Accounting for Small Businesses and Start-up Ventures

Accounting Lifecycle and Evolution

The accounting function is critically important for any small business or startup venture. We discuss how you may want to think about setting up your accounting and how things change as you grow.

If you are starting a business for the first time, you may be wondering how to handle accounting.

In a simple startup venture with no employees, the accounting needs are very simple. But things will need to get more sophisticated as you grow.

Accounting Systems for New Businesses

When you first start out, with a simple business, you don't even need to do accrual accounting, which is a bit of a pain. You can opt to be taxed on a cash basis, and you can run all of your accounting on a cash basis.

With no outside investors to report to and no need to take on any debt, you don't even need to prepare the usual accounting statements, which include a balance sheet, a profit and loss or income statement, and a cash flow statement.

Just open a business bank account and maintain a spreadsheet that shows what comes in and what goes out. Every check that comes in is a row in the spreadsheet, every expense that goes out of the account is a row in the spreadsheet. You keep a running tally of your bank balance in one column. It's as simple as that.

This is the accounting system for many new businesses. You can tell whether your bank balance is growing or shrinking pretty easily. If you need a little bit more visibility into what the future holds, you can add your receivables and payables to the spreadsheet, which lets you do "what-if" analysis and decide what you can pay when and who you need to chase down to get money coming into the business checking account.

For bills you pay, you can put it on a credit card, use your bank's bill payment service, or do it the old-fashioned way and write a check. If you use a credit card, we recommend using one row per expense in your spreadsheet.

You'll also want to include a column that indicates if an expense is for meals and entertainment, as these expenses cannot not be fully deducted come tax time. In general, you'll want to classify your income and expenses in some way.

Creating invoices can also be done with a spreadsheet invoice template. You just enter the customer information, add one to the invoice number, put in the line items and the dollar values, save to a PDF, email it to your customer, and you're done.

You still need to get your taxes done, but that can be done without having a bookkeeper or accountant whom you pay regularly. You can either do it yourself or pay someone to do it. Giving them your spreadsheet with your income and expense should give them everything they need to do to file your taxes.

We're not saying you absolutely shouldn't spend more on your accounting infrastructure when you first start a company, but just that using spreadsheets is a way to keep your costs down and keep things simple, with the added benefit that you will be very close to your financial numbers and they will be very easy to understand.

Accounting Systems for a Growing Business

As your company grows, many things happen. You start to get so busy that even something as simple as creating an invoice and getting it out to a customer doesn't get done on time. You may hire some employees. You might decide to get a bank loan.

None of these things necessarily require you to switch from cash accounting to accrual accounting. The bank doesn't care how you do your accounting, and they will just want to look at your tax returns to see how the business is doing.

But this is the stage where you may want to hire a part-time or full-time bookkeeper, and you might want to consider investing in an inexpensive accounting system.

The bookkeeper can advise you on which system to get, and the most popular option these days is Quickbooks Online. The bookkeeper will do all the setup work for you, and, on a monthly basis, they will send out invoices, record payables, and send out checks to your vendors.

You don't need a full-time accountant and you certainly don't need an accounting team. For most early-stage ventures, a part-time resource is fine.

If accounting isn't your strength, ask your accountant or bookkeeper to orient you to the accounting systems and the various reports it generates. As your business grows, accounting and finance will become more important, so it's good to continue to up your understanding of accounting and finance basics.

Some of you might be wondering what the difference is between using a bookkeeper and using an accountant. Bookkeepers are less expensive, may have less training and fewer credentials than an accountant. That's really the only difference.

We grew a business from $300,000 to $15 million in annual revenues by starting with a part-time bookkeeper who eventually went full-time with us and then upped her skills to the point where she now calls herself an accountant and would likely be insulted if we referred to her as a bookkeeper. We followed the same evolution of our accounting group that is outlined in this article, so it worked for us.

The other big turning point for a growing business is hiring employees. Hopefully, you are just hiring them in one state. For this, we recommend a payroll service, specifically an online payroll service. It's just a better approach than DIY or having your accountant do everything.

So, as you grow, you will want your bookkeeper or accountant to take on additional responsibilities, such as keeping all your business records organized, making sure quarterly tax estimates are filed on time, creating an annual business budget, getting payroll ready via the payroll service, filing annual reports for the company and other administrative tasks, in addition to all their basic accounting functions.

The Next State of Your Venture's Accounting Evolution and Lifecycle

Eventually, you need get big enough that you need to choose an accounting firm and engage them.

You'll also need to convert to accrual accounting if you are large enough that you are considering selling your business. Most buyers will require you to have audited financials, based on accrual accounting.

While some would argue that even before you get big, you should hire an accounting firm, use proper accounting software and run the business on an accrual accounting basis. There are strong arguments for that, but it's not essential.

You can hire an accounting firm to convert your books from cash basis to accrual basis, making sure you are in compliance with accounting standards, and it will run you about $25,000. By the time you are that big, and with an exit transaction ahead of you, you will be happy to pay the money.

With a much larger company, you will certainly have converted your part-time accountant or bookkeeper to full-time, and you may even have accounting and finance departments, with multiple employees.

At some point, you will also outgrow entry-level accounting solutions like Quickbooks, although you'd be surprised at some of the very large businesses that run on Quickbooks. You'll need an accounting system that can slice and dice data better.

But that's all in the future. For now, assuming you are just getting started, a spreadsheet will do.

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