Startup accounting 101
No one founded a startup to do more accounting … except us – we only do startup accounting!
And as a founder, there’s a lot to get your head around so let us lighten your mental load with this start up accounting crash course.
We’ve put it together for early stage startups who need the basics in one handy place so they can take care of their startup business accounting as quickly and easily as possible.
How to keep track of your finances
Follow these five steps to set yourself up in the early days and be the start up accounting envy of all your friends.
Set up a business bank account
Do. Not. Use. Your. Own. Account. It might be tempting but using your personal account for your startup is messy from a tax point of view and irresponsible from an investor’s point of view (if you’re planning to attract them later on).
Record your spending and earnings from day one
Ideally in cloud-based accounting software like Xero, which has direct feeds from your bank. But a simple spreadsheet is fine for startup business accounting in the early days too.
Keep electronic copies of receipts and invoices
Take a pic and email them to yourself if you need to. Be as organised as you can with how you save them – set up electronic folders that make sense to you and will be easy to dig into at tax time, for example (also consider services like Receipt Bank that let you snap and send receipts and link into Xero).
Do a financial model
In other words: a budget. This should reflect your operational plan, which steps out what you want to do and when.
Monitor your cash flow
This is absolutely critical. To put it bluntly, running out of cash is the second biggest reason startups fail. Which is why it’s one of our biggest startup accounting tips.
So … set a calendar reminder (and set aside the actual time too!) to check your budget and accounts every month.
Always look six months ahead so tax and other obligations don’t take you by surprise AND so you know when funds are likely to run out. You need at least six months to raise funds, whether it be by grant, investors or otherwise so it’s no good starting the process two months before the well runs dry. It will be too late.
Putting money into your startup?
Yep, it’s only natural to have skin in the game. Just transfer money into your startup’s account and pay yourself back later … or not … right?
If you’re planning on applying for the R&D tax incentive (one of the biggest sources of startup funding in Australia) and/or attracting investors, you need to go about this the right way from a startup accounting point of view.
- If you’re putting in a lump sum, have a loan agreement that covers any interest rates and repayment terms. A startup friendly lawyer should not charge you the earth for this
- If you’re using a spreadsheet to manage your finances, record the loan details in it (amount and date lent) and record every repayment (amount and date paid)
- If you’re using accounting software (like Xero) to manage your finances, set up a loan liability account to record founder loans and repayments
And even though we strongly recommend setting up a business account for your startup as early as possible, you might have covered expenses before then. If that’s the case, follow the steps under the ‘EXPENSES’ heading here.
Let’s talk about tax
Even in the beginning, you are likely to have three tax returns each year:
- One for your startup company*
- One for your family trust*
- One for you personally, as a founder
*Maybe you don’t want to set up a company and family trust? We really recommend it for a heap of reasons. You can read why here.
If your company’s financial year ends on 30 June, your tax returns need to be lodged and any associated tax needs to be paid by 15 May the following year.
There’s also GST and PAYG to consider when it comes to tax.
For GST: You need to register for it once your business’s annual revenue reaches $75,000. Many startups register for it before then so they can claim the GST on any purchases they make too.
Once you’re registered, you have to pay GST quarterly via Business Activity Statements (BAS), which you can do yourself or through your accountant.
And for PAYG: There are two types of taxes to be aware of:
- PAYG withholding is tax you hold back from your employees each pay cycle, so it can be paid to the ATO. There’s more on this here
- PAYG instalments is tax you pay on your income, once it reaches a certain amount. This can apply to you personally as a founder, to your startup company or business and to your family trust (if you have one). The ATO lists the incomes thresholds here. It will notify you (or your accountant) if you have to start paying these via your quarterly BAS based on the income in your latest tax return
And there’s also payroll tax: Once your company’s payroll reaches about $47,000 per month, you’ll likely be up for state-based payroll taxes.
The good side of tax
Okay, that might be an oxymoron, but there are some tax incentives to be aware of too, namely:
- The R&D tax incentive program. This is one of the largest sources of early stage funding for Australian startups. It provides refunds of up to 43.5% of the costs of development work and here’s the best part: You don’t need to be making a profit to access it. Oh, and you might be able to access it in advance too – more on this here
- Employee share and options schemes for startups. This program is aimed at helping startups attract talent by allowing them to offer employees, contractors and directors tax-efficient ownership
- Early stage investor scheme. If you’re an early stage innovation company, this program could give your investors a 20% tax offset
You can also claim all ‘ordinary and necessary’ business expenses in your tax return. That can include anything from work-related travel to office supplies, client meetings and possibly a proportion of your rent and utility bills if you work from home. But if you’re claiming, you have to have made a profit in that tax year – even a tiny one. Otherwise, you can wait until you are making a profit and claim those historical expenses in your tax return then.
Wait, I have more startup accounting questions …
We can help with all your startup accounting needs, and there’s also our free Founder’s Guide to Accounting and Tax ebook. It’s a 15-minute read covering the basics including some FAQs and a real-life story from a startup we work with.
If you can’t see the download pop up on this page, just email us and we’ll email you a copy.
You might also find some of our other articles helpful, like this one about how to pay yourself from your startup (yay!).
And for a bit of fun, this on the difference between a startup and traditional accountant. Spoiler: We’re more fun.
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