Accounting Basics Every Startup Should Know

Launching a business is thrilling, yet demands crucial financial decision making. Mastering accounting basics is vital for steering your startup towards success. Let’s dive into the essentials together!

What is Accounting?

At its core, accounting is the systematic process of recording, classifying, and summarising financial transactions. It serves as the backbone of your newly incorporated business, offering insights into its financial health and performance.

Why Accounting Matters

Accounting isn’t just about crunching numbers; it’s about gaining clarity on your company’s financial performance. From identifying profitability to attracting investors, accounting plays a pivotal role in shaping strategic decisions.

Ways to Manage Your Business Accounting

1. Outsource to Professionals: Leveraging specialised expertise through outsourcing can offer flexibility and cost-effectiveness.
2. Using Accounting Software: Modern accounting software empowers startups with small budgets to access functionalities for invoicing, expense tracking, and financial reporting.
3. Hiring an In-House Accountant: Considered the traditional method performed within the company, albeit more costly than outsourcing. Involves internal employees managing financial operations.

Effective Accounting Practices to Adopt

1. Maintain Separation: Keep personal and business finances distinct to gain a clear understanding of your company’s financial standing.
2. Attention to Detail: Thoroughly record and reconcile all transactions to ensure accurate reporting and compliance.
3. Seek Professional Guidance: If navigating accounting software seems daunting, enlist the support of an accounting professional to streamline your processes.
4. Record Keeping: Keeping meticulous records of payroll, invoices, bank statements, and financial statements is essential for monitoring your company’s financial health and compliance.

Streamlining Your Accounting Process

1. Choose Your Business Entity: Selecting the right business structure impacts your liability and tax obligations, making it a critical decision for start-ups.
2. Open a Business Bank Account: Separating personal and business finances streamlines accounting and enhances financial transparency.
3. Determine Your Accounting Method: Whether opting for accrual or cash-basis accounting, choose a method aligned with your business’s needs and goals.

Basic Accounting Terms Every Founder Should Know

Familiarising yourself with key accounting terminology will help equip you with the language necessary for financial decision-making.

1. Assets: Resources owned by your business that hold economic value and can be converted into cash. They encompass tangible items like equipment and inventory, as well as intangible assets like patents and trademarks.
2. Liabilities: Your company’s financial obligations or debts to external parties. These can include loans, accounts payable, and accrued expenses, all of which must be settled in the future.
3. Equity: The ownership interest in your business, representing the residual value of assets after deducting liabilities. It encompasses contributions from shareholders and retained earnings.
4. Revenue: Also known as sales or income, refers to the total amount of money generated from your business’s primary operations. It represents the inflow of economic benefits resulting from the sale of goods or services.
5. Expenses: Costs incurred by your business in the process of generating revenue. They encompass various expenditures, including rent, salaries, utilities, and supplies, necessary for running your operations.
6. Cost of Goods Sold (COGS): Represents the direct costs associated with producing goods or services sold by your business. It includes expenses directly related to production, such as raw materials and labour costs.
7. Gross Profit: The difference between revenue and the cost of goods sold. It indicates the profitability of your business’s core operations before accounting for other expenses.
8. Net Profit: Also known as net income or bottom line, represents the remaining profit after deducting all expenses, including COGS, operating expenses, taxes, and interest, from total revenue.
9. Cash Flow: Refers to the movement of cash in and out of your business over a specific period. It reflects your ability to generate and manage cash to meet financial obligations and fund future growth.
10. Accrual Accounting: This accounting method records revenue and expenses when they are incurred, regardless of when cash exchanges hands. It provides a more accurate representation of your business’s financial performance over time.
11. Depreciation: The systematic allocation of the cost of tangible assets over their useful life. It reflects the decrease in value of assets due to wear and tear, obsolescence, or usage.
12. Burn Rate: Measures the rate at which your business consumes cash to cover operating expenses and sustain operations. It helps assess your runway or how long your business can operate before running out of funds.
13. Break-Even Analysis: Determines the level of sales needed for your business to cover all costs and achieve zero profit or loss. It helps identify the minimum revenue required to sustain operations.
14. Fiscal Year: Also referred to as a financial year, is a 12-month accounting period utilised by businesses for financial and tax reporting. Each company determines its own Financial Year End (FYE), marking the completion of the accounting period.
15. *Balance Sheet: Provides a snapshot of your business’s financial position at a specific point in time. It summarises assets, liabilities, and equity, showcasing the company’s overall financial health.
16. *Income Statement: Also known as a profit and loss statement, an income statement summarises your business’s revenue, expenses, and net profit or loss over a specific period. It highlights operational performance and profitability.
17. *Cash Flow Statement: Tracks the inflow and outflow of cash from operating, investing, and financing activities. It helps assess your business’s liquidity and ability to meet short-term obligations.

*The balance sheet, income statement and cash flow statement are the three core financial reports for startups. Mastering them will empower startup founders to gain a comprehensive understanding of their company’s financial position and performance.

Summary

Understanding accounting basics is vital for startup, offering insights into financial health and facilitating strategic decisions. With the right knowledge, startups can navigate accounting intricacies for financial success.

Using an incorporation service as an extension of your team

Setting up a company in Singapore can be challenging, but with professional support, it can be simple, Counto’s mission is to support your new business, take away the complexities of compliance, and save you time and money throughout the year. Speak to us directly on our chatbot, email us at [email protected], or contact us using this form.

Here are some articles you might find helpful:

How a tech startup got their business registration and accounting handled efficiently

SSIC codes

Business bank account opening