Simple Guide to Setting Up an Accounting System for Your Startup
A startup might not need to hire an accountant right away; they can start with a bookkeeper or an online accounting service. But as their business grows, they'll need to hire an accountant who can do more than just keep records and prepare financial statements. They will also want someone who is knowledgeable about the unique needs of startups and can offer advice on how to avoid common mistakes that startups make when it comes to their finances.
What is the significance of an accounting system?
1. How much money did you make from your business?
2. How would you manage your cash flow?
3. What were the transactions that occurred over time?
4. An accounting system is the answer to all of these questions.
5. To ensure that a company is not wasting money, it is necessary to keep track of its cash flow.
6. Accounting software can also be used by a business owner to generate reports based on "profit" and "loss," cash flow, and balance sheets.
7. It provides a brief overview of the company's current situation.
8. It is essentially the heartbeat of a company. An accounting system will assist you in understanding your company's past and present state.
What is An Accounting System?
Accountancy is the process of keeping financial records, preparing financial statements, and providing advice on the organization’s financial position. It's a crucial part of running any business or for the success of any startup. A startup is a company that has been in operation for less than 5 years and is usually seeking to grow rapidly. To do so, the startup needs to have a strong financial model, and pitch deck.
A financial model provides information about the company's expected performance, which can be used by investors to determine how much funding they are willing to provide for the company.
A pitch deck is an overview of a company's plan for growth, which can be presented as part of an investor meeting or used as part of an application for venture capital funding.
What Kinds of Accounting Systems Exist?
1. System of Single Entry
A Single-Entry System is the first type of accounting system, in which a small business records every transaction as a line item. It is a straightforward and practical method used in small businesses.
2. System of Double-Entry
The second method is the Double Entry System, in which each transaction is recorded as a debit and a credit in separate accounts.
The accountancy services offered by Bookkeeping Angels will help you with all your accounting needs: from setting up your accounting system to preparing your financial statements
There are three main tools for financial modeling: - accounting software like QuickBooks - Excel - Google Sheets
How to get your first accounting system up and running?
1. Have a thorough understanding of business transactions: Obviously, before implementing an accounting system, you need to have a thorough understanding of financial operations, such as transactions, investments, assets, and liabilities. Complete understanding will increase your confidence in carrying out each step of the accounting system setup for your firm.
2. Open a company account
This is the first stage in launching a company. Personal and commercial accounts must always be kept separate. To safely save money, you must have an account.
3. Select a payment collecting method.
To begin, you must recognize that an accounting system is built on the foundation of two approaches. The following is a description of the two of them:
Accretion method: This method counts income immediately once a sale is made, regardless of whether you have received money or not. This strategy entails generating invoices for the goods or services before the customer pays.
Cash Method: The income is counted after the consumer makes the payment in the cash method. It's a frequent way to start a small business, especially one that accepts instant payments from customers.
You can choose either the cash or the accretion technique from the options above. The accretion approach is more precise, but the cash method is easier to manage, thus it is typically used in small organizations
4. Keep track of your purchases.
You must choose a technique to record the transactions after picking one of the above options. You can either do it manually or with software. Keeping a log of transactions will allow you to keep track of every transaction you make, calculate profit, analyze losses, and track your entire cash flow.
5. Create a chart of accounts: A chart of accounts is an organizational tool that lists all of a company's financial accounts. It simply separates financial assets, liabilities, expenditures, and transactions. It also aids in providing investors and shareholders with a comprehensive view of a company's financial health. The following items must be included in a chart of accounts:
Under the asset account, the sub-accounts present should be
- A checking account
- Assets in inventory
- Funds not deposited
- Accounts payables
Under the liability account, the sub-accounts must be
- Payable notes
- Credit card
- Liabilities accrued
- Payroll liabilities
6. Keep track of your receipts and invoices: Keep all relevant papers, such as receipts and invoices, in a safe place so that they may be referred to in the future. This can be done on paper or with any electronic device. It will also serve as proof of all of the company's transactions.
7. Consider your taxes: This may come as a shock, but you must consider your taxes even before you begin selling. Your taxable income is your net income, which is the amount left over after all expenses have been deducted. This is why it is critical to keep track of all key documents; it will make the process go more smoothly. Both provincial and federal taxes require your company to construct a stand-in. Find a tax specialist that can assist you in managing your tax obligations and making proactive steps to study the tax bites.
8. Keep track of past payments: If you use cash, keep track of all the money you receive from consumers. Your bookkeeping system must supply you with invoices and balances if you employ the accretion approach. When collecting payments from customers, make sure to remind them of due dates 2-3 days ahead of time. Begin with a basic payment collection system and work your way up to collecting checks and even online payments.
9. Forecast your expenses: Make an analysis of the flow of money with the help of the accounting system. Record the anticipated expenses to help you to manage your cash bites. It will help you to gain good financial management and do good planning for future purposes. Also, you will save money and invest accordingly in the business. So, knowing or forecasting future expenses is advantageous.
Understanding accounting fundamentals is the first line of defense against your firm collapsing due to a cash shortage.
You don't have to be a chartered accountant to work in accounting and taxes. Aim to grasp the most significant topics and how they relate to your industry.
Accounting aids you as a small business owner by:
Find out how to budget.
Make tax preparations.
Maintain your organization.
Examine your earnings and spending habits.
Make better choices.
Get a high-level picture of your company's financial health.
Selecting the correct accounting approach, comprehending the three main financial statements, cooperating with the right accountant, installing the right accounting software, and staying up to speed on routine bookkeeping operations are the greatest accounting practices you can implement.