Accounting for Startups

As Founders, we may not know all there is to know about our business yet, but one thing is for sure — there’s always going to be accounting to do. So let’s break it down as simply as possible — it’s time to learn WTF accounting is!

October 3rd, 2022   |    By: Wil Schroter

While we may not know all there is to know about our business yet, there’s still going to be some good old-fashioned accounting to do. So let’s break out those green visors and add machines — it’s time to learn WTF accounting is!

At its core, in order to be an accountant we need to be able to collect all the sources of income and expenses and translate those into a spreadsheet. When the numbers are small, this is so easy to do we’ll wonder why people get paid to do it. When they get large, we’ll wonder why anyone is willing to do this for any amount of money ever!

Whatever our business structure our accounting process will follow generally accepted accounting principles.

Can any Founder do Accounting for Startups?

Yes! Because accounting for startups in the early days just isn't that complicated yet. Even if we've never seen any financial statements or worked with accounting software it's not a problem because we have so few financial transactions.

We can build a basic accounting system to track our business transactions (think bank statements and credit card statements) using a simple spreadsheet.

What we need to dispel are the myths you probably have in your head of what accounting for startups is and is not. Short version - it's not hard.

"But I don't know Accrual Accounting from a Cash Flow Statement!"

Don't worry about any of this right now. What matters to a business owner in the first year or two is that we have basic financial records that provide a solid indicator of the financial health of our own business — that's it.

When we think about complicated financial statements tax returns, or cash flow statements, most of that we'll farm out to someone with real business accounting experience. More on that later.

Just know that in the early days absolutely anyone can tackle accounting for startups.

I've been a Startup Accounting CFO for 20 Years — and you're smarter than me

I've been a startup Founder for 30 years (read: I'm old) and a startup CFO for 20 years. You may think I must have been some sort of math wizard who just happened to start doing accounting. You would be hilariously wrong.

I never made it past freshman algebra in High School (despite 3 years of Summer school) and I never made it past "Math 050" (remedial math) in college. There was no Good Will Hunting moment for me where it turned out the janitor was incredible at complex math.

Startup Accounting changes when it's Your Money

Then something really interesting started happening. As I was building startups, I realized that our financial statements (and the math behind them) had a very different purpose - it was MY money in those business transactions.

I realized that my success was directly tied to understanding the basics of our accounting. Since then I have been the Founder, CEO, and the CFO of my last 8 startups. At Startups.com we have over 200 people (and financial staff) but I still review every single one of our business transactions and our financial statements.

Startup Accounting is a Superpower

For Founders, understanding startup accounting is a massive superpower. It allows us to understand every aspect of the business simultaneously. So when we make a marketing decision (spend more!) we instantly know how that might affect our salary budget for hiring more engineers (so expensive!).

This purview of knowing how every one of our financial transactions affects the other isn't just accounting for startups — it's being a better Foundr

How Financial Statements get Built at a Startup

Our financial accounting will require basic bookkeeping for creating financial statements no matter the business model.

1. We add up all the money we earned

We hop into our credit card processor’s website and look to find out how much gross revenue we collected. We then look at our bank statement to see where we’ve deposited checks or cash or other forms of credits (income) that came our way. We put that into a field on our spreadsheet (so kindly provided by the charming folks of Startups.com!)

2. We add up all the expenses we incurred

We look at our bank statements, credit cards, and anywhere else money would have been transacted (which could include personal receipts). We then populate our handy spreadsheet with the expenses by simply putting the name and the value into each row of a spreadsheet.

If our accounts payable is in a separate bank account that's OK - we gathering ALL our financial information.

This includes things like salary costs, payroll taxes, rent, marketing costs, and our Starbucks bill. Wow, that’s a nasty Starbucks bill.

3. We find out if we made money

Once all of our income and expenses are loaded in, the spreadsheet, through the wonders of code and math, we’re told whether we made or lost money.

Typically we find out we lost money, we cry, and we go back to work. That’s how startups work. Don’t blame the spreadsheet.

Accounting for startups: our financial data may tell us we lost money, but our business bank account at zero kinda says that too!

That’s it. That’s literally how startup accounting works. If we can put numbers into a field in a spreadsheet (especially one set up to do some math for us – like what we provide) then holy cow — we’re now a startup accountant!

It Gets More Complicated – But Not until Later

Does startup finance get more complicated later? Yes. A bunch of complicated accounting may eventually come upon us — probably a year or two from now. We’ll start dealing with far more complicated versions of taxes, health insurance, receivables, and cash flow.

For now, we don’t have to worry about any of that so we’re going to start with an accounting system that’s very easy to understand and manage.

We may need help with our balance sheet or accounting basics like financial reports or cash basis accounting.

Where to Call in More Help

Finance is a big topic, so it’s safe to say we can’t cover every possible facet of it. That said, there are a few areas of finance for that we may require a bit more support. Let’s talk about what they are and where to seek out good guidance.

Payroll

There’s very little upside in trying to figure out payroll on our own. Instead, for less than $50 per month, we can outsource all the complexity to an online provider like Gusto.com (that’s who we use).

Dealing with withholding taxes, employer payroll taxes, creating W2s, and other issues is a huge waste of time. Whether we’re paying 1099 or W2, absolutely outsource this.

Taxes

A startup tends to have very simple taxes. So long as we’re doing a good job of tracking all of our income and expenses, handing our Income Statement over to a qualified accountant should make handling our taxes easy.

Many accountnig services and accounting firms can handle more complex financial reporting come tax season.

The cost of a tax accountant goes up exponentially when clients show up and say “I have no idea what my income and expenses were – please figure that out.” If we show up with a pretty clean income statement, our cost goes way down.

CPA Review

No matter how good we feel about learning finance, there’s almost always this voice in the back of our minds that is saying “Oh man I probably messed something up!” That’s OK.

If we do most of the heavy lifting on our own, such as collecting all of our revenue and expense items and then doing our best to categorize them, that’s most of what would cost us a fortune with an outside CPA.

Even venture backed startups use an accounting professional or professional accounting to manage tax liabilities.

If we want, we can have a CPA review what we have done – likely on a quarterly or annual basis – to simply do a spot check on our work and make sure we didn’t miss anything. In some cases, this may sync with the same person who does our taxes. So don’t worry about getting an extra pair of eyes on this!

What’s nice about what we’re about to go through is that once we understand the basics of startup finance, our reliance on 3rd parties drops drastically. The reason for this is that like anything else in life, once someone demystifies the work for us (like we’re hoping to do here), none of it really seems that complicated.

Summary

And just like that, we now have a crash course understanding of the basics of startup finance!

So what have we learned?

Well, we learned that we basically don’t know squat and that that’s a perfectly normal situation to be in as the Founder of an early-stage startup.

If we’re plunging headfirst into Year 1, it’s entirely reasonable going into this not knowing things like how much our customers will pay for our product, how much we need to spend to acquire them, or what our net margins are. How could we?

What we do know, is that early startup finance is all about building wild guesses around these amorphous costs and values, using those assumptions to forecast for the future, and constantly iterating until we get close to something right.

If that sounds tremendously vague and scary, never fear. Here’s the thing: everyone who’s ever put an ounce of effort into startup finance begins here. But unlike everyone else who’s had to go it alone, we’re going to walk through the process every step of the way.

With that, let’s get to guessing! Time to move on to Financial Projections.


About the Author

Wil Schroter

Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes BizplanClarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.

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