You probably heard of some of the greatest accounting scandals committed by large public interest This week Tech Hub Harare caught up with Culverwell Venge to shed more light on why keeping good accounting records is not only good for startups but the best way to grow and attract investment.
A start-up must think strategically about its accounting so as to create transparency and good financial standing. Being strategic about your accounting means that you focus on developing scalable accounting practices that ensure your start-up maintains true and fair records which reflect the financial reality at any given time. In framing accounting practices one should cover the basics for start-up accounting. Here we discuss about five critical basics.
- Proper Accounting Records
Accounting records are recordings of all financial data originating from transactions. These records must adequately show and explain the transactions entered into. This requirement is not only legal but assists in building reliance and confidence on the analysis and/or financial statements produced from these records.
These records comprise of transaction source documents such as invoices normally filed for reference (have a good file management system), books where you record the data from the source documents (heard of journals? this is their primarily use) and ledger accounts which will act as controls and checks for the records (enabling reconciliations and analysis).
You may be thinking this is a tedious task- you’re correct! A start-up should think about leveraging technology early. Instead of paper records one can device an electronic records keeping system on their smart phone or use accounting software depending on the scale of the start-up and its transaction volume.
- Management Information
Steering your start-up demands that you are able to perform analysis and derive key insights which enable you to scale the business according to the pursued strategy. This ability to measure and inform business decisions is more useful if one can mash-up accounting and non-finance data. To do that your data sources will include accounting records, store/app usage records, website (e.g google analytics) and any such other source as may be available.
For a start-up, developing a dashboard that shows segmented reports which embodies financial and product analysis, website visits or app downloads, conversions per visit or download etc, can be handy in ascertaining what needs tweaking and where to put energy. These reports will paint a more complete picture when one can use them together with a variance analysis which gives insight as to the per product performance. Adding working capital analysis to the mix will help show the level of funds available for any short-term organic growth financing.
- 3 Rs of Start-Up Tax
Taxes are a business cost that needs proactive management. A start-up should at all times keep view of the 3 Rs of tax compliance. These are
- Register: For one to become a compliant taxpayer they need to be registered with the respective tax authorities, in Zimbabwe that would be ZIMRA. The requirement for registration is for all taxpayers, including individuals, companies, partnerships and cooperatives who want to venture into any business. This means that whatever legal form your start-up may have, you are required to know which taxes to register for including the thresholds or conditions for registration.
- Record: Taxes are one of the major legal reasons why your start-up should keep records. These records are critical for the computation of tax dues and/or possible refunds as well as for providing proof should the taxman disagree with your tax assessments. These records need to be retained for specific periods in accordance with the tax laws.
- Return: Once you have registered and kept records you must now prepare and file returns to the tax authorities. A properly filed return is one that has correct tax computations, filed to the tax authorities on time and followed by the correct amount of tax being paid. Failure to properly file returns will result in administrative penalties.
- Compiling Financial Information
Compilations of financial information are often in the form of financial statements. A complete set of these statements includes a statement of financial performance which shows what the start-up made in a period, a statement of financial position which shows how much the start-up is worth at a particular date and a statement of cashflow which shows how much cash was used and generated by the start-up in a period. Depending with the legal form of the start-up it may be necessary to include a statement of changes in equity which shows the contributions and distributions in relation to the start-ups shareholders. Note that such statements only report on information as provided by the accounting system, so developing a reliable accounting system leads to verifiable statements.
Apart from these statements being important for managing the business’ performance and understanding its growth and cash requirements as well as fulfilling legal requirements (where these statements are required to be presented to the registrar of companies together with annual returns), a start-up can compile them with a view to present them for the acquisition of additional funding. This is largely because financial statements tell the character and composition of the start-up while providing input data used for valuing the business especially when financiers use asset or revenue based valuation techniques.
Accounting for your start-up is an important task which you cannot afford to get wrong. It is safe for every start-up to seriously consider outsourcing this function to a dedicated professional accountant. By so doing the start-up frees up time and resources which allow focus to be redirected to developing the business rather than wasting time on accounting work which they often perform poorly. Poor accounting practices are evidently the major reason why funding is difficult to access and why regulatory requirements are cited as burdensome by most start-ups.
A start-up that masters these accounting basics is surely on the growth path. Numbers tell stories. Why not have them tell a relevant and faithful story about your start-up.
Culverwell Venge is a professional accountant and a member of the Association of Certified Chartered Accountants. He writes in his personal capacity. For comments and discussion contact him on +263 714166190 or firstname.lastname@example.org.