The business environment today is conducive for startups. Yet, the failure rate of start-ups is alarmingly high at almost 90 per cent. Approximately 38% of startups fail because of monetary issues or lack of funds. It implies accounting and financial management play a substantial role in the sustainability of startups.
Startup companies rarely have a precedent concerning the product or solution they market. It is because they address specific issues or problems. There has to be extensive research to zero in on the most viable product (MVP), which is the cornerstone of developing the business idea into a scalable business model. Every stage of startup funding contributes to its success and growth.
Startup accounting or innovative accounting has gained popularity over time. To quote-unquote the famous American entrepreneur and author, Eric Ries, on startup accounting, ‘the focus must be on the boring stuff like how to measure progress, how to set up milestones, and how to prioritize work.’ These are possible through accounting. So, it is but natural to list the accounting benefits before probing into the strategies that work for startups.
Accounting is not just keeping the records but tracking them to make strategic decisions. For a better understanding, accounting is like an electrocardiograph (ECG) machine. Like the variations in ECG reading shows concerns about health, accounting acts as an indicator of business' health. The core benefits of accounting in startups are as follows:
The famous management guru, Peter Drucker, said, "the problem is not the absence of knowing what to do, but the absence of doing it." It is one thing to know what works for a business and another to know how to do it right. Here are some accounting tips and strategies that work well for startups.
Every startup is unique. There will be new challenges and threats, along with new opportunities. There is no one-size-fits-all solution for all hurdles. Below are some common accounting tips and strategies to help a startup with better financial management.
The initial funding of many startups is usually from personal finances. Many do not separate the business account from the personal one. It is mainly due to a lack of accounting experience. There are multiple advantages in separating the business account. The foremost is the easiness to track the expenses. Also, the integrity of the business remains intact in front of future investors. So, it is prudent to maintain a dedicated, separate account for the business right from the start.
The accounting system is the process of integrated procedures and controls that record, process, summarise and generate reports to aid business decision making. Accounting is not a skill set favoured by all. An inexperienced startup owner, probably, may make grave accounting mistakes. The accounting system helps to avoid such errors. The accounting system is expensive to install but is available as an outsourced service. It helps to have an accounting system that aids the business as it grows.
As per Dave Ramsey, a renowned finance personality, "a budget is to tell your money where to go instead of wondering where it went." Every business knows the importance of budgeting for effective financial management. The tip is to have detailed budgeting on every accounting head. In this way, there will be an amount kept aside for taxation, investment, and expenses. Also, it is possible to have better financial control.
Taxation and investment are two heads that need special treatment. One ensures stability, and the other provides for scalability. Missing the deadline for taxes is expensive for businesses. A good accounting strategy will be to set multiple reminders for the tax deadlines. Similarly, it is crucial to know the different investment opportunities for a startup's growth.
Generally, during the initial stage, startups face financial and human resources crunch. It is common for one person to handle multiple duties. As the business grows, it is better to segregate the duties for better financial control and efficiency. In this way, it is possible to curtail any malpractices that will hinder the business growth.
Every startup must compulsorily have a contingency management system. Most startups fail because of a lack of funds. It is sensible to allocate a certain amount as a reserve for such untoward situations. After all, it is common knowledge to save for a rainy day.
Accounting tasks are time-bound in nature. For the accounting system to generate reports to aid the decision-making, timely recording of the entries is a must. Reconciliations ensure that the transactions have a supporting document. It is an essential task but may have a longer time frame to complete. Effective financial management of a startup depends on the timely completion of accounting tasks.
The financial statements reveal the actual status of the business through numbers. The balance sheet, profit and loss or income statement, cash flow statement conveys the financial health of any business.
The above is not an exhaustive list of tips and strategies. It underlines that those good practices have a substantial influence on financial management. The growing pains of a startup are exceptional. The accounting culture and discipline help ease this stress and steer a startup on its path to success. The right partnership with the experts will help the startup find its foothold.
The team at Tickmarks is proud to be of assistance to many successful entrepreneurs and startups. They have always tried to understand the challenges faced by new businesses and handhold them with tailor-made accounting solutions.
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