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Accounting for Startups: Building A Strong Business Foundation

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Your startup is a reflection of the innovative ideas that you want to bring to market with efficiency and speed. To do this, you’ll need investor interest in your ideas and the capital that changes those ideas into a reality.

But what about financial processes? Are they important when you’re trying to work out the business structure, the fastest way to get your product or service to market, and how to fund your ideas? Of course, that answer is yes! Without accounting systems in place as the foundation, all these other areas will eventually suffer.

Why should you be concerned about your business’s financial processes?

Image illustrating various business financial processes

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Incomplete or delayed financial information doesn’t seem like a problem when your focus is on developing exciting products and services. But what about when the ball really starts rolling? Suddenly, you’re always one step behind with the financial data you need to make proactive decisions.

To illustrate, your body needs clean water, air, exercise, and wholesome food to flourish and stay away from disease. Anyone who prioritizes these things is bound to see the results they are looking for - to stay healthy and thrive in their daily activities.

In both these examples, it might be too late to put good internal disciplines in place when you are already in trouble. By that time, you’ll be in crisis management instead.

You’ll be concentrating on putting out fires instead of confidently knowing that your startup’s financial health is under control and you have a contingency plan you can fall back on.

In this article, we’ll cover the ‘good internal disciplines’ that you can put in place to protect your business’s financial health. The disciplines for startup accounting are called ‘generally accepted accounting principles’ (GAAP). You can think of them as the rules that govern financial transactions and financial reports.

Investors get excited about startups that have their ducks in a row. Does anyone remember how many candidates went home disappointed from the series, ‘Shark Tank’? They had great products, but they got booted when their internal controls weren’t in place. [1]

So, let’s not do what they did. Let’s get those accounting systems and appropriate accounting software in place so that you’ve got all the data you need to impress potential investors, even the ‘sharks.’

Do you know what would really help investor confidence? If you have a CFO at your meetings to discuss growth projections, funding needs, burn rate, and investor returns. Hall Accounting Company offers fractional CFO services for startups. This service allows you to use the expertise of a CFO in your business without employing one full-time. Don’t be the one to walk away disappointed.

Schedule a call, and let’s see what we can do to help.

The best accounting method for startups

This is the first step in getting your financial internal controls in place. There are two common accounting methods and they dictate everything else you put in place, so this is important.

Cash accounting method

This method records revenue and expenses when cash is received or paid out. It's straightforward and suitable for startups with simple financial transactions and limited inventory. Cash basis accounting provides a clear picture of available cash flow but may not accurately reflect long-term financial performance or liabilities.

Accrual accounting method

With this method, revenue and expenses are recorded when they are earned or incurred, regardless of when cash is received or paid. Accrual accounting provides a more comprehensive view of a startup's financial position and performance over time, including accounts receivable, accounts payable, and inventory.

It's often preferred for startups, as it aligns better with GAAP. Using a GAAP-compliant accounting system will provide an accurate representation of financial health and allow you to scale your business.

How to put accounting basics in place

Image illustrating basic accounting practices

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The next step is to set up basic accounting practices. These are also called bookkeeping processes and practices.

Whether you are in the development phase of your business or have started making money, you need processes that facilitate the recording of financial transactions and the appropriate accounting software for the type of business you run.

The production of accurate financial records such as the cash flow statement, income statement, and balance sheet comes from having a systematic approach to recording business transactions.

If you want to outsource these basic bookkeeping services to an accounting firm, get a QUOTE today from Hall Accounting Company. One of our customers had this to say:

“I have been working with Jeremy Hall and his team at Hall Accounting Company since opening my business in 2017. Jeremy has helped my business grow with sound financial accounting and advice. Jeremy also handles our personal accounting and he is extremely responsive and dedicated to his clients. Having Jeremy and his team on MY team has allowed me to focus on growing and managing my business with the peace of mind that the accounting is taken care of. I highly recommend Hall Accounting. Five stars!”

- Blake Kimzey

Still interested in understanding the accounting basics you need in your startup? Keep reading.

Analysis of financial transactions

Categorizing financial transactions as income, expenses, assets, liabilities, and capital and allocating them to the correct accounts in a general ledger system.

Journal entries

The manual or automated entry of receipts, bills, and sales invoices using journal entries. Changes to these accounts are reflected as debits and credits. This is known as the double-entry bookkeeping method.

Generating and processing sales invoices

The ability to generate an invoice for a client that lists the products or services that the client has purchased from the company. Clients then pay the invoices by a certain date, and this money is used for operating expenses.

Keeping track of operating expenses

Image illustrating tracking operating expenses for startups.

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The company’s financial position is dictated by how much income it generates vs. how much it spends to keep running. These are called operating expenses and can account for a large deficit in net profit if they are not properly managed.

Generating a trial balance

A trial balance tells you whether journal entries have been correctly recorded and posted in ledger accounts.

Reconciliation of bank statements

Adhering to GAAP requires you to open a separate bank account for business transactions. A business owner may have a personal bank account, but this not be used for business finances and vice versa. The business bank account will provide information for reconciliation to the ledger accounts.

Regular reconciliation of the bank statement to the cash balance in the ledger is an important step in producing accurate financial statements. This should be done weekly, biweekly, or monthly.

Tax Returns

Having an organized system for keeping track of documents required for your tax return will save you from a last-minute scramble.

All document collection, storage, and retrieval should be something that you take seriously as a startup. The chances that you’ll be looking for supporting documentation to give to financial institutions, investors, and the Internal Revenue Service are high. A cloud-based accounting software would be the perfect solution to this problem.

Closing accounts

Most startups have revenue and expense bank accounts (temporary accounts). At the end of an accounting period, these accounts are closed by reducing them to zero. A financial statement called the profit and loss statement can then be generated to show net profit or loss.

Accounting software

The software you use is very important. It must handle the accounting method you use, as well as accommodate transactions that are specific to your business. Automated accounting software is a welcome addition if you have a large number of invoices you need to capture manually and also if you have many expense claims and receipts you need to process.

At this point, most business owners begin to debate whether they need an accountant or if they can put simple processes in place themselves. Here, we give our honest opinion about why you should seriously consider accounting services.

Do you need an accountant for a startup?

In short, the answer is yes. Why? Here are 10 good reasons.

accounting professionals having a conversation

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1. Don’t mess with the IRS

As a startup, the government requires that you account for business transactions in a very specific way. The IRS does not mess around when it comes to financial reporting for businesses. A CPA has the knowledge and the skills to guide you through these requirements.

2. You need help picking the right accounting software

You can’t just pick any software, as we mentioned. It will all depend on what you need to account for. An accountant can see through the piles of documentation and your financial goals and provide suggestions that will work.

3. Your investors will expect you to have one

If you’re going to have investors, then you will have to account for all your expenses. They will consider it their right to know what you are doing with their money. Everyone in the world of finance does things the same way. It doesn’t matter where in the world your investor is, they will require you to stick to accepted accounting norms and practices. This ensures that the information they are basing their investment decisions on isn’t a bunch of mambo jumbo.

4. You need someone who can read financial statements

That may be you. Great. If not, you need an accountant.

5. Startups aren’t based on a gentleman’s agreement

Good for doing business in the 1800s. Not so good in the 21st century. You won’t get other people’s money without proof that you know what you’re doing. An accountant provides you with the language to communicate to investors, bankers, and partners that you can handle the company’s financial health.

6. Managing accounts receivable and accounts payable is a complex process

If you’re moving goods, you’ll need to manage your cash flow. This is a delicate balance of being able to buy materials for the production of your goods and receiving money for the goods you have already sold.

For instance, if you need to move $1 of goods that require 50 cents of materials, then you need to have that money in the bank. You may require bank financing to do this. That will require you to have financial statements.

If you give customers ‘time’ to pay, then you will need the money in the bank to cover your costs while you wait for payment.

An accountant will strategically manage this process and fine-tune it. They will credit risks and manage debt collection, ensuring you have a healthy cash flow to continue business activities.

7. You must pay tax

If you don’t do proper financial accounting, how are you going to file your corporate taxes correctly at year-end? Also, you need to pay ‘sales tax’ on goods sold. If you get this wrong, you WILL be fined after you are heavily audited. Just to get to the audit you’ll have to hire a CPA to sort out the mess and that will cost you thousands by the time it’s resolved. Our advice is to just get an accountant now.

8. You need to do payroll

Employee salaries are not something you can give to the finance clerk or the receptionist. Yes, it’s happened. Errors on the payroll are costly to fix, not to mention the problems you can cause with tax withholding. An accountant can set up your payroll system so the correct salaries, commissions, benefits, and deductions are put through monthly.

9. You don’t want to upset your customers, suppliers, and investors

As a legitimate business entity, you want to behave like one. The more convinced everyone is that you can meet your financial obligations, the happier they will be. If they’re happy, you’ll be around to tell the tale. An accounting firm will help you manage all the financial processes that drive you crazy while you’re trying to get your product or service to market.

10. You need expertise you can count on at critical phases in your business

This is also a pretty good reason to hire a bookkeeper or an accountant. When you’ve got your hands full of other things, you could do with some help. An accounting firm like Hall Accounting Company will provide you with the expertise of a CFO when you need it. When you don’t, you can scale down on the services. That’s a huge advantage over having a full-time accountant or CFO when you’re just getting started.

A strong business needs a strong foundation

As we’ve explored in this article, establishing a robust accounting framework is not just beneficial but essential for establishing a strong foundation for a successful enterprise.

This foundation supports not only day-to-day operations but also facilitates strategic planning, investor relations, and long-term growth.

Accounting can be viewed as the less exciting and innovative side of entrepreneurship. However successful business owners will vouch for it 100% of the time. One ‘serial entrepreneur commented on Quora:

“...Accounting should be mandatory for anybody in business, more so if you will be an entrepreneur. Being skilled in business means being able to look at a balance sheet and being able to tell in one glance how management "cooked the meal." You can enjoy a meal without knowing how it’s cooked, but would you invest in the restaurant without proper accounting?”

Be proactive about setting up a decent accounting process. This will give your investors the right impression about how you conduct business, and they will be more likely to give you funds when they see how you’re going to handle the funds.

As you continue pushing the boundaries of what’s possible, outsourcing this critical function to experts like Hall Accounting Company not only ensures that your startup's financial processes are in capable hands but also allows you to focus on what you do best: innovating and growing your business.


1. "Shark Tank USA" is a reality TV show where aspiring entrepreneurs pitch their business ideas to a panel of wealthy investors, known as "sharks," in hopes of securing investment deals.