Startup Accounting: Finance 101 for Startups. In this article, Burkland contract CFO Debbie Rosler outlines key finance and accounting considerations for Pre-Seed and Seed startups. Learn the formula for getting startup accounting and bookkeeping right from the start.
I will be sharing a series of blogs over the next few months which will provide guidance on the best practices for finance, accounting and tax for venture-backed startups from seed to scale. This four-part series will cover the following topics:
- Finance 101: Best practices in setting up bookkeeping, tax and accounting for startups in Pre-Seed and Seed stage
- Finance 102: Overview of strategic finance requirements for companies approaching their Series A raise
- Finance 103: Establishing a disciplined approach to financial planning, analysis and reporting post-Series A
- Finance 104: Overview of strategic finance requirements for companies approaching their Series B raise
Startup Accounting – Finance 101
In this Finance 101 article, I dive into the key finance and accounting considerations for startups that are Pre-Seed or Seed. At this stage, the focus is primarily on properly setting up bookkeeping, accounting, and tax, with a limited focus on strategic finance topics.
As Jeff Burkland highlighted in “Financial Modeling, Seed Stage,” many startups don’t need a financial model until they get closer to a Series A fundraise. The formula for getting bookkeeping and accounting for startups right from the start is straight-forward and not terribly expensive, and I have outlined the key steps below. However, in my experience, it is prevalent for startups to get it wrong, either because they are cutting corners or not dedicating enough time/resources to establishing a good accounting foundation. Here are some of the common pitfalls I have seen from startups with poorly set up accounting systems and processes:
- Significant time and money investment required to clean up incorrect accounting. I have seen several startups have to completely re-do their historical accounting records, a huge distraction that can easily cost 10x what it would have cost to do it right the first time
- Manual and error-prone processes that waste time and money and create a massive distraction to the business
- Large tax penalties due to missed or incorrect filings
- Risk of fraud and embezzlement
- Loss of credibility with investors
To avoid these risks, there are a few key steps you can take to ensure that you establish an excellent accounting foundation for your startup:
- Hire experienced accounting support. While CEOs and other co-founders may be savvy with numbers, this doesn’t make them good accountants. Bring in professional outsourced CFO services that have experience implementing accounting systems and processes with startups. There are many firms and individuals that offer outsourced CFO services and accounting services for startups at reasonable rates (including Burkland).
- Choose the right financial systems. We recommend cloud-based finance tools for startups that interconnect, automate, and have a range of add-ons with a robust approval workflow. QuickBooks Online is a fantastic base accounting system for startups. Many add-on applications sync well with QuickBooks and automate processes such as employee expense reimbursement and accounts payable. Paper files are a thing of the past for accounting — everything should be managed online.
- Find the right payroll partner. Choose a full-service payroll provider that can support payroll and compliance reporting requirements as well as offer a full suite of healthcare and other benefits (e.g. 401K, FSA). Professional Employer Organizations (PEOs) such as Trinet offer a one-stop-shop all payroll and benefits. While PEO fees are higher than regular payroll providers, the lower insurance rates PEOs can offer from a larger employee pool can offset some/all of these higher fees. Alternatively, many of the newer cloud-based payroll companies offer a similar one-stop solution for payroll and benefits needs.
- Choose a bank that specializes in startups. Open a bank account for your startup early on that is supportive of the startup community, such as Silicon Valley Bank. These banks often offer specialized services and discounts for startups, facilitate networking in the startup community, and eventually can be a good source of venture debt.
- Establish financial controls. Financial controls help to mitigate the risk of fraud and embezzlement. Learn more in this article that I wrote entitled, “How Venture-Backed Startups Can Mitigate the Risk of Fraud and Embezzlement.”
- Hire a tax professional. A tax professional can make sure you submit tax filings accurately and on-time. They can also help you to take advantage of the recently instituted R&D payroll tax credit, which can be a great benefit to startups.
- Organize your due diligence materials. Build a file organization structure and be disciplined about savings files to streamline future diligence requirements. Searching for records that are buried in emails can be a nightmare and cause fundraising delays.
If you are interested in learning more about any of these topics, please reach out to me at firstname.lastname@example.org. I have a more detailed presentation that I can share that dives into each of the above recommendations.