Accounting Essentials for Early-Stage Startups

Early-stage startups are largely strained when it comes to their resources. In a typical startup, founders and other employees wear many “hats” and perform a variety of duties to ensure the startup stays operational and can provide its product or service to early clientele.

Among all of a startup’s challenges, perhaps the most significant are those related to its finances. Startups typically don’t have the budget or the resources to manage their finances in-house — and robust financial management is important for growth, fundraising and regulatory compliance. That’s where startups can benefit from working with a reliable, experienced partner like Graphite Financial.

Why Accounting Matters for Early Stage Startups

Good accounting and establishing good financial habits have so many benefits for early-stage startups, underscoring the importance of taking such matters seriously. For starters, accurate financial data can help support better decision-making at the leadership level. Solid data also helps provide an accurate picture of a startup’s overall financial health so leaders can see where any adjustments need to be made.

Some of the other key ways that good accounting can benefit an early-stage startup include:

• Fundraising and investing: Investors want to see your finances to gauge your startup’s health and viability so they can better assess any return on investment as they decide whether to invest in you.
• Tax compliance: Good accounting practices can ensure you’re meeting federal and local requirements, avoiding potential audits and penalties for non-compliance.
• Optimized cash flow management: Cash is king for your startup, and good financial data can help leadership identify pitfalls and optimize ways to maximize your cash flow.
• Mitigating risk: Good accounting practices can also help with risk management and identifying the potential for problems that may arise, prompting corrective action to be taken more swiftly.

Common Accounting Challenges Startups Face

Startups face several accounting challenges, including:

• Problems with managing cash flow.
• Difficulty tracking revenue and expenses.
• Compliance with various federal and local tax laws and regulations.
• Preparing for audits during and after fundraising rounds.

The best way to overcome these and other challenges is simply to work with a financial professional who knows what they’re doing. That’s how Graphite can help support your startup — by assigning one of our experienced, expert professionals to manage your startup’s finances. Such challenges can also be overcome by implementing the right financial software, leveraging automated technology to perform certain tasks, and staying in the know about the latest financial news and regulations. Graphite can help with all of this as well.

Essential Accounting Practices for Early-Stage Startups

To ensure proper financial management, all startups should establish some accounting method best practices early on in their tenure. Some of these best practices include:

• Maintaining accurate and up-to-date financial records so you always have an idea of where your startup stands from a financial perspective.
• Creating a chart of accounts that’s specific to your startup. A chart of accounts is a thorough record of all the accounts associated with your startup to help you keep track of your finances.
• Separating your business bank account and personal finances.
• Regularly reviewing your financial reports and adjusting your budget and forecasting accordingly.
• Setting up a reliable accounting system to ensure all transactions are recorded accurately and that your bank statements and financial data is organized and accessible.

The sooner your startup adopts these best practices, the better financial habits it will establish.

The Role of Technology in Startup Accounting

Today’s accounting tools can help simplify and streamline accounting processes for your startup, and there’s no shortage of advanced solutions to choose from. Some of the most popular accounting tools include QuickBooks, Xero and Wave — and these solutions are ideal for startups. These programs have also integrated automated solutions into their platform, which help streamline productivity and reduce manual errors on financial statements.

Startups should also consider integrating their accounting software with other tools, like payroll systems and CRMs. Doing so can further enhance productivity, ensure data accuracy and bring together relevant financial data into one centralized space.

When to Bring in Professional Accounting Help

If you’re struggling to properly manage your finances or your startup has grown to the point where you think you need more help, then you should give serious thought to getting professional assistance. At Graphite, we offer a wide range of financial services to support startups — from a fractional CFO partnership to tax services to basic accounting and bookkeeping.

One of Graphite’s most popular services is a fractional CFO partnership. A fractional CFO is a part-time, external CFO who can offer your startup high-level financial expertise at a fraction of the cost of what it would be to hire a full-time CFO in-house. Fractional CFOs can do everything that a full-time CFO can. Common duties include fundraising, scaling for growth, navigating tax structures, financial forecasting, budgeting and creating financial models.

Aside from supporting your startup with its financial needs, a professional can also help ensure that you’re staying compliant with all laws and regulations and following generally accepted accounting principles, which can be of particular help when readying for audits or appealing to investors.

Key Metrics Early Stage Startups Should Monitor

Startups should regularly monitor several key metrics. These include:

• Cash runway
• Cash flow statement
• Burn rate
• Monthly recurring revenue (MRR)
• Annual recurring revenue (ARR)
• Gross margins
• Net profit margins
• Customer acquisition cost (CAC)
• Customer lifetime value (LTV)
• Churn rate
• Working capital

Build a Financially Sound Future for Your Startup

Building a strong financial foundation within your startup is key to setting a precedent and charting a course for future success and long-term accurate financial records. That’s why it’s so important to familiarize yourself with some of the key accounting metrics you’ll want to track, develop a chart of accounts, and use various software programs and tools to your advantage.

Working with the right professional can also help position your startup’s financial health for future success. Graphite is here to help support your early-stage startup. With our range of accounting services, our professionals will work to become an extension of your startup and provide you with the expertise and experience you need to establish good habits and thrive.

Ready to Elevate Your Startup’s Financial Game? Let’s Partner.

Is your startup ready to take its financial game to the next level? Contact Graphite today to learn more about our solutions. Our professional, experienced accounting professionals have helped hundreds of startups grow and prosper — and we’re standing by and ready to help yours as well. Contact us today to schedule a free consultation and download a complimentary financial model template in the meantime to get started.

FAQs

Why is accounting important for early-stage startups?

Robust financial management and accounting are important for growth, fundraising and regulatory compliance, all of which are key for early-stage startups.

What accounting software is best for startups?

Some of the most popular accounting tools for startups include QuickBooks, Xero and Wave. These solutions tend to be simple to use and have also integrated automated solutions into their platforms to help streamline productivity and reduce manual errors. They can also be integrated with other platforms to bring data into a more centralized space.

When should I hire a professional accountant or fractional CFO?

Consider hiring a professional to properly manage your finances when your startup has grown to the point where you can’t keep up with day-to-day financial transactions and management. Professional accountants are ideal for day-to-day accounting tasks, while fractional CFOs are best suited for setting financial strategies and advising leadership.

How can startups manage cash flow effectively?

Effective cash flow management isn’t about doing one big thing, but many little things. Some strategies to help startups effectively manage cash flow include closely monitoring accounts, creating a good budget, creating cash flow forecasts, negotiating mutually beneficial terms with vendors and cutting any unnecessary expenses when applicable.

What’s the difference between cash and accrual accounting for startups?

Cash accounting records revenue and expenses when money is either received or paid. Accrual accounting records transactions at the time that they occur. While cash accounting is a more simple principle, accrual accounting tends to provide a more accurate picture of your startup’s overall health.

How do I prepare my finances for fundraising?

Fundraising is an important part of any startup’s growth, but it’s not as easy as just soliciting potential investors. There’s a large financial component involved in fundraising to help raise awareness and effectively manage campaigns. Some steps to prepare your startup’s finances for fundraising include creating a detailed budget that outlines expenses, setting realistic fundraising goals, and analyzing any past fundraising performance to help inform your budget and your goals.