Accounting for Startup Businesses

Small Business Accounting

Accounting is a critical component of any business.  Small business accounting has special importance in a startup.

Accounting serves a number of key purposes:

• It is a calculator for measuring your startup’s progress, costs, opportunities and problems.
• It is a requirement for participants which might include investors, government and your organization.
• Finally, it serves as a check and balance to make certain everything is recorded and understandable.

To give you a simple idea on the importance of small business accounting, the following is my worst example of a simple situation where accounting was improperly applied.  A company was providing free shipping throughout the continental U.S.  The company mistakenly had a $1,500 shipping bill to Hawaii for an $800 order, and did not realize the problem for two months.  On a more specific level, accounting can help a startup in numerous ways:

• Develop a financial business plan which could project 3-5 years out and help to outline the course a company intends to take to grow its revenue.
• Decide which type of entity is most suitable for the business:
  • sole proprietorship;
  • partnership;
  • corporation;
  • S corporation;
  • limited liability company.
• Help in the formation of the entity by filing applicable elections with federal and state agencies:
  • obtain the employer identification number with the IRS;
  • application for a sales tax certificate of authority; and
  • setup payroll and payroll related tax deductions.
• Guidance with initial startup financing.
• Setting up business accounts:
  • checking account;
  • line of credit;
  • credit cards.
• Preparation of an initial budget and forecast for the next several years.
• Initial set-up of accounting books and records including establishment of a chart of accounts.
• Setting up on-line payroll services, if applicable.

What kind of accounting services do start-up businesses need?

If you are an experienced business person with an extensive accounting background maybe none.  At a minimum, make sure to buy software small business accounting and/or tax programs such as QuickBooks, Peachtree, TurboTax, etc.  Be certain to understand their instructions and make sure to execute them.  These small business accounting programs also have a number of great options.  For example, they include budgeting, which you should review and consider.  But, like many entrepreneurs you might not have or might not have interest in using your financial acumen and are creative and/or marketing oriented.  More importantly, you might hate numbers and accounting.  If you are one of these people, be sure to hire an accountant.  They can provide objectivity, help balance your ideas, and do the things you neither enjoy nor are good at.  I cannot tell you how many plans I see that stop before the financials because of a lack of financial skills or interest.

Hiring an Accountant

Hiring an accountant is not complicated.  In general, during the early stages of your startup you need hands on assistance with fairly simple tasks rather than a CPA who will provide expensive advice on topics that are not significant.  You need to ensure your accountant/s care about you and are willing to explain the justification for their recommendations.  Make sure to try and look within the industry when trying to find an accountant.  Ask associates for recommendations, get references and be sure to get a clear proposal on costs and deliverables.  Be sure you meet the person who will actually do your accounting related work rather than some senior partner who may do summary reviews and determine how much to charge you.

Key Accounting Issues

There are a few key small business accounting issues you should review with an accountant while starting your business:

• Will your staff be contract or employee or a combination?
  • The decision should be based on the nature of services, weekly hours, and your relationship with the individuals. The government may require classifying the person as an employee which will require more paperwork, deductions and taxes.
• Will you be on a cash or accrual basis for tax reporting purposes and are there significant differences?
• What type of organization is your business (LLC, sole proprietorship, etc.) and what are the tax reporting requirements and consequences?
• Keep your business records separate from your personal records.
• Inventory costs are not expenses until they are sold but can require investments and cash requirements.
• Capital costs (buildings and equipment) are expensed or depreciated over a period of time but again may require upfront investments. Make sure your accountant advises the best approach.
• Startup expenses are generally expensed for tax purposes but need to be segmented to determine the actual potential income and loss of the business. Be sure the accountant advises on the proper approach.
• Ensure that travel and entertainment expenses are reasonable and within government guidelines for tax deduction purposes.

Summary

Do not let small business accounting issues disrupt your business.  If you need help, get it.  Whatever approach you take, make sure you have proper recordkeeping and recording to help you manage the business and meet any outside requirements.

Where to find more information:

The IRS has an extensive website, www.irs.gov.  From there you can find any form and its instructions.

Contact local accounting and CPA associations.