When starting a company, you might decide to worry about a lot of operational aspects later, but it is never early to set up a simple accounting function. Whether you’re tracking your bootstrapped expenses or your early revenues, you don’t want to get too far in the game without establishing an accounting system. I am not talking about setting up a complex one, but excel sheets won’t cut it either. It’s useful to establish an accounting system that supports your business model and company’s unique expenses while keeping in mind the future growth your company will go through.
In this post, I will cover how to set things up for your pre-funded startup:
1. Get a simple accounting system
In your early stages, you don’t need anything fancy. There are lot of good options out there such as Quickbooks, Freshbooks, and Xero. They’re all excellent and startup friendly accounting systems – inexpensive and easy to use. If you’re looking for a free solution, then I would recommend Wave. Most accounting systems have payroll, invoicing, and payments functionalities. It’s better to have all those functions under one application.
Make sure to compare all features and ask for demos before signing up. Last thing you want to do is setup an accounting system that is not compatible with your province or your geographic location. Stay lean.
2. Set up your chart of accounts
I recommend you look at my previous post, What are chart of accounts (and how to track your income and expenses)?. Your chart of accounts (COA) will be the backbone of whatever accounting system you choose to adopt. Your COA should reflect your company’s unique operational needs to help you monitor your income and expenses properly.
3. Open a business banking account
Regardless if you’re generating revenue or not, a business bank account is a must. Don’t commingle your personal and business funds. Most banks offer an online business portal to help you eliminate unnecessary manual processes and manage your finances better. Your bank account should have the ability to setup preauthorized payments and any additional functionalities you might need such as automatic invoicing. In addition, all of the accounting systems I mentioned above have the ability to integrate with your bank account, which makes things even easier.
4. Don’t commingle personal and business expenses
As I mentioned earlier, mixing your personal and business expenses is a big mistake and very common among early stage companies. Your company’s finances should be separated from your personal ones. Why? Besides the tax implications, mixing the two puts you at risk in case of any lawsuits your company might face. By default, banks will setup a checking and savings accounts along with a debit card for each principal of the company. If you’re a startup with no track record, your bank might be willing to issue a low limit credit card with a personal guaranty. Bottom line is, pay all your business expenses from your business bank account.
5. Keep all your receipts and invoices
Whether paper or electronic, I recommend you keep all your receipts and invoices. The CRA stipulates that you keep records of transactions totalling more than $50. Keep your records organized to have a less stressful tax season.
6. Pay your tax obligations and keep the CRA happy
Whether your filing your GST/HST/QST returns, remitting payroll deductions or simply filing your annual tax returns, it’s time to start thinking about your process before hiring employees and generating revenue. Your company needs to be in good standings from a federal and provincial tax perspective. Contact the CRA (and Revenue Quebec if applicable) to find out about your payroll deductions and tax filing deadlines. If this is a space you’re not comfortable with, I suggest you find yourself a good accountant and tax professional to help you minimize headaches in the future.
7. Estimate your runway
In a previous post, I talked about your startup’s runway. Projecting future expenses will help you manage your cash burn, track the length of your runway, and plan any required fundraising.
To conclude, setting up an accounting function for your company is not a do it yourself project. Mistakes you make now could be costly in the future and could impact any due diligence performed by future investors. At such an early stage, I would say focus on setting up a basic system to manage your cashflow, be on top of your tax obligations, and have a high-level view of your current financial situation. Once your company matures, you might want to consider outsourcing accounting to a professional firm or hiring the proper resources internally.