Frances De Leon

Launching a business is the start of an exhilarating journey filled with creativity, innovation, effort and the ability to turn ideas into reality. Amidst the excitement, accounting is probably not the first thing on an entrepreneur’s mind. However, proper financial management is crucial for the sustainability and growth of any startup. At MontPac, we have assisted 1,000’s of companies to go from inception to exit during the past 18 years and we have developed a few strong opinions along the way. Here’s a comprehensive guide on key financial considerations every startup should keep in mind. 1. Choosing the Right Accounting Method Startups typically have two primary accounting methods to choose from: cash basis and accrual basis. Unless your business model is very simple, we recommend accrual accounting.  It is a little more complicated but in most cases vastly more useful in showing your financial position.  Cash is still and will always be king so couple accrual accounting with some cash forecasting if that is helpful. 2. Setting Up a Chart of Accounts A chart of accounts is a structured list of all the accounts used to record financial transactions in the general ledger. This tool helps in organizing financial data and is essential for generating meaningful financial reports. Key categories include: The chart of accounts for your business could be straightforward but we recommend structuring the revenue and expenses into cost centers or departments.  Research & Development, Sales & Marketing and General & Administrative are the typical departments.  If you plan to be audited some day or if your goal is to be acquired by a large corporation this structure will align with the acquiring entity. 3. Financial Reporting and Analysis Regular financial reporting provides insights into the financial health of the startup and supports strategic decision-making. Key financial statements include: 4. Budgeting and Forecasting Creating a budget helps in planning and controlling financial resources. It involves estimating revenue and expenses for a specific period and serves as a financial roadmap for the business. Regular forecasting helps in adapting to changes and making informed decisions. Knowing when you will break even, run out of capital or become cash flow positive is critical and a diligent financial plan or budget will show you that.  Combined with good monthly reporting analysis of comparisons to plan is the tool that allows you to iterate and become successful.  5. Cash Flow Management Cash flow is the lifeblood of any startup. Managing cash flow effectively ensures that the business has enough liquidity to meet its obligations and seize growth opportunities. Key practices include: When customers pay you and when pay vendors have a huge impact on your cash flow.  A profitable business can still fail if it runs out of cash.  We recommend a 13 week cash flow of ins and outs so if a liquidity problem arises you have time to solve it.   6. Tax Compliance Navigating the complexities of tax compliance is critical for startups to avoid legal issues and penalties. Key tax considerations include: Life is simpler when the government is not sending you scary mail.  Invest some time staying in compliance because it can be expensive to fix and delay or prevent funding or acquisitions. 7. Utilizing Technology and Tools Leveraging modern accounting software can streamline financial management processes and enhance accuracy. Tools like QuickBooks, Xero, and FreshBooks offer features such as invoicing, expense tracking, and financial reporting. Additionally, integrating AI-driven tools can provide advanced insights and automate routine tasks. Think about not just your current situation but a couple years out.  Outgrowing the tools in your finance and accounting tech stack can cause big problems.  Find tools you won’t outgrow in the next couple of years. 8. Seeking Professional Guidance Engaging with financial advisors or accountants can provide valuable expertise and ensure compliance with financial regulations. They can assist in setting up accounting systems, managing tax obligations, and offering strategic financial advice. Find one that has experience with companies at your stage and can help them go well beyond that stage.   Conclusion Accounting might not be the most glamorous aspect of running a startup, but it is undoubtedly one of the most crucial. By establishing solid accounting practices from the beginning, startups can navigate the financial complexities of business growth, ensure compliance, and pave the way for long-term success. Whether you’re just starting out or looking to refine your financial management processes, keeping these key considerations in mind will help you build a strong financial foundation for your startup.