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The Basics of Startup Accounting and Finance

basics of accounting

In this blog post, we’ll discuss the basics of startup accounting and finance and why it’s relevant for any startup founder. Yesterday, we hold a Zoom session on the same topic and had over 35 enthusiastic startup founders joining the show and sharing their thoughts and concerns with us.

The Zoom session was hosted by Anshuman Sinha, an angel investor and co-founder of Startup Steroid, and we also had Nishank Bani, Managing Partner of Fair & Good CFO Advisors as our guest speaker.

After a brief introductory session, a Q&A round started, and startup founders asked their queries and concerns.  Our mentor Anshuman Sinha launched the Q&A session by asking What is one of the biggest benefits of becoming a C Corp and not an LLC

While many of the attendees tried to answer it, the real reason why C-Corp is the most preferred form of business entity for startup founders is that there’s a provision of $10 million tax exemptions for investors who’ve at least held their shares in the company for five years. Thus, shareholders who have held their stock for 5 years may be able to exclude their gain from federal tax. 

“For any reason if your startup was not launched in the form of a C-Corp and you selected some other form of business, your investors may ask you to change your business entity and relaunch it as C-Corp. Then your real startup journey will start. — Anshuman Sinha”

A startup founder should have a clear concept and understanding of basic accounting terms like Cash Burn, ARR, Burn Rate, Runway, and others. 

Nishank also chimed in, adding his perspective and sharing his knowledge of basic accounting terms and concepts that every startup founder is expected to know. 

The session also highlighted some other interesting aspects of startup accounting and business formation. The session touched upon relevant topics like how to make your startup global, how you can launch your startup in a country where you are not residing, and the types of software and accounting tools that you must use. Overall, it was an insightful Zoom session, and startup founders got an opportunity to ask their questions and get their doubts cleared by our experts. 

Basics of Startup Book Keeping and Accounting: Key Takeaways

Accounting and bookkeeping are critical for startups to maintain accurate financial records, understand their financial health, and secure funding from investors.

Choosing a Business Entity: Choosing the right business entity is crucial, impacting tax obligations, liability, and investor relations. C Corp is often the preferred choice for investors.

Choosing an Accounting Method: Startups must decide between cash basis accounting and accrual basis accounting, maintaining consistency in their chosen method. On a cash-basis accounting process, income and expenses are tracked when they are received or paid. While under accrual basis accounting, income, and expenses are recognized when they are earned or accrued. You can choose either of them but you have to be consistent in it. You can switch from one accounting basis to another. 

Collect Essential Documents: As a startup, you should always have all essential financial documents ready, preferably at the end of each quarter. Keeping essential financial documents up to date, such as income proofs, expense vouchers, and bank statements, is advisable on a quarterly basis.

Determine Net Profit Margin Ratio: Analyzing the net profit margin ratio provides insights into expenditure patterns and expected profits. Cost-cutting measures may be necessary if the net profit margin is low.

Simplifying accounting and bookkeeping processes can be achieved through integration with accounting software tools like QuickBooks, Clockify, Freshbooks, Zoho Books, Xero, and Gusto Payroll.

Payroll Calculation: Payroll calculation is crucial for any firm. Starting from managing employee records to maintaining their attendance and timesheet, a payroll software app can help. 

Efficient payroll calculation is crucial, and using a payroll software app can help manage employee records, attendance, and time sheets effectively.

Key Accounting Terminologies As Explained By Our Experts

Burn Rate: Burn rate refers to the rate at which a company or project consumes its available cash or resources over a specific period of time. It is typically used to measure the rate of spending or negative cash flow of a startup or new venture. Burn rate is often expressed as a monthly or weekly figure, indicating the amount of money a company is spending on operating expenses, research and development, marketing, salaries, and other costs.

ARR: Annual Recurring Revenue or ARR is a metric used to measure the predictable and recurring revenue generated by a business from its subscription-based or recurring revenue model over a 12-month period.

Balance Sheet: A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It presents a summary of a company’s assets, liabilities, and shareholders’ equity. The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity.

In Conclusion

Startup accounting plays a vital role in the success and longevity of a new venture. By maintaining accurate financial records, startups gain valuable insights into their financial health, cash flow, and profitability. Effective accounting practices help in making informed business decisions, securing funding from investors or lenders, complying with legal and tax obligations, and ensuring transparency and accountability. 

You are not alone in this startup journey of yours. Join our weekly online Startup meetups to participate in our interactive Zoom session and share your experience and talk with experts. Check out the Zoom calendar of our upcoming meets.

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