The Dos and Don’ts of Basic Startup Accounting, According to TempCFO’s Johnnie Walker
As an early-stage startup, chances are your finances aren’t overly complicated (yet). But there are a few bedrock principles and rules you need to know. Johnnie Walker of TempCFO led a Labs session all about the essential do’s and dont’s of startup accounting. Here are eight to remember.
Do: Reconcile your accounts regularly
Start by tracking all of your transactions then set up a monthly process to review them. It’s key that you do this regularly so you don’t forget what each transaction is. Don’t forget to set up a system for expenses, too. Anything over $75 needs a receipt, and Walker recommended simple tools like Expensify for keeping track of yours.
Don’t: Misunderstand your actual revenue
This is all about proper revenue recognition. Say you’re a subscription Saas company and your customers pay you up front for a 12-month subscription. On a purely cash basis, that’s one year of revenue that came in during one month. But you should actually look at it as 1/12 of that total amount coming in each month. Spreading it out over the time period covered by the subscription or invoice is the smarter and more accurate way to look at your books, because earned revenue isn’t actually earned until you’ve provided the service.
Do: Recognize when it’s time for you to hire someone else to do your accounting
For the most part, accounting is simple when you’re first starting out—it’s mostly account reconciliation. But when it comes to taxes, Walker recommends having a professional accountant handle that for you. And if you’re spending several hours a week on accounting as a founder, Walker said that’s a sign that you need to bring on help. You don’t have to hire a full-time team member though—you can look for a part time bookkeeper. Walker said that this needs to be someone you find through referrals because good bookkeepers are tough to find.
Don’t: Forget to pay your Delaware franchise tax
It’s a given that most startups incorporate in Delaware (Walker said investors expect it), but it’s crucial that you remember to pay your Delaware Franchise Tax, or the fee the state asks for annually to be a Delaware company, Walker said. It keeps you in good standing with the state, and you may be asked to produce a certificate of good standing in the future. Just make sure you get an accountant to calculate how much you owe—Walker said he’s seen startups overpay by a lot.
Do: Track your geographic financial activity
If you’re selling goods or services or doing business in various states, you need to know if you’ve established a nexus in any of them. (A nexus is a tax law term that means a business has created a tax presence, or nexus, in a given state.) If you have, then you may need to pay sales tax there depending on your product/service. What constitutes a nexus varies by state, so the smartest strategy is to keep careful track of your financial activity and where it takes place and have a tax professional handle your taxes.
Don’t: Let your cap table go off the rails
You want to keep your cap table clean and minimize the layers of terms as much as possible, Walker said. The more layers you have, the harder it is to ensure that the information in your cap table is correct, and when it comes time for a funding round, Walker says that revenue and equity are the two things that always get checked by investors.
Do: Figure out how and when customers are going to pay you
Mismanagement of cash is one of the biggest mistakes founders can make, Walker said, and not understanding how and when you’ll get paid by customers plays a huge role. This is especially important if you’re invoicing your customers—establish the terms of payment early and clearly.
Do: Keep your personal and business accounts separate from the start
If you don’t have a business bank account set up for your startup yet, that’s okay, Walker said. But you need to separate your business and startup expenses as soon as possible. And it’s as simple as creating a separate account within your own bank account, and making sure to draw any funds related to your company operations from the new account. That way it’s easy to keep track of what’s a business expense and what’s a personal expense and keep your books clean.
This post is based on content from a WeWork Labs programming session.