* * * EVERY START-UP IS SPECIAL * * *
The success story of a business is effectively retold by its financial statements. It shows how well the company is performing and its industry standing compared to its competitors. Proper accounting and bookkeeping will help the start-up monitor and ensure that the business has the funds necessary to succeed.
The following concepts and practices are highly recommended by Nama Ventures to be implemented by portfolio companies to uphold transparency and reliability in their financial statements:
* * * YOU are your START-UP but your Start-up is NOT YOU * * *
Be Familiar with your Business Entity Type
Understanding what is the business entity that models the start-up determines how you will be taxed, how you can pay yourselves, the extent of your potential liabilities, etc. The five main types of business entities are sole proprietorship, partnership, c corporation, s corporation, and limited liability company.
Keep Business Matters Separate
Keep your personal and business transactions, especially finances completely separate. A separate recordkeeping system is important for all transactions related to the business alone. A separate bank account solely for your business is a requirement.
* * * Your FINANCIAL RECORDS are your START-UP STORYBOOK * * *
Importance of Accounting and Bookkeeping
Bookkeeping is the process of recording and tracking all of the company’s financial transactions. Accounting, on the other hand, is the analysis or interpretation of financial data. These two are critical to a company’s success. Good financial records generate fairly presented financial information that gives the startup a sound image to investors, creditors, customers, and even to its employees.
- Hire an Accounting Resource to Handle Accounting Needs
A bookkeeper/accountant who understands the business is critical in setting up the proper accounts for the accounting system of the company. Maintaining the accounting records is also as important. You need good records to monitor the progress of your business.
Determine Which Accounting Method You Will Use
- Accrual Basis
- Revenue (Sales) is recorded when the service is provided or when products are delivered regardless of full payment by the customer. Also, expenses are recorded when incurred regardless of full payment by the entity. Prepayments and liabilities on sales and expenses are established.
- Cash Basis
- Revenues (Sales) are recorded when payment is collected from the customer and expenses are recognized when a payment is made to the vendor or supplier.
Automate your Accounting System
Maintaining an accounting system is essential to secure the reliability of financial data presented about the business’s operating performance. To skip the tedious process of doing manual recordkeeping, it is best to utilize a cloud-based/online accounting system that simplifies this financial burden. There is a need to use this resource to save time and commit fewer errors. Founders only need to invest in the right accounting platform that serves their bookkeeping needs.
* * * Your OPERATING PERFORMANCE reflects your VALUE * * *
Maintain Separate Bank Accounts for Business Use
One of the most critical parts of maintaining business transparency is cash management. For startups and their founders, it is important to note that the cash OWNED by the startup is NOT owned by the founders. Bank accounts intended only for all business transactions maintain the separation of personal and business matters of the founders. Other benefits include easier tracking of revenue collections, expense disbursements, cleaner bookkeeping, clearer cash flow trails, and even a better image for VCs, investors & financing prospects.
- Take Advantage of Cashless Transactions
The convenience of cashless transactions does not only apply to personal benefits but extends to business advantages. For a business, obtaining a company bank account solely for the use of the business is efficient in tracking cash inflow and outflow transactions. However, technology made it so convenient with the birth of plastic money ( debit & credit cards ), digital e-wallets, and payment gateways.
Debit/credit cards and e-wallets can be utilized for company expenses and disbursements. E-wallets and payment gateways like Paypal, Hyperpay, Payoneer, and Stripe will lessen the burden of collecting payments. These provide the convenience of easy tracking of spending and real-time generation of transaction records.
It is still to note that these platforms are only for the use of business transactions.
- Collect Bills and Receipts Consistently, Digitize Documents
Using cloud storage drives to store all the digital copies of bills & receipts make things efficient. The users can have easy access to these documents. If needed, items can be easily found by searching the keyword in the drive. This decreases the possibility of omissions because you might lose the physical copy of the document but you still have the digitized one safely stored in your cloud drive.
- Automate Sending Invoices
Duplication of invoice control numbers can be avoided and upon issuance to the customer, the invoice is readily available to be referenced in the accounting entry of the transaction. Matching and tracking invoices to sales and collections are also made easy with automated invoicing. Automation of invoices increases efficiency and can be integrated into your accounting system. The good news is this can be an add-on feature in your accounting system.
- Reconcile your Records to your Bank
- This action simply makes the founders of the startup balance their bank accounts with the payments and collections they recorded. Simple yet tedious and very important.
- Reconciling your record and your bank statement can give accurate figures for your cash account that will be reflected in your balance sheet.
- Be Consistent With Your Financial Reporting Tasks
Bookkeeping is a routine that needs to be done consistently.
- Weekly posting or recording of transactions is cost-friendly and convenient. It ensures that all the transactions of the week are recorded in the books. Proper documentation/filing of bills and invoices and tracing or monitoring of unidentified transactions can be made without much work and time on a weekly basis.
- Bank reconciliations should be made monthly. Keeping track of your expenses and on-time payment of your bills is necessary to be done every month to avoid late payments and additional interest. Monitoring sales and invoices should be done monthly to avoid outstanding payments and risks of loss from late collections of receivables.
- Evaluate Your Financial Data
- In as much as the accounting records are consistently maintained by the startup, it is the responsibility of its management to be accountable for the outcome of its transactions. This is why analyzing financial data is important to startup founders.
- Quarterly analysis of financial data is critical in evaluating the progress of the company in terms of achieving its earnings projections for the quarter. This gives a better view of the company’s standing, whether they can achieve the next quarter’s goal or do some revisions to improve their current sales and marketing strategy. Quarterly financial analysis guides the company in its short-term decision-making highlighting its improvement in terms of its earnings, sales, or revenue strategies.
- Yearly analysis of financial data focuses on the growth of the company in terms of efficiency in managing its assets and liabilities (debts) and smartly strategizing for its capital and investment acquisitions a.k.a “Is the company doing better from its previous operations?” Yearly financial analysis is important in making long-term financial and business decisions. The outcome of this analysis is also critical for the use of current investors, creditors, and potential investors.
* * Please check on these financial ratios to help you in your financial data evaluations. 🙂 * *
- Reduce Errors
- One way to reduce errors is by automating transactions. Platforms that automate transactions give users access where they can review the transactions that have been recorded and easily adjust them if necessary. Another is to implement a process of recording transactions. The process should be continuous, maintained, and monitored on a timely basis. Having a process will serve as a guide on how to record the transactions properly. Have a regular review of your data records to identify unavoidable errors and omissions so that these can be corrected before they can affect the company negatively.
Get Involved and Active
- As founders, you will have a clearer understanding of how money flows in your operations from a financial standpoint. It’ll give you a better view of your financial standing and a value add confidence in making decisions for the startup’s next steps.
- The Accounting Elements
- Assets – These are the things the company owns or controls.
- Liabilities – these are the company obligations in the form of loans or debts.
- Equity – This is the value of the capital investments made by its owners ( founders, investors, shareholders ) and the total of its earnings.
- Revenue ( Sales ) – The income or gross earnings of the company for a specific period of time.
- Cost of Goods/Services Sold – These are the costs or expenditures that are directly related to the product/service offered by the company.
- Expenses – These are the costs or expenditures that are indirectly spent during a specific period of time ( e.g. administrative expenses, selling expenses, interest/bank charges ).
- Profit ( Gain ) – This is the positive difference between revenues (sales) and expenses.
- Losses – This is the negative difference between revenues (sales) and expenses.
- The Financial Statements
- There are three important financial statements that a startup must have and the founders to have an understanding of:
- Balance sheet
- It relays financial information that explains business growth and stability as of the current reporting period. It presents everything that the business owns ( assets ), obligations ( liabilities ), and the value of the investments pooled together by the founders and its investors ( equity ).
- Cash flow statement
- It presents the amount of money leaving ( outflow ) and entering ( inflow ) the business. Take note that a cash flow statement reflects only the transactions that involve actual money/cash.
- Income ( Profit/Loss ) Statement
It presents how profitable the business is over the reported period. It sets out the company’s earnings versus its expenses and losses.