Accounting for startups - A complete guide

Here are the foundational steps to set up accounting for your startup:

1. Choose a business structure: Consideration should be given as to the most suitable type of entity for the business. This decision will depend on legal, commercial and administrative factors, as well as taxation. For example, the rates of tax and NIC are different depending on the business vehicle used. If the business is expected to be loss-making in the early periods, then we would recommend preparing financial forecasts to assess whether business owners can save any tax during these periods. The most common structures include sole traders, partnerships, and limited companies. There will be other matters to consider when setting up a new business, such as the risk and liability for any debts incurred by the business, expectations of customers/suppliers and regulatory requirements. 
2. Financing the business: There may be various options available for financing the business but some will depend on the type of business structure that has been chosen. It may be that a mix of funding is the most suitable. Here are the most common funding types.
   • Equity - A limited company can raise finance through the issue of shares. It is possible to issue different share classes and this is advantageous for family-owned companies that want flexibility with the extraction of profit. 
   • Personal loan – You can invest your own/family money into your company. This is generally the easiest and cheapest way to fund a new business and means you keep 100% ownership - but you may not have enough cash to fund everything.
   • Startup loan – This is an unsecured personal loan of between £500 and £25,000 and is backed by the government. The rate of interest is generally lower than that charged by a bank but there is a lengthy application process.
   • Business loan – Banks and other financial institutions may be willing to lend your business money to help you start out. The rates of interest on these loans are generally higher than other funding sources.
   • Grants – A grant does not have to be repaid and helps startups grow. There are a range of grants offered but they are generally only available for a specific project or to create jobs in specific sectors. There are various options available to the tech sector.
   • Presales – If you have a strong value proposition you may be able to secure advance sales from customers before you provide your product/service.
   • Startups may also be able to raise finance through tax-incentivised investment schemes (SEIS, EIS and VCT). 
3. Select an accounting method: You need to decide which accounting method to use, the cash basis or traditional (accruals) basis - see below for further details. 
4. Choose an accounting system: Options range from manual bookkeeping to sophisticated ERP systems. Software like QuickBooks or Sage can help you automate many tasks and can save you time every month. We have provided a summary of some popular solutions below. 
5. Document financial transactions: Once you have implemented an accounting system you will need to keep a record of all your business transactions – sales, purchases, taxes and financing. It is a good idea to do this as regularly as possible because it will save you time in the long run and give you a real-time picture of your finances. 
6. Reconcile bank accounts: You will need to make sure that your accounting records match your bank statements each month.
7. Prepare financial statements: Depending on the size and structure of your business you will need to prepare some or all of the following: balance sheet, cash flow statement, and profit and loss statement.