Accounting for Tech Startups: What a Better System Can Do for You
Written by Amanda Bower | Published: October 12, 2022
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Achieving unicorn status is the holy grail world of venture capital. In the financial world, unicorns refer to privately owned startups with a $1 billion valuation. This elite group of tech startups defied the odds to hit the dollar mark valuation in five years or less. Usually, these tech firms owe their grand success to the ability to triple their annual revenue for the first two years.
And therein lies the success of scaling the height of success in the tech startup world – sound accounting practices and financial management. These startups owe their success to having exceptional products and using accurate financial data to steer their growth.
You, too, can ride the coattails of these successful companies and scale your business to uncharted heights, naturally, by streamlining your accounting process right out the gate. Switching to a superior accounting for startup solution bolsters your ability to grow and scale your business.
The Early Days of a Startup
It’s common for founders to handle every aspect of their business, including managing the books during the early days. The DIY route comes with several distinct advantages in the beginning. It lets you build skills and knowledge in every facet of your business while keeping your overhead low.
It’s easy to maintain good accounting hygiene when you’re first starting out because the transactions are relatively simple. Besides learning to separate your personal and business finances, it teaches you how to balance the books. You learn to categorize business expenses and assess debt, credit, and your overall financial position.
Typically, most founders gravitate towards handling finances as a cost-saving measure. It makes much more sense to channel all the available funds towards growing the business. It may seem unwise to hire an accountant to keep your books if the company is hardly generating revenue.
However, as you grow and scale, managing the books can become far more complex and there may be things you are not taking full advantage of that could make all the difference. Failing to adhere to sound accounting processes may cause you to suffer crippling financial headwinds in the future. And cleaning up messy books will cost you serious time and money down the road.
How Do You Know it’s Time for a Proper Accounting System?
Ideally, you should hire an accountant as soon as the time spent managing the books hits a point of diminishing returns. Luckily, there’s an acid test to help you determine exactly when it’s time to outsource accounting. Set your dollar rate per hour based on the dollar value your company receives for an hour of your time, and track how much time you spend running finance. Calculate the total and contrast the figure to what a professional accountant would charge to do the same work all while being an expert in the field.
If you find you’re spending a small fortune and taking yourself away from other revenue-generating work just to manage the books, it’s time to hire a professional.
5 Ways a Better Accounting System Can Impact You:
Good accounting takes more than just software. You need an accounting system that incorporates technology and skilled professionals to give you the best of both worlds. Swiping out the spreadsheets for a full-blown accounting system will prove beneficial to your business and attractive to investors and stakeholders.
Helps Your Startup Grow
Implementing an accounting system will help streamline your business operations. The technology organizes and stores your financial data in a central location, but it takes a skilled professional to transform the insights into actionable business strategies – that’s where your trusted advisor comes in to complete the system. Through the reporting functions, they’ll be able to analyze revenue data and track company performance for seamless and efficient financial management.
Tracking sales data is invaluable because it helps you identify what’s working and what’s not, set resource thresholds, and uncover sales patterns. Monitoring and analyzing your business data can help you plan and structure your business growth. You can then expand your operation to accommodate the growing demand when you’re financially able.
Improves Your Pitches
Time is money for investors – they aren’t going to give you their time or capital without an impressive pitch. The perfect pitch captures your business story while highlighting essential data. Investors fund businesses based on their envisioned ROI, so the numbers need to make sense. But it takes more than numbers on a page to get investors on board.
Your pitch must demonstrate exceptional knowledge and market value. Working with a trusted advisor can help you understand how certain variables in your financial forecast can affect your business growth. You can tweak the variables to optimize your progress and create contingencies to account for possible obstacles.
Lets You Plan for the Future
Since accounting software stores all your financial information, an accounting expert can analyze the data to generate critical insights. They can help you uncover trends and predict monthly, quarterly, and annual sales. Accurate sales and revenue data can help you project growth over the next quarter or financial year. You can easily predict your MRR, ARR, subscribers, sales, overheads, expenditure, and more.
Improves Investor Relations
The best accounting for startup solutions allows you to generate polished financial statements for your investors. Providing timely, accurate, and properly formatted financial reports boosts investor confidence and improves relations. An accounting expert can help conduct a deep dive into a startup’s finances and highlight your unique strengths when wooing investors. Using an accounting system increases the chances of securing a deal from potential investors.
Gives You Time to Focus on Non-Accounting Tasks
One of the perks of accounting technology is the ability to automate. You can automate recurring functions such as issuing invoices, sending reminders, and accepting payments. That frees up your time to focus on growing your business.
Instead of poring over spreadsheets, that time can be better spent polishing and expanding your marketing strategies and responding to your customer needs. Improving customer experience is a surefire way to increase customer loyalty and reap the benefits of repeat sales.
Why is Accounting for Tech Startups Unique?
Establishing a practical accounting and financial system is critical for every tech startup. Working with an expert can help you get it right from the get-go. Tech firms have a relatively short growth cycle and are subject to higher legal and financial scrutiny. Tracking the company’s financial performance enables you to identify and rectify any underlying problems with your growth strategy.
Agility is a crucial requirement in tech startups, and it calls for robust, flexible, and scalable finance and accounting systems. Effective accounting, cash flow management, and resource deployment become exceedingly important as your business scales.
Sound financial and accounting management lets you track your income and expenditure and ensure healthy cash flow. It enhances statutory compliance while streamlining your ability to provide investors and regulatory authorities with accurate financial information.
Implementing the best accounting systems and practices provides the flexibility and scalability your startup needs for exponential growth.
What Do You Typically Need to Get Started?
You’ll need to take a few crucial steps to give your new startup a good finance and accounting foundation. That includes:
- Establishing your business structure
- Opening a business bank account
- Determining the best bookkeeping system for the business
- Finding an effective accounting software that suits your needs
- Finding an expert in the field
A proper accounting system is a critical requirement in the tech startup world. The software lets you capture each financial transaction in real time. Most accounting for startup solutions are reasonably priced and are designed for business owners. They combine the best accounting technology and human skills to free up your time and provide the best of both worlds.
Growing Businesses Have More Complicated Finances. What Might You Be Missing as You Grow?
As your startup grows and starts ramping up sales, the accounting process will increase in complexity. It’ll take more time and effort to stay on top of your finances, especially if you wish to attract investors. Beyond crunching numbers, you’ll need to adhere to strict regulatory standards.
You’ll need an expert to deal with complex tax structures, budgeting, appraisal, forecasting, and an equally complex payroll.
You’ll need to stay on top of granular metrics such as your break-even costs, MRR, cost of customer acquisition, and a customer’s lifetime value. You’ll need these figures when pitching investors and forecasting your projected growth. It takes real accounting expertise to generate actionable reports and pitches.
That calls for working with professionals that deeply understand your business and products. Ideally, you should hire an accountant or CFO who’s thoroughly knowledgeable about your business and all its growth phases.
Luckily, the best accounting for tech startup solutions deliver on two fronts. They pair the power of accounting technology with the benefits of a skilled accountant for as long as you need.
Accounting for Tech Startups is Our Thing.
At hiline, we live, speak, and breathe numbers to help tech startups hit the ground running. We combine best-in-class cloud accounting technology with skilled professionals to create dynamic accounting solutions for our customers. We go beyond traditional accounting services to deliver a premium financial accounting experience. We are here to help you grow faster, smarter, and achieve your financial goal while outpacing the competition.
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