Accounting for Startups

accounting for startupsFirst things first. Every startup needs an accountant. Or an accounting firm. Either way, no matter how small you are, if there is any money involved, you’ll need someone to handle the books. Quickbooks? Maybe. But better to be in safe hands. (Assuming you plan to make millions, or hopefully billions).

Why Do Startups Need Accounting?

No startup is too small for an accountant. Though one can argue that in the very early stages when there is no monetization or investment (or investments less than $200,000), that an accountant is unnecessary. And that is true in that moment. However, the main issue is that the minute that the startup experiences growth (hopefully rapid), all financial aspects become complex very quickly. Startups which begin their accounting early on are rewarded as they grow.

Don’t believe me? No problem. In response, I bring to you a study conducted by accounting Professor George Foster, of Stanford University, which found strong evidence that startups that began their accounting early on were more likely to succeed due to a variety of factors.

“Control systems are critical for providing executives with data they can use for their managerial decision making. We can’t prove whether growth pushes the adoption of management systems, or whether the adoption of management systems pushes growth, but clearly both are occurring. Larger companies are more complex and need the discipline that such systems can bring. At the same time, it’s generally true that managers of early-stage companies are unlikely to predict accurately exactly when growth will occur. Therefore, because significant growth does tend to happen within a year of their establishing management accounting systems, it’s likely that these systems anticipate and fuel growth, as well.”

In short, companies that hire accountants experience faster growth early on. Whether it’s causational or correlation is a separate issue, but the takeaway is that once accountants are on board, things are more likely to get lost in the fray, and might even lead to more investments from VC’s, who appreciate the professional nature of having an accountant as a startup.

(PS if you haven’t yet seen them, we have an awesome new line of the best startup t shirts available with cool logos and startup slogans).

Venture Capital Firms Are Definitely in Favor of Accounting for Startups

Foster’s study found evidence that venture capital firms absolutely preferred that the startups that they invested in had accountants working for them.

“Often managers want to be sure that the funding will not be abused, so they are eager to set up controls as soon as they can. VCs also understand the importance of good financial management and encourage the use of these systems. More experienced executives recognize the importance of formalized decision-making mechanisms and are quicker to implement them…”

Is Excel Sufficient for Startup Accounting Purposes? Quickbooks?

The short answer is: yes, at first. But as you grow your startup, you will quickly grow out of Excel. Excel becomes a much weaker program as your startup grows, as it is unable to handle growth or complexities. A much better option is to use software that is made for this. QuickBooks, Peachtree and Xero are all great options for any startup to use for accounting. The sooner you move on from Excel, the better off you’ll be long term.

Cloud Accounting?

Moving data to the cloud opens up a bevy of options. If you can’t afford a full time CFO, you can hire an accountant part time, and he can access all of the data on the cloud at any time. By storing financial and accounting data on the cloud, you can always access it, and provide access to anyone who needs (CEO, VC, etc). Potential investors will certainly appreciate the ease of access to data that they may need, as well as enjoy the simplicity of many of the cloud-based accounting services.

And, of course, if you can’t afford a full time accountant, then cloud based accounting is the next best and affordable option out there on the market today. Of course, as profit rolls in, your ability to hire will hopefully increase…

Are You Turning a Profit?

There are 2 aspects in which one can ascertain as to whether they are turning a profit:

  • Gross Margin: At base, this is a company’s total revenue minus total costs that were directly involved in producing the service/product/core business, divived by revenue. This number essentially shows what percentage of total sales is remaning after your immediate and direct expenditures and costs. It is a great shortcut metric for determining overall efficiency, which can indeed be a vague metric. This number provides insight and assistance on whether you need to adjust your service or products price or reduce/raise your volume of production.
  • Net Margin: A company’s net profit measured against its sales, including all expenses that were doled out at one point or another. Essentially, net margin tells you how much of each dollar (from sales) your company is keeping in its bank account after all expenses are divvied out.

Worldwide Startup Accounting Trends

There is no hard data as to the enlistment of accountants by startup companies. George Foster found in his study that Germans have a greater propensity for establishing (accounting) systems at earlier stages than US companies.

Ironically, there are plenty of accounting startups out there. In fact, there are 452 accounting-related startups, with 480 total investors at an average of a $3.8 million valuation.

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