For a startup to get funded you want to exercise due diligence to be sure everything is in order. Savvy angel investors and venture capitalists always look at accounting records. Investors want to see cash flow and “burn rate,” or how quickly you “burn” through the funds in a clear, well-organized fashion. To help understand how startup founders can set up their accounting records for success, we will be interviewing Michelle Carley, a bookkeeping expert. She has worked with thousands of small businesses and startups to organize their accounting books which led her to develop accounting software called Big E-Z Books, used by hundreds of businesses that are looking for something similar to Quickbooks, Sage, or Freshbooks.
Joanna – A common problem for first-time startup founders is blurring the lines between their personal finances and business finances. What are the best steps for startup founders not to do this, besides getting a dedicated bank account and credit card for startup expenses?
Michelle – I’ve heard it once said that even one personal transaction recorded in with your business records can “pierce the corporate veil” and expose your business to liabilities. We open businesses and structure them as LLCs and other corporations to limit our liability. We really don’t want to jeopardize our business structure with a careless act. It is something to keep in mind when recording and categorizing your transactions.
You know, it happens to all of us. We’re at the store making a personal purchase and realize we don’t have our personal credit card with us – only the business credit card. So, we use the business credit card. What I would do then is be very upfront and honest when categorizing the transaction in your bookkeeping system. I would list the amount in a category such as an Owner’s Draw or, in the case of a corporation, I would put it against Shareholder Distributions. You want to be above reproach on this stuff.
Joanna – When someone decides they want to get a startup off the ground and they use their own money to fund it, how should a startup founder list their initial investment in their accounting records?
Michelle – Keep a list (in Excel or on paper) of start-up expenses before you open your business bank account and keep receipts related to those expenses in a folder too. Once your bank account is established, you can designate a main category called “Startup expenses” in your bookkeeping system. Since some amounts may be taxed differently from others, I would break them down further by sub-categorizing with titles like consulting, research, travel, etc.
Joanna – When friends and family of the startup founder invest in their startup, how should it be listed in the accounting records?
Michelle – If the friend or family member is a shareholder, it can be listed as a loan or a contribution to the equity on the books. If they are not a shareholder, it is definitely a loan and needs to be repaid with interest. This is a conversation that needs to take place with your accountant or tax professional who knows your business intimately. In both cases, you can place the amounts of loans received under the title “Loans” and your tax professional will adjust for it later.
Joanna – When a startup is getting off the ground and products are getting prototyped and tested, there are expenses. How does a startup founder list these expenses in their books for failed products?
Michelle – Until you start charging customers and collecting money, you would want to track all the expenses as start-up costs. When you meet with your tax professional, they can advise you as to what should be considered research and experimentation expenses and what should be listed as start-up costs. Then they will adjust your books and tax return accordingly.
Joanna – When products or services start getting sold, when is the best time to declare revenue in your accounting books? I do know it is a risky approach to do so at the time of sale without thinking of expenditures.
Michelle – If you haven’t started collecting money for your product or service, you may want to get the advice of a CPA with lots of experience with startups. From the moment you first start charging for your products and services, your books will show a profit or loss. They say “timing is everything,” so it pays to be diligent and check into this thoroughly.
It is important for startup founders to keep clear, accurate bookkeeping records for the future success of a startup, if it is self-funded or funded by venture capital. Happy Bookkeeping!
For more information about Michelle Carley and Big E-Z Books go to bigez.com