All businesses need to implement some basic accounting functionality, including start-up businesses that do not have extensive or any earnings. Businesses will need to report their earnings or losses on their tax returns, even if they are solely owned. Beyond the compliance angle, accounting can provide some significant benefits for a company, even if they are only getting up and running. Understanding accounting for small businesses begins with knowing what benefits are associated with proper accounting processes.
External Needs for Accounting as a Startup Business
Startup businesses will need to pursue accounting in order to be compliant with income tax and withholding tax rules. Companies that do not invest in an accounting process may be subject to penalties and interest from the IRS and state or local tax authorities for non-compliance with rules. Many startup businesses operate with losses and without proper accounting records lose the ability to claim refunds on their company income taxes.
Accounting records can help a business to properly bill their customers and collect on their outstanding receivables as well. An accounts receivable process will help a company to collect on outstanding invoices from customers and improve their overall cash flow as well. Companies are more likely to pay invoices that are accurate and delivered timely. By developing an accounting process that is effective, including an accounts receivable, a startup business can improve on the overall success of their company by being able to reinvest their cash collections into their business.
If a startup is looking for debt or equity financing, an accounting process and system is a critical need for a business. An accounting process can help an organization to develop the key financial reports that will be provided to lenders or investors and illustrate to them that the startup takes financial reporting seriously.
Internal Needs for Accounting as a Startup Business
Startup businesses will need to make critical decisions that impact their business based on their financial records and viability. Many startup businesses will use their accounting systems to provide information to their decision makers on the profitability of their products, in order to make pricing decisions, and to organize their overall headcount and employee needs. An accounting system can help a business to make decisions that are in the best overall interest of the company in order to help to drive their success forward.
An accounting process can also help to reduce loss from theft of assets and other forms of fraud and reduce the overall exposure of the business to financial loss. Accounting processes track the inflows and outflows of expenses and can be used to identify loss from theft. Accounting systems are also critical components of budgeting processes and can help a business to plan for their financial needs going forward.
What Does a Startup Business Need to Get an Accounting System up and Running?
Each accounting software program is different, but all can provide basic reporting such as balance sheet and profit and loss data, and cash flow history. Options are often available to report on the sales by product line and cost by department as well which can be valuable for startups.
Accounting is a critical component of all businesses, including startups. It is important to develop sound processes for tracking revenue and expenses and developing the financial infrastructure for a business while a company is still forming as this discipline will continue to assist the business while growing.
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