Most startup founders have a great handle on their core product or service offerings, and they usually know how to put the best team they can afford in place. But few startup founders have any background in accounting or bookkeeping. As a result, they often make some critical accounting errors that are easily avoidable.
Here are some basic accounting principles that founders need to know before they launch.
1. Maintain a strict separation between business and personal funds
This is a basic principle of business finance. A lot of people still make the mistake of commingling business and personal funds.
Yes, you should open up a separate business checking account for all business operations. But that’s just a start. You also need to treat them as separate, every day. Don’t give in to the temptation to use your business account for personal expenses and your personal account for business expenses. That just muddies the accounting waters – and it could get you into trouble with the CRA.
2. Set up a bookkeeping and accounting system from Day One
Lots of founders get around to setting up their accountant policies and procedures as an afterthought. But you’ll make your life much easier if you set up your whole system from the very first day of operation. This will save you and your future bookkeepers and accountants the time and expense of going back in time and undoing the damage or playing catch-up.
Have a system to capture, track and save all your transactional documents, including:
- Accounts receivable. Keep a record of all outgoing invoices. Track and update your list every time an invoice gets paid. Hold someone accountable for collecting unpaid invoices.
- Accounts payable. Keep a paid and unpaid folder. Keep to a regular schedule and pay everything out on time.
- Expenses. Create an easy-to-use system for capturing all receipts for business expenses – especially for employees and agents who are out in the field.
- Payroll documents. You’ll need to track every dime paid out in employee salary, wages and other compensation. You’ll also need to track your payroll tax obligations and what you’ve paid out.
- Petty cash. Create a log and a policy for petty cash use, including how much petty cash should be held at one time, and who can authorize spending.
It’s a great idea to contact a financial and bookkeeping professional help you set up your system from the ground up, so it’s already in place on your first day of operation.
3. Set up financial controls
Accounting controls include dividing up financial authority and responsibility. This helps minimize your risk of theft or embezzlement. It also helps keep multiple eyes on the financial situation, which helps provide early warning of any accounting problems.
Common financial controls include:
- Requiring two signatures on checks.
- Separating transaction entry duties from payment. The same person who inputs your transactions into your accounting system should not be the same person who pays the invoices.
- Placing a low limit on all corporate credit cards except one, kept in the owners
4. Don’t do everything yourself
Bookkeeping is very important. But it’s not important that founders and owners do it themselves. It’s not one of your core competencies as a business owner – and it will take precious time away from executing your core competencies and growing your business.
Generally, as an owner, you want to focus as much of your own personal time and effort as possible into your core business activities, and delegate or outsource everything else as much as practicable.
You should know the details of what’s happening to your company financially, and you should be aware of every dollar coming out of your business checking account. Especially as a startup. But you shouldn’t be the one entering individual business transactions into your ledger and reconciling every transaction against your bank statements. That’s a sure path to burn-out, and it’s a terribly inefficient use of your time.
5. Outsource some or all of your bookkeeping to a Web-based remote bookkeeping service
It’s important to have your bookkeeping done right from the get-go. But hiring a full-time bookkeeper or accounting professional is prohibitively expensive for most startups. Even if the cash is there to hire one straight away, that money can almost always be better invested in sales, marketing or technology.
That’s why outsourcing your bookkeeping to an online accounting firm can be a great move. A third-party accounting firm can help you set up all your policies, procedures and controls properly from the outset – at a fraction of the cost of hiring a full-time bookkeeper.
LedgersOnline provides affordable bookkeeping services for startups anywhere in Canada, or around the world.
Contact us or learn more about our affordable bookkeeping services and see how we can help you with your books – regardless of your location.