For early-stage businesses, cloud accounting services offer a number of advantages:
Funding rounds and acquisitions can occur quickly, and startups need to be ready to present their financial data for due diligence quickly. A cloud-based accounting solution increases your efficiency and gives you and your accounting team real-time access to your financial information.
Kruze is one of the pioneers in cloud accounting services. As a CPA firm, we can not only produce reliable, GAAP compliant monthly financial statements, we can file tax returns and represent you before the IRS and other taxation authorities. Kruze serves VC-backed startups who have raised over $10B in funding, and know what it takes to be prepared for financial due diligence.
Our COO, Scott Orn, was interviewed on the Cloud Accounting Podcast (the leading podcast covering cloud accounting software and services). He explained the what and why of Kruze investing in technology and embracing virtual accounting solutions. From the interview,
“What it really comes down to is you either need to make a choice: you’re gonna be a high hourly-rate person, conceptually, and just charge a lot for your services, and be kind of a lone wolf, or a small firm/small headcount, or you need to really standardize, drive adoption, drive process, driving improvements, become a bigger firm. We’ve chosen the process-centric approach in scalability, and investments in software to make ourselves big…”
Cloud accounting services are remote accounting, tax and bookkeeping services delivered using SaaS cloud accounting software like QuickBooks Online. Companies choose cloud accounting services providers like Kruze to lower their costs, improve financial reporting quality and prepare for complex accounting and tax due diligence. With cloud accounting services, accounting data is stored in the cloud, leading to better reliability, lower costs and improved quality.
We recommend QuickBooks Online (QBO) for startups and high-growth small businesses. As the leading cloud accounting software for small businesses in the US, it interfaces with a wide variety of other automated cloud-based systems like payroll. It’s also an industry standard, so you can easily find remote bookkeepers or accountants that can work with this system. We are a partner of QBO, and highly recommend their system to most, US-based startups. Note that as a partner, we can receive a commission from them if you sign up through our link.
As companies scale, cloud accounting software becomes even more important (unless the business will be 100% co-located in one office, in which case, hey, be old school and run everything locally! Just kidding, don’t do that, cloud technology is still better, as it provides better backup, easier remote access, superior workflows and more.) At scale, additional solutions are a good fit. We see startups switching to Netsuite and SageIntact as they approach an IPO.
The top reason startup companies fail is running out of cash. Hiring a cloud accounting expert can help you track and manage your cash flow, review your expenses, file state and local tax returns, and much more. Routine cloud bookkeeping tasks include:
This sounds complex, but online accounting software can streamline the process. By using a cloud system, you’ll get access to first-class accounting systems that can help you, or your remote bookkeeper or accountant, handle the regular accounting tasks.
In addition to ongoing bookkeeping tasks, the best cloud accounting experts provide your business with the information you need to make informed decisions, including crucial information like your runway and burn rate. These two metrics may be the most important for a startup. Your burn rate measure how fast you’re spending your funds every month. That provides you with your runway, which is the number of months you have until you run out of money, or reach your zero cash date.
It’s common for founders to do their own accounting in the initial stages of launching a startup, but it’s never too early to consult an accountant. It’s important to get questions answered like that accounting method you should use (you should use accrual) and other details like the records you’ll need to file taxes.
To get you started, we’ve provided some startup tips that can help you handle your own accounting, including budgeting, financial model templates, recordkeeping, and more.
A budget, which is an estimate of your expenditures and income (if any), is an essential tool for startups, because it’s crucial for you to know how much money you’ll need to make it through your first few months. Cloud accounting systems can help you structure your budget and then monitor it to make sure you stay on track. Your budget will get more complicated as your company grows.
Almost all companies engage in financial planning, but a financial model is crucial for startups. You need a realistic assessment of your business idea, so you can determine if you can turn your idea into a successful business. Other reasons for financial models include:
You can find helpful tips, instructions, and videos for financial modeling here. Many cloud accounting systems provide financial modules for financial planning, budgeting and more.
We highly recommend using your financial models and projections to compare with you actual business activities every month. Your company’s financial health depends on how well your actual sales and/or expense numbers stack up against your financial projections. Good accounting software can help you create dashboards and other tools to quickly match your budget to your actual results.
Every startup needs three traditional financial statements as part of their financial models. The statements need to be prepared using generally accepted accounting principles (GAAP) and your cloud accounting system can help you get the information you need to handle due diligence. If you’re seeking funding or being acquired, investors and buyers will want to see GAAP financials as part of due diligence. For more information, you’ll find our downloadable VC checklist here.
Cloud accounting software can help you adhere to GAAP standards as you develop your:
Cash flow statement. The cash flow statement summarizes all cash inflows your startup receives from ongoing operations and external investments, and deducts all the cash outflows as your company pays various expenses and obligations.
There are a few important metrics that entrepreneurs should know about accounting for early-stage businesses.
The burn rate is how much money you are spending every month. The cash-out date is the estimated date you’ll be in business until given your monthly spend and the remainder of the investment you have sitting in your bank account.
Are your customers paying you ahead of time? Deferred Revenue is when a client pays you ahead of you delivering a service. For example, if you charge a client’s credit card for a 12-month subscription, contracts - you just got 12 months of cash from that client! But you owe them the subscription, so Deferred Revenue gets added to your balance sheet as a liability. The offset to this on your balance sheet is cash - so you’ll have more cash flow than your income statement would “predict.” Not a bad problem to have… Watch our deferred revenue video here.
Accounts receivable (AR) refers to the amount that your customers owe to you for the goods or services sold to them on credit. This lives on your balance sheet under liability because you haven’t yet received the cash for the item or service provided.
Accounts payable (AP) is the money your business owes to its vendors for providing goods or services to you on credit. These are bills that you haven’t yet paid. Different vendors have different payment terms, so you should use this to your advantage. But remember, in accrual accounting, if you use a service/get invoiced by a vendor, you’ll see it on your income statement even if you haven’t paid them yet - thus, making your operating loss different from your cash burn.
Getting through tax season can be stressful, but organization and a cloud accounting system can help. Remember that even unprofitable startups need to file federal and state tax returns.
You’ll need the following documents to complete your tax return:
If you prefer to hand off your returns to a CPA, Kruze Consulting can help.
This government-sponsored tax incentive rewards companies for conducting R&D activities in the United States, and even pre-revenue startups can use the R&D tax credit to reduce their burn rates. Kruze has helped our clients get millions of dollars in tax savings through our work with this tax credit.
This tax credit can offset your expenses by up to $250,000 a year. Note that the maximum amount will double for the tax year 2023 thanks to the Inflation Reduciton Act of 2022. Visit our R&D Tax Credit Calculator to estimate how much your company can save. Contact us now to see how we can help your early-stage business!
At Kruze Consulting, we’ve developed a refined process to manage bookkeeping for startups and provide a multi-level review of all the accounting.
Step 1. Our process relies on a cloud accounting system like QuickBooks Online and our own software that interfaces with QBO and categorizes and labels transactions.
Step 2. After the initial step, a staff accountant verifies that all the transactions are labeled and in the correct accounts, and then reconciles the accounts against statements.
Step 3. The controller, who is an accountant with at least 10 years of experience, checks the transactions to make sure there are no errors.
Step 4. An account manager or CFO reviews the financials before they are provided to the client. Since they are familiar with the individual clients, they can make sure the clients’ specific procedures are followed correctly.
If your startup is selling a service and starts earning revenue, it’s important to account for that revenue correctly. If the service is contracted over a period of time, you only get to recognize part of the revenue each month. For example, if your startup sells a 12-month contract for services, you only get to recognize one-twelth of your contracted revenue each month. The remainder of the revenue stays on your balance sheet under “deferred revenue,” and that total will come down over time as your startup recognizes the contracted revenue each month. That’s part of accrual accounting, which is the best way for startups to handle their accounting. It’s also what venture capital firms want to see as part of the due diligence process.
Ready to Work With The Best Accountant?
We know you are busy. So, we have developed highly automated systems that we use to quickly get the job done for you. However, we don’t just stop there. We go above and beyond automation and always have a team of certified public accountants (CPA) experts ready to provide you with white-glove service. This is the Kruze way!
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Important Tax Dates for Startups