crucial for complying with tax laws, claiming eligible deductions and credits, and establishing credibility with investors and other stakeholders.

Benefits of accounting in a startup

Accounting may seem like a difficult, time-consuming process with little reward. Here’s the thing, though: high-quality accounting methods provide significant benefits for startup teams and startup founders. 

This is why.

Producing, maintaining, and analyzing accurate financial records allows startups to stay organized, increase efficiency, obtain financing, control expenses, and identify future risks and opportunities. In other words, accounting allows entrepreneurs, business owners, and startup CFOs to create data-driven growth strategies.

Establishing a solid accounting foundation from the start helps startups comply with tax laws and regulations, prepare for due diligence, build credibility with investors and other stakeholders, and position themselves for long-term success. 

There are various key benefits to accounting in a startup. 

Let’s review them.

Organization

Organized record-keeping of financial documents (e.g., invoices and receipts) enables startups to easily locate and reference specific financial information when needed. This makes informed decision-making, accurate reporting, and compliance with legal and tax requirements easier and more accurate. 

Other benefits of the organization include more streamlined budgeting, forecasting, and financial analysis, allowing startups to identify areas for cost optimization and strategic resource allocation.

Due diligence

Due diligence is the investigation into a startup’s background and finances done by a potential investor when they are deciding whether to invest in a company. 

How can startups show their financial health during the rigorous due diligence process? 

They can do this through organized financial records, accurate reporting, transparent revenue recognition, in-depth expense analysis, intellectual property evaluation, debt and liability assessments, tax compliance documentation, and well-managed customer and supplier contracts.

Compliance

Maintaining accurate and organized financial records (including income and loss statements, balance sheets, cash flow statements, invoices, receipts, and tax documents) allows startups to demonstrate transparency and accountability to tax authorities, investors, lenders, and other stakeholders. 

Accurate accounting also allows for the proper filing of tax returns, claiming eligible deductions, and avoiding penalties or legal consequences for non-compliance. This is critical for a startup’s growth.

Systems + processes setup

Keeping organized financial records, accurate data entry, and standardized processes allows for seamless integration with software systems. These types of software can involve inventory management, payroll, customer relationship management, and enterprise resource planning tools. 

In a nutshell, well-structured accounting systems and processes lay the foundation for scalable software systems that can grow with the startup, minimizing the need for costly overhauls, overhead, or migrations as the business expands.

Reporting

Another benefit of accounting for a startup is reporting. 

Why is this key?

Reports are essential for attracting investors, securing funding, demonstrating financial viability to potential partners or customers, and making data-driven decisions about resource allocation, growth strategies, and risk management. Accurate accounting is the method by which these reports are generated. 

Prep work for budgeting, planning, and forecasting

Accurate and organized financial records, including income statements, balance sheets, cash flow statements, and supporting documents, give startups a comprehensive understanding of their financial performance, trends, and projections. 

This data serves as the foundation for creating realistic financial forecasts and budgets that allocate resources effectively, identify potential shortfalls or surpluses, and enable strategic decision-making. 

Fundraising

Well-maintained and organized financial records present a clear picture of a startup’s financial performance, growth potential, and overall health. 

This level of accounting preparedness instills confidence from potential investors. It also demonstrates the startup's ability to manage funds effectively and execute on its growth strategies, increasing the likelihood of securing investment.

Responsiveness

This is important. Accurate, up-to-date financial records allow startups to be highly responsive to changing market conditions, emerging opportunities, and potential risks. Why? Because they can quickly analyze their current financial position, identify areas that require immediate attention, and make informed decisions to pivot strategies or allocate resources effectively. 

In other words, well-organized accounting systems allow startups to respond swiftly to fluctuations in demand, supply chain disruptions, or shifts in customer preferences. 

Taxes

Taxes might be difficult,time-consuming and annoying Bbut accounting makes them easier and can help you avoid costly mistakes. 

As mentioned earlier, maintaining accurate and organized financial records ensures compliance with tax laws and regulations. Accounting also provides the necessary data for timely preparation, facilitating tax planning strategies to optimize cash flow and minimize the overall tax burden. 

Financial advice

Accounting provides the critical information necessary so you can receive valuable financial advice that can guide important business decisions and strategies. 

When to hire and when to outsource accountants

There are several key factors that determine when a startup should hire an in-house accountant versus outsourcing accounting to a third party. 

Let’s dive into the differences between early and growth-stage startups and the factors startups should consider when looking to hire or outsource accounting. 

‍Early Stage:

In the early days when accounting needs are less extensive, it is generally recommended for startups to outsource their accounting activities to a third-party firm, accounting firm, or "fractional accountant." (We’ll review fractional accounting in detail below.) 

Here are the benefits of outsourcing during the early stages:

• Provides access to expertise at a lower cost compared to hiring a full-time employee. 
• Turns a fixed expense into a variable expense. 
• It is faster than hiring and provides immediate access to accounting services when needed quickly.

Growth Stage:

As the startup grows and accounting needs become more complex, it may make sense to transition to hiring an in-house accountant or accounting team. 

Typical milestones for considering in-house hires include reaching a six-figure annual revenue run rate, raising a Series A or B funding round, or preparing for a liquidity event like an IPO. 

Here are the benefits of hiring an in-house accountant or accounting team:

• Allows for dedicated focus on the company's specific needs and closer integration with business processes. 

Factors to Consider:

• Outsourcing is generally more cost-effective initially.
• Outsourcing provides access to a breadth of experience and specialized expertise in a niche.
• In-house hires can provide more strategic advisory.
• Outsourcing is more scalable as needs change.

The bottom line is that outsourcing is often the recommended approach for startups in the earlier stages due to cost and flexibility benefits, while hiring in-house accounting staff becomes more viable as the company grows, gains traction, and requires dedicated, strategic financial management.

Key hires

Specific key hire roles and timing depend on the startup's growth stage, funding, and industry. 

Let’s review several key hires for accounting needs. 

1. Bookkeeper: In the early growth stages, startups often hire a bookkeeper to handle basic accounting tasks like recording transactions, managing accounts payable/receivable, reconciling bank statements, and preparing financial statements. This can initially be an outsourced or part-time role.
2. Controller/VP of Finance: As the startup gains traction and accounting needs become more complex, they may hire a controller or VP of finance. This senior-level position oversees the accounting function, financial planning, budgeting, cash flow management, and financial reporting. This person provides strategic financial guidance to the leadership team.
3. Staff Accountant: Larger startups may hire staff accountants to handle day-to-day accounting operations like accounts payable/receivable, payroll, month-end close, and preparing reports under the controller's supervision.
4. Tax Accountant: Startups need expertise in tax planning, compliance, and filing tax returns. They may hire a tax accountant (in-house or outsourced) to ensure proper tax accounting, take advantage of tax credits and/or deductions, and avoid penalties.
5. Accounting Manager: As the accounting team grows, an accounting manager may be hired to oversee the staff accountants, bookkeepers, and accounting processes while reporting to the controller.

Fractional accounting

You may be wondering what fractional accounting is. It’s a model where companies outsource accounting and finance functions to experienced professionals on an as-needed basis. 

So, instead of hiring a full-time accounting department, businesses can access fractional accountants, controllers, and CFOs to handle tasks such as bookkeeping services, financial reporting, budgeting, and business and income tax preparation.

Fractional accounting provides flexibility, cost-efficiency, and access to high-caliber talent that may be difficult to attract as a full-time hire. Fractional accountants typically work remotely and are employed by a financial services firm, allowing them to serve multiple clients simultaneously. 

By leveraging fractional accounting, startup and small business owners can scale their finance functions without the overhead of a full-time accounting team.

What to look for in a good startup accountant

By prioritizing startup experience, industry knowledge, technological savvy, communication skills, and scalability, you can find an accountant who will be a valuable asset to your startup team and help drive your company's financial success. 

There are several key factors to consider when hiring an accountant for your startup.

Let’s dive in. 

Startup-Specific Experience

Look for an accountant who has experience working with startups and is familiar with the unique challenges and rapid growth that characterize the startup environment. This person should understand the importance of agility, risk management, and adapting to changing needs.

Industry Knowledge

Find someone who can hit the ground running. Accounting for a new industry has a learning curve, and your startup doesn't have time to wait while your accountant gets up to speed. Ideally, your accountant should have some knowledge or experience in your specific industry.

Technological Proficiency

Your accountant should be comfortable with modern accounting software and technology. This person should be able to help you choose the best accounting software or enterprise resource planning (ERP) system for your needs and use it effectively to manage your finances.

Strong Communication Skills

Your accountant will need to work closely with your team, communicate financial information clearly, and provide strategic guidance. An attribute that’s important to look for is collaboration, as well as a good fit with your company culture.

Certifications and Credentials

While not always necessary, certifications like CPA (Certified Public Accountant) can demonstrate a high level of expertise and professionalism. CPAs can also represent your business in tax audits.

Scalability

As your startup grows, your accounting needs will become more complex. Consider hiring an accountant who can scale with your business and provide the level of expertise you'll need in the future, even if you start with more basic needs. 

Key startup accounting metrics to know

Let’s go over key startup accounting metrics that will help you and your accounting team succeed. If you want to dive deeper into any of these, read more on each metric.

Burn Rate

A burn rate refers to the rate at which a company, especially a startup, spends its available cash reserves. It is typically measured as the net amount of cash spent per month, calculated by subtracting monthly operating expenses from monthly revenue. 

A high burn rate indicates that a company is depleting its cash supply quickly and may need to raise additional funding or cut costs to extend its financial runway, which is the estimated number of months the company can continue operating before running out of cash at the current burn rate.

Deferred Revenue

Deferred revenue refers to money received by a company in advance for goods or services that have not yet been delivered or performed. It is recorded as a liability on the company's balance sheet until the revenue is earned, at which point it is recognized on the income statement as actual revenue. 

Deferred revenue is a common practice in subscription-based businesses, where customers pay upfront for services that will be provided over a period of time, such as a monthly or annual subscription fee.

AP Metrics

AP metrics are key performance indicators (KPIs) that measure the efficiency and effectiveness of a company's accounts payable processes. 

These metrics provide quantitative data on various aspects of AP operations, such as processing costs per invoice, on-time payment rates, discounts captured, and the percentage of electronic invoices received, enabling AP teams to identify areas for improvement, optimize workflows, and drive cost savings. 

Tracking AP metrics is crucial for aligning the AP function with overall business goals, demonstrating the value of AP to senior management, and ensuring the timely and accurate payment of supplier invoices.

AR Metrics

AR metrics are KPIs that measure the efficiency and effectiveness of a company's accounts receivable processes. 

They provide quantitative data on various aspects of AR operations, such as days sales outstanding (DSO), average days delinquent (ADD), accounts receivable turnover ratio (ART), and collection effectiveness index (CEI). These metrics enable AR teams to identify areas for improvement, optimize workflows, and improve cash flow management. 

Tracking AR metrics is crucial for aligning the AR function with overall business goals, demonstrating the value of AR to senior management, and ensuring timely collection of customer payments.

Startup accounting best practices

Follow GAAP best practices

When it comes to startup accounting best practices, following Generally Accepted Accounting Principles (GAAP) is crucial to ensure financial transparency, compliance, and credibility. 

To follow GAAP best practices, startups should implement GAAP-compliant accounting software, engage an accounting expert to ensure proper application of GAAP standards, maintain detailed records and documentation, and regularly review and reconcile accounts. 

By establishing GAAP-compliant accounting practices from the start, startups can build a strong financial foundation, demonstrate credibility to venture capital firms, investors, and stakeholders, and position themselves for long-term growth and success.

Get an accounting system

Accounting software like QuickBooks Online or NetSuite provides startups with a centralized system to easily track income and expenses, generate financial reports, manage invoicing and payments, and gain real-time insights into their financial health. 

Why? 

An accounting system enables startups to make data-driven decisions, control costs, and focus on growth while maintaining accurate records. Automated accounting also saves significant time compared to manual bookkeeping, allowing founders to focus on strategy rather than data entry.

When should your startup implement an accounting system?  

Implementing an accounting system early on is crucial for startups to stay organized, increase efficiency, obtain financing, and identify risks and opportunities. 

Another benefit is that accounting software integrates with other business tools, provides robust security, and ensures compliance with tax laws and regulations. 

You will like this benefit — by establishing a solid accounting foundation from the start, startups can build credibility with investors, streamline due diligence, and position themselves for long-term success.

Cash vs. Accrual Accounting

When it comes to choosing between cash vs. accrual accounting for a startup, accrual accounting is generally the better choice, especially as the company begins to scale and grow. 

Let’s go over the reasons. 

Accrual accounting provides a more accurate picture of the company's financial health by recording revenue when earned and expenses when incurred, regardless of when cash is exchanged. This allows for better visibility into accounts receivable and accounts payable, which is crucial for budgeting and cash flow management. 

Accrual accounting also complies with generally accepted accounting principles (GAAP) and is preferred by investors and lenders when reviewing a startup's finances during due diligence. 

Note, however, that in the very early stages (pre-profit, pre-seed,) when simplicity and low accounting costs are priorities (or for startups with high uncertainty around future sales or expenses), cash accounting may be appropriate. 

As a startup begins to scale, generate profit, and raise capital from investors, transitioning to accrual accounting becomes crucial for providing an accurate, GAAP-compliant view of the company's financial health.

Best accounting software for startups

With a myriad of software out there, consider what software is best for your business structure. Let’s dig into the best accounting software. 

Software vs. FaaS

The main difference between FaaS (Function as a Service) and traditional software is the way they are deployed and executed. 

FaaS is a cloud computing service that allows developers to run code in response to specific events or requests without managing the underlying infrastructure. With FaaS, functions are executed on-demand and developers only pay for the compute time consumed rather than provisioning and maintaining servers. 

In contrast, traditional software is self-contained, installed on local machines or servers, and requires ongoing maintenance and updates by the user or IT staff. 

The bottom line is that FaaS provides a more event-driven, scalable, and cost-effective way to run code compared to traditional software deployment models

Accounting software for startups

QuickBooks Online

You have likely heard of QuickBooks. It is a popular accounting software that offers various features tailored to meet the needs of startup businesses. 

It helps startups keep track of income and expenses, generate financial reports, manage invoicing and payments, track inventory, process payroll, and gain real-time insights into their financial health, making it easier to make data-driven decisions and focus on growth. 

Xero

Xero is a cloud-based accounting software designed to make small business accounting easier. It helps startups automate tasks like invoicing and reporting, gain real-time insights into their financial health, collaborate with their accountant online, and connect to a wide range of business apps, enabling them to focus on growth while maintaining accurate financial records.

FreshBooks

FreshBooks is a cloud-based accounting software designed specifically for small businesses and startups. It helps startups streamline their accounting processes, including invoicing, expense tracking, time tracking, and online payments, allowing them to focus on growing their business while maintaining accurate financial records.

Integrations to accounting software

To make the best of your accounting software, make sure it integrates into your workflows to save your team time.

Rho offers seamless integrations with leading accounting software like QuickBooks Online. Rho allows startups to automate manual accounting workflows and sync transactions directly to the business’s general ledger.

These integrations speed up the financial close process, enable real-time transaction reconciliation, and save significant time each month. 

The bottom line is that startups gain a centralized view of their business finances, streamline workflows, and make data-driven decisions to drive growth by connecting Rho to their business banking platform with their accounting software.

Is automated accounting an option for startups?

Yes, automated accounting is a good and increasingly popular option for startups. Cloud-based accounting software such as QuickBooks, Docyt, and Puzzle provide startups with automated tools to easily track finances, generate reports, manage accounts payable/receivable, and gain real-time insights into their financial health. 

The benefit is that these solutions help startups stay organized, make data-driven decisions, and prepare for fundraising and growth, while reducing the time and effort required for manual bookkeeping. 

What’s more, automated accounting enables startups to focus on their core business while maintaining accurate financial records and compliance. This is key for businesses looking to scale efficiently.

FAQs about startup accounting

What is the best accounting software for startups?

QuickBooks stands out as the market leader and the preferred choice for many VC-backed startups due to its industrial-strength reliability, robust features, and seamless integrations.

QuickBooks offers a comprehensive suite of features designed specifically for startups, including invoicing, expense tracking, time tracking, and financial reporting. It integrates with a wide range of other business tools, has a large ecosystem of third-party apps, and provides reliable security and customer support. 

Other popular options include FreshBooks for its user-friendly interface and online payments, Xero for its flexibility and low cost, and Zoho Books for its clutter-free design and reliable support. 

How do I account for startup costs in GAAP?

Under GAAP, startup costs should be expensed as incurred rather than capitalized as assets. This includes costs such as legal and registration fees, employee training, pre-opening advertising, feasibility studies, and travel expenses incurred during the initial stages of a business before it begins generating revenue. 

Startup costs are recognized in the income statement as operating expenses, often under a single category. 

The key is to distinguish startup costs from other expenses that may require different accounting treatment under GAAP, such as research and development, customer acquisition, or costs of internally developed assets.

Do startups need audited financials?

Startups are not legally required to undergo annual audits of their financial statements like public companies. However, audited financials can provide significant benefits for startups, especially when seeking funding from investors or preparing for an acquisition or IPO. 

Audits build trust by verifying the accuracy and integrity of a startup's financial records, demonstrating compliance with GAAP, and identifying areas for improving accounting practices and internal controls. 

Many investors expect to see audited financials before releasing funds, and having audited statements ready can streamline due diligence and increase a startup's valuation if acquired. 

So, while audits are not mandatory for most startups, they are a worthwhile investment to ensure financial health, attract investors, and position the company for future growth and liquidity events.

Seamless integrations make accounting simple with Rho

Accounting is critical for funding, forecasting, budgeting, and overall business growth and financial health. As you choose your accounting software, prepare for the future now and make sure it integrates into your workflows to save your team time.

Rho offers seamless integrations with leading accounting software like QuickBooks Online. Rho allows startups to automate manual accounting workflows and sync transactions directly to the business’s general ledger.

The benefit is that these integrations speed up the financial close process, enable real-time transaction reconciliation, and save significant time and resources each month. 

Want to learn more about accounting software and its integration with Rho? Get in touch.‍

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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