One of the biggest challenges facing startups in Africa, as well as in other parts of the world, is the issue of accounting. Without setting up proper accounting practices from the outset, companies can quickly encounter serious issues that have the potential to unravel an entire organization. Accounting can easily become a complicated and overwhelming topic, especially for entrepreneurs who have a number of other responsibilities. The following are small steps that can be taken to create a comprehensive approach toward accounting that all startups should follow in order to keep themselves solvent for the long run. Through good accounting practices, entrepreneurs will be more likely to appeal to investors and other sources of capital, including crowdfunding.
1. Track All Business Expenses
In order to keep a solid financial record, companies need to clearly account for all of the money that it spends. The information can help to monitor growth, create financial statements, prepare tax returns, and identify which functions are costing the company the most money. From the very beginning, entrepreneurs should establish a system for tracking and organizing receipts, whether they use old-school filing or keep online records. Several services exist for keeping such records. Expenses include meals for business meetings; travel for business purposes; and costs for home offices, gifts, and even vehicle-related expenses. All money spent to support the business should be accounted for on a balance sheet.
2. Open a Business Bank Account
All too often, entrepreneurs try to support a business with personal bank accounts or decide to forego an account altogether. Through combined personal and business accounts, tracking a company’s performance becomes incredibly difficult. With a business account, entrepreneurs can quickly see what capital the company has and even look at the recent transactions to help in other accounting practices. Checking accounts are vital for making and accepting payments, but savings accounts can help for tax planning purposes. Business credit cards are a great way to build credit for the company for in case of an emergency.
Entrepreneurs should always do their homework before opening an account, since not all banks have the same policies or offer the same deals. By comparing the account structures at several different banks, individuals can choose a deal that works best for their needs. Typically, the fees associated with business accounts vary quite a bit from those for personal accounts, but these additional expenses should not encourage people to continue using a personal account in lieu of opening a business account.
3. Learn About Bookkeeping Systems
Bookkeeping is different from accounting. From a business perspective, accounting focuses on the progress of the business and uses compiled data to create financial statements. On the other hand, bookkeeping is the day-to-day recordkeeping that makes accounting possible. Through bookkeeping, businesses record and categorize transactions and then use this information to reconcile bank statements to ensure that no errors have been made.
Several different methods of bookkeeping exist, and entrepreneurs should choose which approach to take in the earliest days of the company. Each approach has its own pros and cons, so the decision largely depends on personal preference. For startups, the two primary options include DIY solutions and outsourced departments. Quickbooks, Wave, and other software solutions make the process slightly easier and provide tools to help people who are unfamiliar with bookkeeping. At the same time, there is still a risk of keeping books incorrectly. Individuals with a background in accounting or especially simple transactions could also use an Excel spreadsheet. In terms of outsourcing, companies can hire someone locally on a part-time basis or use cloud-based solutions like Bench Accounting.
As a company grows, it may become financially prudent to invest an in in-house, full-time bookkeeper who can also double as an accountant. In these cases, entrepreneurs should ensure that the person has the training and experience necessary to perform the job.
4. Identify Tax Obligations
Tax processes vary from one country to another and become more complicated if people intend to conduct business across international lines. While the thought of preparing taxes may seem overwhelming, entrepreneurs need to be diligent in learning about local policies. Some people may want to hire an expert to ensure that they thoroughly understand their obligations. A small oversight can have incredible financial ramification later down the line. Tax responsibilities typically depend on how the company is registered and the number of employees. Sometimes, taxes are paid annually. Other times, tax payments may need to be made at small intervals, whether quarterly or bi-annually.
Tax preparation involves implementing sales tax procedures. The policy may vary between countries or even jurisdictions in one nation, and the issue becomes more complicated with ecommerce. However, the entrepreneur is ultimately responsible for collecting this tax, and failing to do so can quickly minimize profit margins.
5. Set Up a System for Accepting Payments
When people want to pay for a product or service, a company needs a reliable method of collecting that money. A number of solutions exist for accepting credit card payments or for transferring funds digitally. These methods are typically safer and easier to track than cash transactions, but they can cost a great deal of money. Processing fees are often associated with these payment acceptance methods so entrepreneurs may need to build these fees into their pricing in order to protect their profit margins.