5 basic accounting disciplines for startups
Small businesses need to do pretty much all by themselves to achieve audacious goals with scarce time and resources.
In the priority list, accounting occupies the bottom place. Entrepreneurs probably think, "Let there be some sales to account for first!" Urgent always wins over important.
Although I concur with the perspective of such entrepreneurs, it is essential keep track of the accounts, even if it is in the form of an excel sheet. There is no need to spend on fancy software. Here are five basic accounting disciplines that will help startups be on track.
1. Maintain a listing of invoices
A general practice is to send invoices as and when needed. Some are maintained in excel or a word format. What you need to understand is that invoice means hard cash blocked in a service or goods to be recovered. A meticulous listing with date, invoice number, client name, channel partner, service provided, amount, tax and gross amount would help a lot. Collection of cash is the key which depends on clarity on all these aspects while following up. There are other aspects like trail on revised rates, cancellation of invoices, change in quantity, etc. This information is needed for Service Tax, VAT or Excise calculation purposes. Look at my notes from a session to understand more.
This exercise means having a multiple column excel sheet with headers mentioned above. It would be great to keep canceled invoice line item intact with a field labelled "canceled".
2. Write a cashbook
Petty cash register saying who is paid for what on which date will help a lot. It should have a receipt and payment column which nets off to a balance. It is best to balance this at the end of every day, and confirm with the physical cash in the box and signoff. A basic excel with a formula for balance column is perfectly fine for the same. If you have multiple petty cash with different people or location, might as well have multiple excels.
3. Prepare a Bankbook and do the reconciliation every day
The key issue with a bank is that it clears the cheque only after a couple of working days of the deposit. These gaps result in a lack of clarity on the real balance as against the balance the bank shows. It's a matter of planning on one side and credibility on the other to take control of the bank transactions.
Banks work on simple logic. An excel sheet with dates of issue / deposit and date of clearance with all routine items like cheque number, name of the person, purpose, against which bill, handed over to, etc would be sufficient. You just need to see the bank statement online and update the dates on clearing from that as and when you see them happening.
4. Keep an expenses file and create a listing of these
As a practice, keep original prints of the bill in a file. While doing this create a listing of the same in a spreadsheet with date of bill, date of receipt (very important), name of the party, purpose, amount and taxes charged separately. Please avoid ‘kaccha’ invoices and bills without tax registrations. Noting while the bills are paid off as regards the date and cheque number would be a great idea to give a basic grip on what's paid and what's pending. Don't forget to take due credits of excise duty, service tax or VAT depending on what's charged when. Tax credit is available almost across the board in same categories. Excise and service tax have inter-adjustable option.
5. Have an asset register
Assets are vehicles, machinery, computers, softwares, printers, furniture, plants and so on. It's essential to have an inventory of these assets in a listing with model number, date of purchase, vendor, registration number, location, warrantee period, service center, expiry date, maintenance, insurance, etc. Along with the amount that's paid (exclusive of tax). Collecting the tax credit from assets is also required although it's a separate call. All the above can be updated in minutes if you do it live. Over and above this, there is a simple year end activity to be carried out. Believe me good tracking system can differentiate your business case vis-a-vis other similar ones when it comes to funding.
Accounting is like a dashboard to measure the efficiency and speed of the vehicle although it doesn't add to the same. A vehicle can work without a dashboard but it's desired for visibility as to measure the progress, efficiency and speed all the time from when it starts.
About the authorMitesh Katira is the founder fo myMuneemJi, a web-based accounting, tax compliance and consultation company. He helps in effective accounting to startups, SMEs, incubators, angel Investors, VC funds, NGOs, social ventures.