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In the early days of a startup, founders are focused on getting their product to market, achieving product-market fit, and growing as quickly as possible. As the business scales, its accounting needs inherently grow with it. Higher transaction volumes and more complex accounting requirements lead to additional work to provide a clear understanding of the startup’s financial performance, which is critical both from an operational and fundraising perspective. Without a scalable accounting system in place, startups risk inefficiencies, financial errors, and compliance issues that could hinder growth.
In this article, we’ll provide a framework for building an accounting function that grows with your startup from seed to scale – and adds value along the way. From establishing a strong financial foundation to leveraging technology that facilitates growth, we will explore the key steps and strategies needed to create a robust accounting system that supports long-term success.
Why Does My Startup Need an Accounting Function?
If you’re launching a startup, you’ll need an accounting function shortly after you get started. Implementing a light-touch but scalable accounting function is key to being able to understand your company’s performance – and convey that performance to investors – as you get your company off the ground. Areas that an early accounting function addresses:
- Financial Health: If you’re pre-revenue, you’ll need to know how much money you’re spending each month (also known as your burn rate). If you’re generating revenue, you’ll need to track your income, expenses, and cash flow, giving you a clear understanding of your startup’s financial health and allowing you to make informed business decisions. Keeping a close eye on your burn rate and your cash position to make sure you’re not going to run out of cash is critical.
- Tax Compliance: Proper accounting ensures that your startup remains compliant with tax regulations, helps you avoid costly penalties, and provides documentation to support tax filings.
- Investor Communications: In the event that you need to raise money, potential investors will expect detailed financial reports and clear visibility into your company's financial performance. A well-organized accounting function makes it easier to prepare reports and build credibility with current and potential investors.
Build A Strong Foundation: Base Elements for a Scalable Accounting Function
When you’re starting from scratch, there are a few key decisions to make early on that will help you scale with as little pain as possible. You’ll need to decide on accounting software, create a chart of accounts that reflects your startup’s unique structure, and implement basic internal controls and procedures – either on your own or with the assistance of an external accounting partner.
Accounting Software
Your accounting software will be the financial command center of your startup. Generally, we recommend QuickBooks Online – it’s relatively inexpensive (starts at $17.50/month), user-friendly, cloud-based, and has a suite of integrations that make it the ideal tool for early-stage startups.
Chart of Accounts
Once you select your accounting software, you’ll need to set up your chart of accounts. Your chart of accounts is a list of the accounts and account groupings that will show up on your income statement, balance sheet, and statement of cash flows. To best understand your financial performance, you’ll want to make sure that your chart of accounts aligns with your business model. For example, the detailed accounts a SaaS founder needs to see on her financial statements are different than those of the founder of a hardware manufacturer. We’ve developed a helpful guide on building a SaaS company chart of accounts here. Being thoughtful about your chart of accounts at an early stage will 1) enable actionable insights from your financial statements, 2) allow you to update your chart of accounts as you scale and your business becomes more complex, and 3) help avoid the need to restate your historical financials in the future. Above all, something to keep in mind – at your startup’s earliest stages, a simple chart of accounts is easier to maintain and expand as time goes on.
Accounting Methodology
The accounting methodology you select will reflect your financial performance. Cash-basis accounting records financial transactions only when cash is received or paid, provides a real-time view of cash flow on your income statement, and is overall less time-intensive for the accounting function. However, it does not provide a complete picture of the financial obligations and profitability of your company. Accrual-basis accounting recognizes revenues and expenses when they are incurred, regardless of cash movement. While more time-intensive for the accounting function, accrual-basis financials offer a more accurate financial snapshot, and is generally what investors prefer to see. While cash basis accounting is less complex, it does not afford the level of visibility you – or a potential investor – might need to assess the current and future profitability of your business.
It is possible to start off using cash basis accounting and later switching to accrual basis accounting to keep your accounting needs simple in your company’s days. However, switching from cash to accrual basis accounting later is often a complex and costly hurdle. If you anticipate the need to eventually switch to accrual basis accounting (again, most investors will expect this type of accounting, especially in post-seed venture capital rounds), you may want to consider utilizing accrual basis accounting from the start.
Basic Accounting Processes
Simply setting up an accounting platform won’t ensure that transactions are recorded and categorized appropriately in your accounting system. Inconsistent, incorrectly coded transactions, or missing transactions are one of the most common issues with a startup’s financials that can hinder critical business decision making. Accurate financial data requires regularly reviewing the transactions that take place and, in some cases, importing transactions from other platforms, in order to make sure all of your financial data is in one place.
Hiring an external bookkeeper/accountant
Founders of startups are responsible for everything in the early days and the accounting function typically falls to the bottom of the priority list. This is natural, as most founders are building the product and focused on sales, not accounting. Hiring an external accounting partner early in your startup’s journey alleviates one of the many headaches for founders and perhaps more importantly, lay the groundwork for a scalable accounting function once the business takes off.
This may seem self-serving coming from us – but hear us out. Hiring an external accounting partner early on can be a relatively low-cost way to ensure your accounting is done properly while giving you more time to focus on getting your startup off the ground – and working with a firm like Founder’s CPA that has the ability and experience to scale their accounting services alongside your startup’s growth can be a powerful way to maintain consistent and accurate financial reporting over time.
Time to Scale: Ramping Up Your Accounting Function As You Grow
As your startup becomes more complex, you’ll likely want to consider adding additional components to your tech stack to augment – and in some cases automate – portions of your accounting function. Here are a few processes where you’ll likely need some tools to help you along the way:
Bookkeeping & Financial Reporting
QuickBooks Online provides the functionality you’ll need to run your accounting function from day 1, and because you were so diligent in getting this set up, you should be able to quickly generate whatever reports you need to monitor your startup’s financial health or to convey your startup’s financial performance to a potential investor.
Expenses & Bill Pay
From what we’ve seen, inefficient A/P processes can be massive time sinks as startups scale. Implementing process-based bill review, expense categorization, and bill payment early on will save you time as your accounting needs become more complex due to growth in transaction volume. Ramp is a spend management platform that provides corporate cards, bill pay software, and other tools. It’s free to start, but the paid plan ($15/user per month) allows for some powerful role-based and workflow automation. Other tools to consider: Bill.com. We recommend not utilizing bill pay tools native to banks, primarily because third party bill pay tools such as Ramp and Bill.com have native functionality that most white-labeled bill pay platforms utilized by banks lack
Invoicing
Beyond Quickbooks Online's native functionality, a tool like Zoho provides customizable invoicing, payment reminders, and integration with multiple payment gateways. Choosing the right invoicing tool, or knowing when to switch to an invoicing platform is one of the biggest areas that prevents startups from scaling effortlessly. How you invoice your customers is dependent on your business – do they buy through your website? Are you selling an annual subscription? Are you invoicing based on time and materials? The general rule of thumb for startups that have to send invoices to customers, if invoicing volume exceeds ~10 invoices a month, an automated solution or process should be found.
Payment processing
For SaaS companies, Stripe offers subscription management, recurring billing, and secure payment processing, making it easy to automate revenue streams and scale globally with robust APIs and integration options. They do take a fee of 2.9% plus $0.30 for each charge under their ‘standard’ package (more pricing info here). While Stripe can be a powerful payment processing platform, its invoicing capabilities are limited. If you have invoicing needs, we recommend using a different platform.
Business Banking
Mercury is a modern banking platform designed for startups, offering fee-free banking, seamless integration with financial tools, and advanced features like virtual cards and cash management to help founders efficiently manage their finances as they scale.
Payroll
Gusto simplifies payroll for startups by offering automated tax filings, benefits management, and employee onboarding, making it an all-in-one solution for managing workforce compensation efficiently and compliantly. Other tools to consider: Rippling, Justworks (especially if you’ll be using their PEO services).
This list is by no means a comprehensive list of the tools available, nor is it a one-size-fits-all list. If there are other tools you like, let us know! We’re always on the lookout for additional tools that we can recommend to our clients.
Let’s Recap
Building a scalable accounting function is essential for any startup looking to grow sustainably and attract investors. By establishing a strong financial foundation early on, selecting the right tools, and implementing efficient processes, startups can avoid common financial pitfalls and streamline their operations. As your company scales, so too should your accounting system, with automated tools and external partnerships playing a crucial role in handling increased complexity.
Ultimately, a well-structured accounting function serves as a vital tool for understanding performance, making strategic decisions, and communicating effectively with stakeholders. By investing in a scalable accounting system from the start, your startup will be well-positioned to manage its growth, navigate financial challenges, and maximize long-term success. If your startup is in a place where you’re looking for a partner to help implement and run your accounting function, set up a call with Founder’s CPA today.
