Does my startup need to do accounting?

As an early-stage startup founder, you know that your company's success hinges on creating a product users want. You prioritize ruthlessly, so you might be tempted to put off accounting for another day (or year or forever). After all, if it doesn’t directly contribute to the product, it can't be that important, right?

Actually, accounting is more important than many first-time startup founders realize.

The IRS requires every company to file taxes, and accounting is necessary for tax filing purposes. In the world of startups, many things can or should be pushed off until they become a bottleneck. But if you put it off, creating a detailed history of every cent that has moved in and out of the company will take significant time. The bigger the company is, and the more complicated the business model is, the harder it becomes. Plus, the longer you put it off, the harder it can be to track down receipts from 10 months ago.

Aside from complying with U.S. law, there are actually many benefits to the work of preparing financial statements and having clean financial data from the beginning. Here’s a look at several of the key benefits.

Know your runway and your cost drivers

A clear accounting system shows you much cash you have, whether your business is making or losing money, how quickly it is losing or making money, and how much time you have before you need to obtain additional funding. Seeing your biggest cost drivers also shows how your spend is evolving, your revenue is growing, and if or when you expect to generate profit.

Be fundraise ready

Tech debt can mean the site crashes. UX debt can mean customers complain. Accounting debt can hold up a fundraise or partnership. That’s because current and future investors will expect to see accurate financial statements. If you haven’t been maintaining financial statements since the beginning, catching up can be a huge headache. Investors will also expect the startup to be up to date on tax filings.

Aside from fundraising, if you ever plan to exit the business, your acquirer will want to see financial statements, and determine the acquisition price based on that. If they don’t exist or are inaccurate, it can derail an M&A or most certainly lower the price.

Minimize your tax burden

All businesses need to file state and federal tax returns, and having accurate accounting records will help with this. But many startup founders are so overwhelmed, especially in the early days, that they push off accounting until tax time (listen around timestamp 4:45 of this TechCrunch podcast about startup accounting).

If you do not file tax returns on time (perhaps because you started generating financial statements the night before the filing deadline and underestimated the time it would take), you will pay late fees and generally spend more energy on taxes than you would have otherwise. Plus, many startups are eligible for significant tax credits and rebates for research and development expenses, but you need accurate accounting records to get these credits.

Now that you know you need an accounting system, the next step is choosing the right system. Apply that same ruthless prioritization that you use in launching a product to identify the accounting system that best meets your needs. Does it make it easy to see your burn and trace changes in expenses? Is it low effort to maintain? Can you invite a tax preparer or other team-members to collaborate? You can probably think of other considerations that make sense for your specific business needs. Take the time to find the accounting system that’s right for you.