Accurate accounting helps startups prepare to fundraise and file taxes, while also giving founders a better handle on their numbers. In our post about why startup accounting costs so much, we explained why accounting can cost a startup $10,000 or more per year depending on their needs. Now that you understand the need for accounting and the reasons it costs so much, the next obvious question is how do you remain compliant but reduce costs? After all, every dollar counts to an early-stage startup, especially if they’re bootstrapped.
Fortunately, there are strategies that can help you save money and stay organized. It can be harder to reinvent accounting processes at an established company, so these processes are especially useful if you implement them early on. Here’s how.
- Start with a scalable chart of accounts.A chart of accounts is basically an index of all the accounts in your accounting system, including assets, expenses, and revenue. By starting with a chart of accounts that allows you to have precise books from Day 1, you can avoid having to redo your books a second or third time in the future.
- Whoever does this for you should have experience in your industry, specifically with venture-backed startups. Otherwise, two things can go wrong: 1) you set it up to be too narrow and you have to restate historical work or 2) the systems are inflexible, so you cannot look at your financials exactly how you want to see them. At Puzzle, we automatically assign you a scalable chart of accounts for you, and you can make unlimited changes.
- Prepare monthly financial statements on a cash basis, but tax filing on an accrual basis.Early stage founders should file taxes under the accrual method to accelerate deductions, but they can prepare monthly cash-basis financials, especially in the pre-revenue stage. Cash-basis financials are simpler to prepare and understand for early companies. At the end of the year, you make some simple adjustments as of December 31st (typically payroll, assets or prepaids, accounts receivable or payable, etc). Founders can do cash basis financials themselves at Puzzle for free.
- Use categorization rules to save time on ongoing transactions.A rule is helpful for categorizing things that are charged on a recurring basis such as Slack, Notion, or Sigma. Some firms will proactively create categorization rules or allow you to manually set up rules for ongoing revenue and expenses. Most startup revenue and expenses are recurring, so you should not pay for the same work every single month. Puzzle gives you 100,000 rules automatically, and our system learns all recurring expenses and auto-creates rules each time you categorize a transaction so you never have to think about it.
- Stay on top of receipts, invoices, and contracts.These are required for taxes, so keep supporting evidence for every transaction over $75. You will need to find every single one before taxes. For example, if you use Ramp or Stripe (and others, as they become programmatically available via an API) we will automatically pull in receipts or invoices for you and attach them to the transactions, so you are tax ready at tax time.
- Use dedicated business-only, best in class software.
- This can help reduce “completeness” checks, which are time-sensitive and expensive. ****From day one, get dedicated business bank accounts, credit cards, setup payroll, and stay disciplined on revenue. If these are clean, it is much easier to find all the transactions each month and make sure your financial statements are complete.
- Trying to separate personal and business expenses adds hours of time each month that are unnecessary and expensive. If you do this in Puzzle, we automatically ingest all the data for you and automatically prepare your reconciliations, giving you peace of mind that your data is complete each month.