The success of every business is based on the bottom line and startups are no exception. Your startup, your idea, will be judged on how well you can translate it into financials. A good accounting foundation allows you to examine your finances and identify risks and opportunities for growth.
If you have the right accounting structures in place, you’re in a better position to know how the company is performing and where you’re heading. Not having a solid accounting foundation is like trying to fly a plane with no navigation system. You’re in the air flying but with no idea of which direction you’re heading or if you’re on the right path.
Here are five simple tips that can help startups get the basics right, as presented to the UNSW Founders pre-accelerator program on “Accounting 101”.
- It all starts with a funding strategy
Most founders find it hard to know which finances and funding sources to prioritise or which approach will give them the best advantage – this can be a major stumbling block. There are a lot of factors to consider when finding the right finance path for your startup but ultimately, it’s about demonstrating how you will develop and manage finances and how the financial projections align to the business’s longterm goals.
Tip: Before developing your funding strategy, know the risks and advantages of each and how it fits with your longterm growth plans. For more information click here.
- Know the difference between cash flow and profit
While profit is an indicator of how your startup is performing, it’s not an accurate prediction of whether you can keep the business running. Cash flow considers your overall cash inflows (sales, cash injections etc.) minus the outgoings at any point in time. Keeping a close eye on cash flow will help you understand whether there is enough cash to keep the business going.
Tip: Schedule a cash flow analysis at least once a month to help predict when cash might be tight and where you need to redistribute expenses. A positive cash flow will enable your startup to grow and increase profits.
- Be realistic with your budget
This is about getting the balance right and setting boundaries. Be realistic about projected sales and margins and consider the impact from growing business operations, rising costs or new competitors. You also need to recognise pitfalls and how you can prepare for them – no startup is flawless. The three items of every startup budget are initial costs, fixed costs and variable costs.
Tip: You can still set aggressive growth targets, but you need to know your breakeven point. This will be critical when investors want to visualise their return or to convince lenders.
- Your cash flow determines your cash runway
Running out of money is one of the most common reasons a startup fails. You need to know the ins and outs of your cash flow and how long your ‘runway’ is. Being smart about tracking your money has a number of benefits – it controls spending, helps to prioritise expenses and prepares a solid cash reserve.
Tip: Make it easy for investors to see the ROI. Clear financials help to show your cash position, burn rate and when cash will run out. Investors want to see that you can keep control over the business operations and the business’ finances.
- Know when to see an accountant
It’s a common misunderstanding that bookkeeping and accounting are the same – they’re not. While bookkeeping tracks and prepares all financial records, i.e. income and expenses, accounting manages the strategic tax planning, financial analysis and forecasting and ensures your budget aligns to future business goals.
Tip: You may want to consider hiring a virtual CFO to offer expert guidance with crucial decisions as your startup grows. They often have strong connections and large professional networks that could also help your business.
Founders don’t need to know all the details of accounting but it’s important to have a plan and a good accounting system. The best time to set up your financial structure is in the early stages of the business. You don’t want to run into trouble down the track that will require you to redo or correct work. This will end up costing you more money, more time and could even have a negative impact on your brand with clients, customers or investors.
You’re better in most cases to outsource your bookkeeping and accounting services to ensure you get the level of support your company needs at each stage. A smart financial strategy will grow with your business.