We can help startups get up and running
Accounting for startups is a vital consideration even in the very earliest days of a business. A startup refers to any business that is its earliest stages of operations.
This page aims to answer all of the most common questions our customers have about startups
What are startups in business?
This type of business is often funded from the pockets of the founders. A startup may have an innovate product or service that the business’ entrepreneurial founders believe in and are keen to bring to market. Very often, in order to take their exciting startups to the next level and to grow them as a business, they will require outside investment. Without this additional funding, very often, start-ups may not be sustainable. External funding may come from venture capitalists.
Often a startup in business is driven by a business founders drive and belief in their perceived demand for the products or services. Often, a startup will have a long-term growth strategy which means there is initially very little money in it for the founders of the startup in the early days.
The dotcom boom in the 1990s saw the rise of this type of startup, with many internet companies finding their feet in this manner. Although many companies fell by the wayside, the likes of Amazon, Facebook, eBay, Uber, and Airbnb are all great examples of successful internet startups that found great success. Many successful startups are able to innovate, experiment, adapt and grow in order to build a lucrative brand.
What are startup costs?
Startup costs refer to any expenses that are required during the creation of a new business. There are two areas to startup costs. Firstly there are pre-opening startup costs, and then there are post-opening startup costs.
- Pre-opening startup costs This can cover a wide range of areas including research and development costs, hiring or purchasing technology, developing a business plan, and any costs relating to any borrowing, permits, licenses and insurance.
- Post-opening startup costs Covering areas such as employee expenses and business promotion costs.
It is important that during the startup phase of a business, every penny is accounted for. This means that bookkeeping and accounting functions need to be applied from day one in order to maintain an accurate record of all financial transactions relating to the business.
What problems do startups face?
A number of challenges may crop up during the startup phase of any business. The primary concern is ensuring that the business has the necessary capital in order to get itself off the ground. Creating a working budget and business plan is vital in the very early stages before a startup launches itself. Understanding how much money will be involved in getting the business established will be critical, as well as how and when the business will be able to generate a return on any investment.
A lack of thorough accounting for startups is another problem that many new businesses often face. Implementing high standards in bookkeeping and accounts early will be the key to maintaining a handle on the cash flow of the business.
How long do startups take to become profitable?
Generally, startups will take some time to become profitable. Often a business will require a considerable amount of capital investment in the earliest stages. In addition to this, generating sales of products or services can be slow as the business grows its reputation.
Every startup is different and it is not possible to specify an exact amount of time that it will take for a new business startup to become profitable. The speed at which a startup becomes profitable will depend on how the company measures its profits as well the initial costs incurred during the setting up of the new business.
Many businesses start to see profits after they have been operating for two or three years. However, profits are not always the only metric of a business’ success.
What operating expenses means?
The operating expenses of a company refer to any expense which is incurred in the day-to-day running of a business. In order for a business to be able to function, it will need to be able to afford to pay for these operating expenses. This information will be found on the companies balance sheet, and it is important that the company maintains excellent bookkeeping and accounting practices in order to get the very clearest picture of the state of their current operating expenses.
There are many different costs which will come under the umbrella of operating expenses, one of the biggest areas is often payroll costs, these will include employer contributions to national insurance and employee pension plans. Business rent and rates, as well as all of the associated costs in the upkeep of the premises that business operates from, will also fall into this category. Taxes are also an operating expense.
An inability to afford the operating expenses of the business may lead to insolvency. It is with this in mind that a business startup needs to understand the need for accounting.
Is startup cost an intangible asset?
An intangible asset refers to any type of asset that is not physical. This can relate to areas such as brand recognition, research findings, domain names, contracts, as well as any intellectual properties including trademarks, patents, and copyrights. These assets, although they hold value to a company, should only be included on the balance sheet of a company if they have been bought for a price or have an easily identifiable value. This is because intangible assets can be hard to measure. For example, if a company purchases a patent or a customer list from another business, this can be included as a long-term asset. Whereas, if a business carries out valuable research, this may not be included in the companies accounts.
Some startup costs may be intangible assets, these will include the initial concepts and research. Whereas other startup costs such as equipment which is owned by the company will be tangible assets with a definite value.
An account will be able to advise on whether an asset is tangible or intangible, and, ultimately how it should be recorded in the financial documents associated with the running of the business.
What are business startup costs?
Any costs that a business needs to spend as it begins to trade will be considered a startup cost. Startup accounting will be crucial in order to record and track these expenses from the very start of the business. Business startup costs will come in the form of both pre-startup costs and post-startup costs. They may relate to the costs involved in designing the products and services which the business will center itself upon. It is likely to include all of the costs involved in buying the necessary equipment to get the business off the ground, as well as the costs involved in renting premises and hiring a team.
Is startup cost a fixed asset?
All of the expenses that a business incurs during the process of setting itself up and getting prepared to trade will be included in the setup costs. A setup cost is usually something that is a one-time activity.
A fixed asset is something which is purchased for long term use. Fixed assets are not likely to be assets which will get converted into cash. For example, during the startup phase of a business, there may be the need to buy manufacturing equipment, servers, and computers. All of these assets will be important in the everyday function of the business, but they will only need to be bought once. As they are not something which will be sold on, they are a fixed asset.
Not all setup costs will be fixed assets as some will be intangible assets. However, there will be many items which will be fixed assets. Relevant startup accounting will be required in determining all the fixed assets and documenting these accordingly in the correct manner.
How do I claim startup costs?
When a business invests in items that it needs in order to operate, it might be possible for them to claim tax relief on these startup costs. It is important that all startup costs are recorded thoroughly and that receipts are kept and logged. In addition to in-house record keeping, it is critical that an accountant is appointed to take care of the businesses income and expenses. An accountant will be vital when it comes to completing essential tax returns.
Tax deductions on pre-trading expenses will be claimed against income generated after the company begins trading. Tax deductions on advance spending are only permitted once a business has commenced trading.
It is important to define whether startup expenses have been incurred before the company formation or after. While both can be considered tax-deductible, an accountant will need to understand who will be claiming the deduction.
What's the difference between a startup and a small business?
One of the most fundamental differences between a small business and a start up relates to their primary objectives. Small businesses will be predominantly driven by the necessity to generate profits. They will also seek to create a strong sense of stability within their organization and will also be keen to generate considerable long-term value. Startups, on the other hand, are more focused on building an innovate product or service. An exciting startup is likely to see a high-level of profits in the long-term, while its short to medium-term goals will be focused on developing the product, building the brand, and honing the business model.
Often, founders of startups will leave very high-paying positions in order to pursue their innovative vision. Often, they will take only a very small salary during the early stages of the development of the startup. The level of investment that they will place in the business may not see them generating a return for a couple of years, however, this type of innovative business may ultimately prove to be more profitable in the long term.
What do startup companies need?
The first thing that a startup company will need is vision. Having an innovative concept that can be turned into a reality is vital. It will be this that allows the company’s founders to create the business that they will turn into a success.
Startups require capital. Whether this comes from the founders or in the form of start up loans, business startup grants or through private investors.
Accounting for startups is something that is vital. Having a good handle on all of the startup costs is important as it will allow a business leader to understand their operating capital. By seeking out an accountant to assist a business with the management of their startup costs as well as their fixed and intangible assets, they will be putting themselves in good stead for the future. Good financial record keeping will ensure that a business is able to better understand its position with regards to liquidity while ensuring tax returns are submitted in a timely fashion, and the risk of fraudulent activity or accounting errors is greatly diminished. By applying good housekeeping standards to a company’s financial records, the business will be able to function in a more efficient manner and time will be saved in the long-run.