Accounting for start-ups: six ways to keep more cash in your new business

Paul Guise, director at Prime Accountants Group, offers some tips to start-ups so they can manage their cash and set their business on the right path.

There’s an old saying in business that cash is king, and that’s a good place to start when you consider accounting for start-ups.

Nothing will shut down a new business more quickly than running out of cash. But for many start-ups, establishing a good financial plan can often be much further down their priority list than things like how to manufacture their products or provide a service to customers.

Here are a few tips to keep more money in your business during the vital start-up phase.

In many ways, accounting for start-ups is the same as for any business. You need reliable financial information to help you make good management decisions. One of the first investments you should make is to buy decent accounting software. I’d recommend a package like Xero as an affordable solution for start-ups. It will make managing your finances a whole lot easier, especially when things get busy.

You need to have enough working capital so you can trade comfortably while bringing enough cash into the business from sales. It could be at least 30 days before you get paid for your first invoice. Will your working capital come from our own pocket, or will you be going out to the market to raise the money from a bank or investor? Remember that an investment must be paid back over time, which will attract interest charges. The cost for all of this needs to be considered within the accounting for your start-up.

Perhaps the most important accounting tool for start-ups is a cash-flow forecast. Look as far ahead as you reasonably can so you understand where money is flowing into and out of your business. For a start-up, we would typically recommend making this a 30-week rolling forecast. Apart from anything else, this discipline will help you to avoid the classic start-up mistake of ‘overtrading’. That’s spending more money in the growth phase of your business on things like stock and premises than you are bringing in through paid invoices.

The bedrock of good accounting for start-ups is to establish a reliable set of management accounts. Whether you do it monthly or quarterly in line with your VAT returns, it’s an absolute must for keeping on top of all aspects of your business and being ready for things like VAT inspections or your end-of-year tax return.

Credit control is another important consideration when accounting for start-ups. When it comes to getting your invoices paid on time, be confident about the value of the work you have provided and don’t be hesitant about chasing payment. Money for the work you’ve done belongs in your bank account, not your customer’s. Credit control will be easier if you have good accounting software that allows you to clearly set out your payment terms, send statements covering outstanding invoices and monitor your costs in line with payments coming in.

For anyone involved with accounting for start-ups, it’s important to understand the margin of products or services. For example, understand what the costs are for getting your product from the raw materials stage to a delivered product that someone will pay for. Once you know this, you can decide how much to charge for the product so you can cover those costs and make a decent profit. At the same time, you can regularly check whether your margin is starting to shift and what adjustments you need to make to your prices or costs.

At Prime Accountants Group, we understand that most people don’t set up a business because they are passionate about accounting for start-ups. They want to focus on their product or service and do the things they are good at.

That’s why we work with many start-ups to create and monitor a cost-effective financial plan on their behalf from day one, while offering them advice and guidance as they navigate the tricky first months and even years of trading.