Our Tech Hub Harare article for this week was prepared by Culverwell Venge who is a professional accountant and a member of the Association of Certified Chartered Accountants. He writes in his personal capacity. Every startup needs to ensure that their numbers are in order from the first day they incorporate.
‘People are accustomed to thinking of accounting as dry and boring, a necessary evil used primarily to prepare financial reports and survive audits, but that is because accounting is something that has been taken for granted….Accounting is key to (their) success.’ This quote, from the famous start-up bestseller The Lean Start Up by Eric Ries, sums up how critical accounting is to your start-ups’ success. Accounting or doing books for your start-up is the missing link you are looking for in order to employ and manage the growth strategy of your business effectively.
For a less technical definition accounting is the art of collecting, recording and analyzing business activity so as to aid in making informed decisions. This implies that any start-up that does not do its books ‘properly’ cannot reach its intended goals no matter how successful it may be on market execution. The drive to properly do your books is necessitated mainly by the need to manage business activity while showing your providers of finance that you master financial integrity as well as for meeting various regulatory obligations.
-Managing business activity
It is great that your start-up manages to create products/services that the market responses to. It may even be attracting huge business towards its products. Tracking business activity becomes a requirement since you will need reliable information at your finger-tips. Doing your books properly means you know how much you are making, who you have invoiced but is yet to pay, how much cash you have at your disposal, who and how much you owe and how much inventory you have left (if your start-up is goods related). The kind of information you can generate is limitless. You can develop a customized decision dashboard that is fed the right information by your books.
All this means you now would be able to effectively manage your working capital by making informed decisions based on the recorded facts of your business’ activities. The operations of your start-up will now be optimized allowing you to plug any leakages and avoid illogical decisions that affect your operational stability. Proper bookkeeping ensures that what gets recorded gets managed.
Another critical advantage is the preparedness you will have over managing your taxes. If most of your business is obtained from other registered businesses, you obviously know the importance of a valid tax clearance certificate. To keep ZIMRA happy with your business you need to file returns and pay taxes when they become due. Keeping books ready reduces the burdens of calculating the taxes and when you operate a proactive bookkeeping system you can never miss on a payment and/or filing.
As your start-up grows in revenue you will need timely revenue information. This information lets you know if you become eligible for taxes such as the Value Added Tax which has mandatory registration revenue threshold. It would be good tax management that avoids penalties which force you out of business prematurely.
Books are a legal requirement
Imagine your start-up being prosecuted by state authorities for not keeping proper books of accounts. For example, under the Companies Act Chapter 24:03 Section 140, Income Tax Act Chapter 23:06 Section 37B as well as Private Business Corporations Act Chapter 24:11 Section 44, persons registered therein are required to have a set of accounts that they retain for a maximum period of six years.
-Show of financial integrity to providers of finance
One way for creating financial integrity in your start-up is by keeping books of accounts. Providers of finance often require that you exhibit your capability in managing finances. Having a simple bookkeeping system in place indicates that you are keen on managing your business’ finances. In addition, possessing records of transactions also serves as an audit trail since it enables potential investors or partners to review your business so as to satisfy themselves of any financial questions they may have.
Doing books the right way
Books are necessary for success but there is no one size fits all set of books. Every business has its own business model that enables the achievement of its strategic goals. So when you are creating accounting systems for your start-up always start by having a thorough understanding of your business model. Gaining this understanding ensures you know what needs to be recorded, when it is recorded, what collection of data makes the most sense when brought together and how is it to be recorded.
-devise simple accounting policies that support your business model.
Once you know the kind of accounting system that supports the business model you can then develop accounting policies that your start-up adheres to. Policies are integral in the process of getting to do books right as they will be the guiding principles on when implementing the accounts system. Generally your start-up should think of policies around the type of accounting standards your business subscribes to, the governance around the records and accounts, receipts and payments procedures and protocols etc.
-choose a platform
Once policies are established as supporting the business model, you will now need to choose the recording and analyzing platform(s). There are various choices a start-up may choose from, ranging from using manual recording systems to tech-enabled books. Depending with the sector you operate in as well as the investment you are willing to put into keeping accurate books certain recording systems will not give you the most advantage. Rule of the thumb when appraising this investment is that the costs of an accounting platform should not outweigh the benefits gained from its use.
Opting for digital accounting systems (especially cloud based platforms) will most certainly save your start-up from future system migration costs as well as some payroll dollars since the platforms are automated. However, this choice should be done understanding your start-ups current capability and capacity.
Using the advice of a professional accountant can be tremendous help since it adds value to the accounting decisions you make for your start-up.
If you would like to find out more about accounting for your startup, or any other information on how to start a grow your venture. Get in touch with us at Tech Hub Harare via our email firstname.lastname@example.org or our website www.cowork.co.zw. For comments and discussion on this article please contact author on +263 714 166190 or email@example.com