Startups have become an exceptionally popular topic lately, to the point where even universities are looking to do more to foster business startups born from some of the cutting-edge research of their students and faculty. The MoneyTree™ Report issued by PwC and the National Venture Capital Association shows $33.2 billion was invested in venture capital as of Q3 2014, the highest level since 2001. So how do you fit in as a future CPA?
First off, stay in school! A formal education can help you to better know how to help a startup, from knowing how things should be done to convincing others that you actually know your stuff. It’s also some of the best career insurance available! Secondly, you can become a CPA and work with startups in many different ways. Before you take any leaps, find your fit. But why should anybody care about startups?
To me, startups represent the future sources of solutions to many of society’s most challenging problems; they typically innovate more efficiently than existing companies. While I’ve been a CFO of an international healthcare product distribution company, I’ve also enjoyed helping entrepreneurs develop business plans, financial models, and investor presentations. The startups they’ve launched range from medical devices to breweries, and from concept to IPO!
Startups can be fun, revolutionary, and a chance to make it big. There are actually quite a few of them – one estimate finds that 543,000 new businesses are created monthly. Every company was once a startup, but not all startups live long enough to grow up. This blog post focuses on the critical importance of capturing the numbers at startups and is the first in a 3-part series on Startup Accounting.
Capturing the numbers is the first and most important step in accounting to make sure a startup grows up. It sounds simple enough, but far too many people make the same mistakes. An easy way to think of what needs to be done is to think like a critic of the startup, and here are 6 things to consider:
- What exactly is the startup? Unless the founders form a corporation, limited liability company, partnership, or another legal entity, then it might just be a sole proprietorship, the easiest type of business to start. The type of legal entity not only affects the liability of the founders, but also tax consequences, investor possibilities, and more.
- How much money does the startup have? Startups should have their own bank accounts and should avoid commingling funds with their founders, employees, and anyone else. This is the only way to know with any reasonable certainty how much money a startup actually has.
- Does it have enough money to pay its bills and stay in business? Startups need to be adequately capitalized from the start, and startups organized as corporations could risk losing their corporate status if the founders don’t put in enough money to actually start up.
- How much expenses, receivables, payables, and so on does the startup have? Startups need to have a dedicated accounting system, separate from personal records. This is another formality where startups organized as corporations could risk losing their corporate status if not followed – and they will certainly lose their ability to manage the startup’s finances!
- Who gets paid what, when, and how? Stockholder agreements, employee agreements, independent contractor agreements, and other agreements should be in place to outline these important financial relationships. All contracts should be reviewed by attorneys before being signed, but you can search your local law or business library for some free examples for quick reference.
- If a certain policy is not yet in place, then who’s making the decisions affecting the accounting? The owner(s) of the startup must empower at least one person to make decisions, and someone must be responsible for managing the books. The startup could be just 1 person or 100. There could be a variety of personalities and levels of experience. No matter the dynamic, the beautiful thing about accounting is that pretty much everything should be recorded in the company’s books according to GAAP (or another specified standard). And that’s where the CPA comes in. For example, take R&D costs for the development of computer software that the startup will sell. FASB 86 says the R&D costs should be expensed until technological feasibility is established, and then they should be capitalized. It’s the CPA’s job to explain concepts like this in non-accounting terms and to support management-level decision making.
Once the startup is capturing all the numbers it needs, it can then review and reclassify as appropriate. Certainly, the fewer journal entries and reverse entries, the better, but even startups need to start somewhere. Who do you know that started a successful business from nothing? In the next blog post in this 3-part series on Startup Accounting, we’ll take a closer look at managerial accounting for startups.