Financial accountancy for Startups

Through the articles on the E-Resources, we have successfully reached a stage where your startup is ready for launch. This is the defining moment for any entrepreneur – as an idea on which he spent considerable time and energy hits the market. The most important section of the company is its finance. The money. Hence, any company has its own financial accountancy section – which accounts for and keeps track of every rupee spent and earned. This ultimately is used to plan strategy and understand where money can be saved.

Accounting is the pulse of a business. Cash flow, expenses, income and budgeting are required functions for all companies, regardless of industry or size. One must be fully aware of the cash flow of the company – as financial health is of prime importance.

Financial accountancy is related to accounting and the subsequent preparation of financial statements for the decision makers of the company. Performance is measured, expenses are tracked, income is accounted for and all the results are subsequently summarised and tabulated for study. Financial data is compiled into annual or quarterly reports.

Generally, established companies are publicly traded, and so must provide this information to the investors of the company. These financial accounts are released as annual reports and generally posted on the company’s website. For a startup, we assume that the IPO has not happened, and so these results are kept private within the startup, however routine analysis and study of the same is done to ensure that the books and the affairs of the company are in order.

A successful business knows its debt to others and those debts owed to it. Monthly statements such as a balance sheet and income statement show the general health of the business with regard to sales. A cash flow statement will determine how much cash is coming in and how much is going out. All of these procedures and statements help paint a picture of a business’s general profitability.

The importance of proper accounting methods cannot be stressed enough. All startups must know where they stand financially in order to survive – especially with the cash crunch that these startups face, prior to VC funding. If a startup needs new equipment, it should know if its finances allow it – and hence whether it can purchase it or not. These become easy to decide when an effective accounting system is in place. A company is only as healthy as its bottom line. And a business will not know its bottom line unless, at a minimum, it keeps track of its income and expenses.

If a company decides an external funding is needed, potential investors will require the previous years’ worth of financials along with a business plan. Without an accounting system in place, a business would be hard pressed to produce the required financials, and would be at a disadvantage with respect to offering financial projections or a clear picture of how the loan would be used. Hence, a startup might actually lose out on the possibility of getting funding.

Accounting is a skill set that many entrepreneurs lack. If an entrepreneur does not feel comfortable handling his own accounting affairs, he can use outside accounting or bookkeeping services. For a startup, a bookkeeper can keep the financial affairs in order.

In fact, the best idea in the most initial stage is to hire a commerce student as an intern, who can maintain simple accounts. As the company grows, professional positions may be offered.

So, buckle up your finances, let’s get the company out in the open with full records!

 

 

Contributed By: Mohit Agarwal

Sources:

a. The Intelligent Investor – Benjamin Graham

b. http://smallbusiness.chron.com/role-accounting-start-up-business-44.html

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