Startup Business Lessons: What Is Accounting?
Launching a startup business is not for the weak of heart. It requires hard work, creativity, and most critically, passion. It also requires smart money management skills because – let’s face it – at the end of the day, your business will only succeed if it makes more than it spends. That may sound simple on its face, but the complexity of that task grows quickly when you factor in the costs for tech, rent, payroll, supplies, taxes, and your own paycheck. Navigating those new costs is a lot, and derails as many as 82% of eventually failing businesses.
Use the power of accounting to avoid this fate, and launch your business already on a growth track to success. If you’re new to accounting principles for business, refill your coffee, pull out your notebook, and scroll down for a quick crash course on some basics for your startup.
What Is Accounting?
Accounting describes the way a business records, organizes, and uses its capital, both incoming and outgoing. It’s flexible and can adapt to the exact needs of your industry, business model, and operations. However, we recommend (and certain states require) that all business accounting systems have a foundation in GAAP, or Generally Accepted Accounting Principles.
What Is GAAP?
GAAP is a collection of rules and guidelines that includes things like:
Definitions on financial and business terms
Baseline standards for how financial statements should look
Each state in the U.S. has different standards for how closely business owners must follow GAAP principles:
How Accounting and GAAP Help Startup Business Owners
The principles of accounting and GAAP help startup owners create and manage a clear picture of their financial business health across five different areas:
Costs, or analyzing whether or not you should change the pricing model for your goods or services
Credit, or the analysis of financial liabilities like loans, bills, etc.
Annual Financial, which involves the preparation of your business’ annual financial health statement to internal and external stakeholders
Managerial, or creating more frequent, internal-only versions of your end of year financial accounting report to help guide business decisions
Tax Accounting, which while IRS regulated, is all about helping you take advantage of any deductions you can before paying the government its share
Launching your business with a clear plan to track, report, and analyze each of the above areas sets you up for success from day one. It does this by eliminating your need to go back in time and change your prices, refile your taxes, or force your payroll and other costs into a reporting model riddled with question marks.
If you don’t have the capacity to get into the weeds with GAAP and build out a long-term business accounting framework, I recommend working with a professional accountant, at least in your first quarter or two. This way, you can get growth-focused reporting processes set up in such a way that you can independently sustain them for the rest of your business’ startup phase. While you’ll still have to do the financial analysis yourself or collaborate with an accountant to make sense of the numbers at the end of the year, this will save you time, headaches, and potentially, a lot of scary IRS liabilities.