accounting for startups: what you need to know
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Accounting for StartupsWhat You Need to Know
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“Startups face a huge burden in today’s economy, often having to choose between funneling resources toward creating their goods and services or managing the often complex accounting, tax and financial strategy planning necessary to run a successful business.”
~ David Ehrenberg, Founder and CEO Early Growth Financial Services
Presentation OverviewThe essentials of startup financial management
• Accounting pre- and post-funding• Accounting systems• Taxes• Accounts payable• Accounts receivable• Financial projections • Financial reporting• Valuation
www.earlygrowthfinancialservices.com3
Accounting: Pre-FundingSet up a low-cost, accrual-based accounting structure that can grow with you
• Open business banking account • Separate personal and business expenses• Keep records of receipts and invoices• Be mindful of tax obligations• Collect payments• Select payroll provider• Stay on top of stock records
www.earlygrowthfinancialservices.com4
Accounting: Post-FundingYour financial strategy deepens and you’ll gain better understanding of your business
• Set foundation for future growth• Build financial infrastructure• Clarify funding objectives• Manage cash-flow• Create clean financials for
investors• Hire professionals to help
company become GAAP compliant (Generally Accepted Accounting Principals)
www.earlygrowthfinancialservices.com3
Finance and Accounting SupportWhen should you engage with a financial services support firm?
www.earlygrowthfinancialservices.com6
• Raised seed or convertible note round over $500K
• Start to have over $20K month in revenue• Have professional or institutional investors
Accounts PayableFormalize your system for keeping track of business expenses
• Set up system early to help maximize cash flow and create essential financial reports
• Choose best tracking system for company needs
• Enter every expense: receipts, bills, etc.• Establish invoice AP schedule• Place vendors on net 30 payment terms• Build reputation of financial stability
www.earlygrowthfinancialservices.com7
Accounts ReceivableImprove cash collections by creating a clear payment collection process
• List all open invoices and balances
• Create “friendly” invoices (and print hard copies)
• Put payment terms in writing for new clients
• Establish credit guidelines• Create collection timeline
www.earlygrowthfinancialservices.com8
TaxesEven in the early stages, you’ll want to be mindful of tax considerations
• Select correct legal entity for company
• Understand federal, state, and city tax obligations; regional fees; and registrations
• Separate business and personal finances
• Deduct business expenses• Pay quarterly taxes• Stay on top of payroll taxes and
1099s
www.earlygrowthfinancialservices.com9
Financial ProjectionsForecast for potential revenue and market capture
www.earlygrowthfinancialservices.com10
1. Start with market size
2. Identify particular segment
3. Extrapolate to calculate total
potential revenue
3. Headcount /
milestone funding
2. Calculate spending
necessary to achieve revenue/development
1. Project revenue growth
over next 1-3 years
Top-Down Projection
Bottom-Up Projection
Financial ReportingFinancial statements reveal important insights
• Financial statements– Profit and loss– Cash flow statements – Balance sheet
• Cash burn reporting• Budget vs actual reporting• Other financial reporting
www.earlygrowthfinancialservices.com11
ValuationThe safest and most effective way to prepare your valuation is to hire an outside firm
www.earlygrowthfinancialservices.com12
• IRS requires Fair Market Value (FMV) analysis in conjunction with stock option grants
• If you are acquired by a public company, a Big Four accounting firm is likely to audit your approach to IRS compliance
• Reports are generally valid for 12 months – even if there’s been no financing activity, you’ll still need a new valuation annually
What to Look For in a Valuation CompanyChoosing the right valuation firm as a business partners is an important choice• Fast turnaround• Free revisions• Guarantee to satisfy audits and withstand Big 4 and acquisition scrutiny• Assurance that company will work with you to
obtain best possible price• Ability to handle other challenging owner
equity issues, such as stock option management and complex capitalization tables
www.earlygrowthfinancialservices.com13
Thank You and Q&A
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Early Growth Financial Services
Sirk Roh
www.earlygrowthfinancialservices.com
415.234.3437
Follow us @EarlyGrowthFS