When I meet with various startups, it is evident that these startup founders are not accountants. This is a very good thing, by the way. Founders create businesses because they have a passion or expertise in providing particular goods or services to market. They see areas where innovation is lacking and their idea can revolutionize their niche market. Or they simply know how to do one thing really well and they believe that one thing can be successful in the market. However, having a revolutionary innovation or knowing one particular skill needs to be coupled with expertise in understanding cash flows or analyzing profitability of a business. Too often startups neglect building an accounting process into their business until profits go downhill or cash slowly drains away. Setting up an accounting process for your startup is critical to the long term success of your business.
Setting up an accounting process is important because it provides organization. An accounting process allows your business to see at a glance where it stands and how it is performing financially. While you may be able to see some of that because there are long lines out your door or you are constantly busy, you won’t know where you stand unless you setup an accounting process to gain that clarity. With an accounting process in place, you can see how you are spending money, how profitable your business is, and how your cash flows are flowing. Too often startups and small businesses struggle because they are not watching expenses and spend more than they are bringing in. With an accounting process in place, you can see where you are spending money and make adjustments.
An accounting process is also important because it allows your business to look forward. Startups or small businesses that that don’t have an accounting process in place find themselves trapped by past actions or constantly worried about having enough money to pay bills. An accounting process allows the business to understand their past activity and where they currently stand in order to plan for the future. They can see trends in their revenues and expenses make adjustment based on past performance. They can be agile and pivot to future successes.
So the question is how do you setup an accounting process? First, you need to get a handle on what is currently happening financially in your business. If you are not able to, then hire a CPA to assist you in getting your finances under control. Once you do that (or hire someone to do that), then you need to put in place an accounting system (like Xero) to help you organize your financial information. Your CPA can help you do that by creating charts of accounts and getting your historical information in the system so you can utilize that information to your advantage. Then, once you have an accounting system setup, you (or your CPA) can record all transactions into the system and get financial reports as an output to allow you to make decisions that make the most sense for your business. You can use those reports to understand your cash flows or where you need to trim expenses to best position your business to succeed. Setting up an accounting system and ignoring it won’t make your problems go away.
Setting up an accounting system is important for your startup as it will allow you to see how your business is doing and allow you to make decisions to strategically position your business for growth. Failing to have an accounting process for your startup is accounting for your startup to fail.