Today we’re announcing a very exciting new collection of 24 accounting articles in the Entrepreneur’s Toolkit. Our partners at Welch LLP did a ton of work creating these resources to help guide you through some of the toughest accounting challenges and enable you to make informed decisions about what external advice you might need. We had some time to chat with members of the Welch LLP team, who co-wrote the articles and led the project.
Why is proper accounting so vital to the survival of a startup?
Accounting, preparing financial statements and filing tax returns are vital not only because there are penalties for not filing your taxes properly and on time, but also because current and potential investors—your financial lifelines—use your financial statements to assess your business.
Accounting records let you know whether your business is profitable, as opposed to simply cash-flow positive. This is especially important for startups, whose operations will often be cash-flow negative in the early years due in part to long-term investments that have to be made in the startup phase. Knowing if the business is profitable (or if not, how far it is from becoming profitable) is crucial to making strategic planning decisions.
What advice would you give to an entrepreneur who is just getting started, and when should he or she seek out an accountant?
As your business grows, there are many times when it can be beneficial for you to talk to your accountant. However, it can be especially helpful to talk to your accountant in the early phases of planning any changes to your business. Some key triggers would be bringing new owners into the structure or branching out into a new product that may require some research. Your accountant can help you to understand the financial implications of such changes.
In some cases, accountants can help you plan the transactions to significantly decrease your taxes or to maximize the tax credits you can get back from the government. They can also help you to understand the reporting requirements of your changing business, including both tax reporting and financial reporting (and when an audit is necessary).
Check out our article on when to seek advice from your accountant for a deeper look at this topic.
How has technology shaped the accounting process for startups?
Technology has changed the accounting process in a similar way to how it has changed other facets of business; as startups become more connected, information is more readily available and easily accessible.
We see startups sending their accounting records to us digitally and, with bookkeeping in the cloud, owners always have access to up-to-date records. This allows clients to record standard transactions themselves, while we can access the same files and update them for month-end or for unusual transactions instantaneously. Business owners can then log in and see their up-to-date financial records.
See how technology impacts the accounting process in our new articles “Lean practices for startups: Lean accounting” and “Using bookkeeping software to manage your financial records.”
What are some common mistakes you see first-time entrepreneurs making? What’s important to keep in mind from the beginning for accounting?
The largest mistake we see entrepreneurs making is waiting too long to talk to an accountant. This may mean that they are late filing tax returns and end up owing penalties and interest as a result. Or it may mean that the window of opportunity to put the most beneficial financial structures in place for the business both easily and cheaply has passed.
Many issues can arise, so we always recommend having a conversation with an advisor earlier rather than later. The initial conversation will probably not cost you anything, but starting on the right footing can save you a lot in the future!
At what point should you consider hiring a chief financial officer (CFO)?
Unfortunately, there isn’t any one magic moment when you need to hire a CFO.
The CFO is a forward-thinking senior manager who is focused on the company’s finances. In your startup’s early stages, you may be able to fill this role on your own, along with some help from your accountant, bankers or other advisors.
As the business grows and becomes more complex, it can be helpful to have someone who has experience in your key areas dedicated to financial planning. You may want to consider a part-time or “virtual” CFO to help you as you are growing.
Our article on the role of a CFO—“Accounting roles: Bookkeeper, controller and chief financial officer”—goes into greater details on this role.
If you’d like a place to start in our new accounting collection, here are a few articles you might find handy:
Stay tuned as we’re working on developing a new two-part workshop on finance fundamentals for entrepreneurs as part of our Entrepreneur’s Toolkit Workshops that will launch soon.