We will get straight to the point. If you’re starting a business, setting up the accounting function should be on top of the list. Having a robust accounting system helps in building a stable foundation for your business. Accounting becomes an enabler behind strategic planning and crucial decision-making. But there are millions of things to consider when you establish the accounting department – what software to use, whether you should go for cash or accrual, should you outsource services or set up an in-house team. We highlight essential considerations to build a strong backbone for your company.
Setting up an accounting department is all about maintaining the financial health of your business.
Start with a simple accounting method
Choosing which accounting method works best for your business is the first step. For smaller businesses with less transactions, cash-basis is a good idea as it can track inflow and outflow of cash in real-time. Cash basis records transactions only when the cash exchanges hands. On the other hand, accrual is a more realistic method of accounting. With accrual, accounts payable and receivables are recorded as and when they occur. The accrual basis of accounting is more authentic – and if your business has a lot of give and take, like an e-commerce set-up, accrual is the way to go.
Set up a chart of accounts
Once you have decided which method you are going for, it is time to start implementing it. Creating a chart of accounts is essential to get an overview of your company’s finances. A chart of accounts is an aggregation of all your business’s accounts – assets, liabilities, expenses, income, equity. It will help you draw out a detailed insight into your financial health and organize your finances effectively. The COA changes and adapts as your business grows and expands.
Choose a bookkeeping system
The good old ledgers seem full-proof, but come the 21st Century, we think your accountant would prefer to have a robust system in place, preferably in the cloud. There are numerous bookkeeping solutions or even ERPs at your disposal, you’ll need to evaluate and choose which is the most suitable for your startup. If you need expert advice to find what works for you and how to begin, talk to us at Rooled.
Separate private and business bank accounts
Although, this isn’t a hard and fast rule at the beginning of your business, it is recommended. As your business grows, the easiest way to understand where your finances stand is to have a different business account. This will essentially give you a holistic picture while ensuring you aren’t inviting unnecessary IRS audits that may stem out of the confusion.
Payroll and Taxes
Once you start building a team, you’ll have to maintain a payroll system. Establish what type of worker you are hiring, how they’ll get paid, and ensure you’re withholding the right taxes. It may even get more confusing if your workers are remote – at such a time, it would be wise to get a payroll service provider to assist. Also, consider what business taxes are applicable for you or if there are any tax relief schemes that your business is eligible for.
Your accounting tasks don’t end here. This is a small step to the extensive management that is accounting, payroll, and finance. As a business owner, you’ll need to periodically evaluate and adapt your accounting department to your growing startup needs. Governing a fully functional accounting department while expanding your business can be tedious, and hiring in-house CFOs is expensive. Although, finance isn’t exactly a vertical you can choose to ignore. In that case, it’s advisable to get an outsourced accounting firm on board – it can only benefit you.
But when should you outsource your finances?
For most startups, it doesn’t make sense to hire a full-time accounting department or a CFO because the means don’t justify the end. Startups need financial expertise but are not capable of bearing the costs. Ultimately, as a founder, you end up donning multiple hats and additionally, acting as an accountant/CFO. But outsourcing the accounting and CFO function can solve a lot of these issues for you. You’ll know it’s time to look out for an expert when:
You are expanding.
If your business expands into multiple offices or if you employ remote workers, get help! The accounting team at a vendor works with multiple clients and is aware of payroll laws, taxes that come with scaling. They are also adept at managing larger transactions that come with scale.
It’s review time.
If you have an imminent financial review with your stakeholders and management or you might anticipate an IRS audit, it makes sense to get an expert on board. Based on your review, the accounting vendor can suggest a proper course of action. Not only will the outsourced team help analyze your financial health but also share insights and assist with making projections for your stakeholders or investors.
You may be missing tax benefits.
With all your financial information in hand, an accounting partner can also help in finding out what tax deductions or credits you are eligible for. The accounting team can work with tax professionals and organize and categorize transactions correctly to identify potential tax savings.
You are looking for investments.
If you are looking for potential funds or are in talks with venture capitalists, it wouldn’t be a bad idea to get an expert on board. An outsourced financial firm will paint a picture that will communicate your financial story to your potential investors. Not only all your financial documents will be accurate and up to date, but they will also highlight insights and projections of a business plan that a VC wants to see.