You are so excited to build a start-up business that the one thing ready to trip you up is sometimes an afterthought.
It’s called cash.
Maybe the money will flow naturally from your new product or service. Maybe it won’t. In the meantime, you have expenses. You need some strategies to manage and pay expenses while also collecting money from your customers.
That’s called accounting.
Here are some accounting strategies to launch and sustain a successful start-up. Be realistic about expenses. Every start-up has expenses, even if your business is mainly online:
- Research and development
- Travel costs for sales or promotion
- Web domains and maintenance
- Legal compliance
- Storefront leasing and build out (if necessary)
- Cell and Internet charges
- Continuing education or certification/licensing
- Taxes and insurance
- Payroll and benefits (even if just for yourself)
To pay those start-up expenses and give your business some financial cushion for a few months before sales come in, you need seed money. You may receive it from family members, private investors or a small business loan or line of credit. Try to avoid racking up debt on a high-interest-rate personal credit card. You can find better credit options through sites like NerdWallet.
Make a list of all possible expenses. Calculate your pre-launch expenses and then a baseline for monthly operating expenses. We recommend having six to 12 months of cash in reserve to help your business get off the ground in that first critical year.
These steps will help you estimate your break-even point each month as well as the start-up funds needed in reserve. Price your products or services properly. Pricing is tricky. You need a competitive price point that your target customers will be willing to pay, but also pricing that covers expenses and provides a margin of profit.
What does it really cost to produce your products or services? This number does not include your monthly operating expenses (i.e. fixed costs). It is the additional supplies, labor and other costs to produce and deliver the product or service (i.e. variable cost per unit). What are similar companies charging, if there are any like yours?
How many customers do you need per month or products/services sold per month to make your desired profit margin? These questions will help you narrow down your price point to be competitive as well as profitable.
Set up a proper accounting system.
It’s very important to have an accounting system in place before you start selling. Often, owners will choose a software package and not take the time to understand its full capabilities. They will miss out on reporting options that tell them the aging of accounts receivables — negatively impacting their cash flow. They will neglect to enter data and reconcile accounts regularly.
According to popular accounting software solutions provider, QuickBooks,® accounting mistakes can stunt business growth or adversely impact your bottom line, clog cash flow, attract undue attention from the IRS or damage reputations with suppliers, customers and staff.
Whether you choose QuickBooks or another accounting software solution, make sure you have assistance with proper set-up and also training on its full capabilities. Even if you outsource or hire someone to handle your accounting, you as the owner should fully understand what you can get from the solution to run the financial side of your business well.
Input, reconcile and review reports regularly.
You may be much more skilled at customer service or business strategy, but the financial side of your business needs constant attention. Some of the primary tasks in accounting include general bookkeeping of credits and debits and reconciling business checking statements, credit card statements, sales tax accounts and other types of financial accounts.
All of this data supports the production of accurate financial statements, which you need to make business decisions as well as prove the solvency of your business to investors, vendors, lenders and the IRS.
We know you are busy. That is why it often makes sense to hire a bookkeeper or to outsource bookkeeping and basic accounting services to a CPA. It is typically more costeffective to work with your CPA since you don’t have the additional overhead costs of employing someone and possibly providing space for that person to meet and work with you.
Here are a few good reasons to work with an expert. Accurate accounting and financial reports mean better business decisions. For example, you are:
- less likely to bounce a check
- less likely to miss paying an invoice and risk your credit worthiness
- less likely to experience delays in receiving materials from vendors
- less likely to have accounts receivables 60 days or more past due
- less likely to violate loan covenants or terms
- more likely to recognize thin profit margins
- more likely to manage expenses or increase pricing
- more likely to build reserves for anticipated larger expenses or investments
- more likely to make accurate estimated tax payments and remit accurate sales tax
- more likely to make improvements in your accounting processes and procedures as you grow.
For more tips, QuickBooks offers a handy checklist of 21 accounting tasks and when to do them throughout the year.
Forecast; don’t just comply.
One of the hallmarks of a successful business is the owner’s ability to look ahead.
Accounting as a business function has been criticized for providing mainly lagging indicators rather than leading indicators. By the time you review your quarterly financial statements, for example, the data is several weeks or months old.
In addition to this historical reporting, every new business owner should prioritize an understanding of key performance indicators (KPIs). KPIs support planning for profits instead of just reporting them.
Your CPA can help you identify and track KPIs that make the most sense for your business. Then your accounting system can produce reports that help you look ahead. You may be starting a business right now, but you will be running one — hopefully — for a long time. Get started on the right financial footing with these resources and tips.
Want more start-up tips? Contact LSL CPAs today!