Startup accounting: Everything you need to know

As a founder or small business owner, your goal is clear—growth. But growing your new venture means starting with a foundation for a financially viable business. And for that, you need to understand accounting for startups.

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Tracking business expenses, working out your cash runway, and making sure bills are paid on time are the routines of all startups and small businesses, and getting them right from the beginning will help set your business up for long-term success.

Role of accounting in startup success

Accounting is a pillar of strong startup financial management.

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Startups need rigorous accounting to ensure they survive the threats faced by fledgling businesses. These include limited cash flow, unproven market fit, and spiraling costs. In fact, according to OnDeck and Ocrolus, 70% of small businesses have less than four months of cash to cover operating expenses.

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Accounting and bookkeeping help you safeguard against these issues. Solid processes can provide visibility into your finances. This helps to highlight and address cash constraints and capital gaps before they develop into bigger problems.

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Effective accounting processes can enable stronger forecasting and budgeting. And that kind of financial rigor shows potential investors that you have the wherewithal to become an established, valuable, and profitable venture. 

4 benefits of effective startup accounting 

Well-maintained and managed finances can support your efforts to build business credit, obtain funding, and clinch partnerships with much larger businesses. Let’s take a closer look at the benefits, responsibilities, and opportunities around strong startup accounting.

Tax compliance

The Internal Revenue Service (IRS) expects every business to pay a fair share of taxes. Businesses that evade paying taxes or skirt the rules may face penalties and interest charges. For example, if you’re not paying your employees’ payroll taxes, you could be charged with tax fraud. By following the IRS’s tax filing rules and regulations, you can avoid these kinds of problems.

Getting funding

Tax compliance can help you maintain good relationships with potential funding sources, too. For example, the Small Business Administration (SBA), may ask to see your business’s tax returns when you apply for a loan. Being able to show that you’ve been compliant with the IRS will prove your startup has responsible financial management. 

Due diligence

Due diligence is the process other businesses use when assessing your business as a potential partner, supplier, borrower, or investment. This is where inaccurate journal entries or patchy record-keeping can cause lucrative business deals to fall away. 

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Startups are sometimes seen as risky relationships for other businesses, whether that is fair or not. Getting strong accounting processes up and running early can help your startup prepare for future due diligence with confidence.

Customer payment confirmation

Good accounting can also ensure you’re getting paid on time, too. By keeping track of customer payments, startups can ensure that they are collecting all of the money that they are owed. When you start to get an overview of all your customer payments, you can then can make profitable changes to how and when you bill customers too.

Financial visibility and clarity

Lastly, startup accounting matters because it gives you, as an owner, more clarity about how your business is performing.

• You can tailor product lines and services to profitable activities
• You can find savings when you understand wasteful spending
• You can reinvest in the business when you can influence cashflow
• And you can prove to investors or lenders that you run a financially sound business.

How to kick off startup accounting

More than 457,000 new businesses were registered in the United States in December 2024 alone. If you’re among these entrepreneurs, here are some steps you can take to kick off accounting at your new business. 

Choose your business structure

What type of business entity should you form? Your answer will affect your taxes, liability, and ability to raise money:

• Sole proprietorship: The simplest business is unincorporated and owned by one person. There are no legal filings or paperwork required, and you may not need to hire a lawyer. However, you are personally liable for any debts or lawsuits.
• Partnership: A partnership is similar to a sole proprietorship, but it's owned by two or more people. No legal filings or paperwork is required, but you are once again personally liable for debts or lawsuits against the business.
• Limited liability company (LLC): An LLC is a popular choice for startups because it offers limited liability protection for owners. If the LLC gets sued, its owners are not personally liable for the damages. LLCs also have tax advantages over other business entities.
• C corporations: Most established businesses elect to be taxed as C corps because they offer many advantages, such as being able to deduct employee health insurance premiums. They also come with fewer ownership restrictions. C corps can sell stock publicly without having to go through an IPO.
• S corporations: With S corp status, your business profits aren’t subject to corporate tax rates. They’re only taxed once when distributed among shareholders. Businesses must meet certain requirements to qualify, including being incorporated in the US with no more than 100 shareholders. 

Decide on a business accounting method

Most new businesses start out as a sole venture, a partnership, or an LLC. Whichever structure you choose, an early and important decision is to select an accounting method. The two most popular methods are cash and accrual accounting:

• Cash accounting records revenue when cash is received and when cash expenses are paid out
• Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when the cash changes hands

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Cash accounting is ideal for small businesses or sole proprietorships with straightforward financial transactions. Accrual accounting is typically better for larger businesses with complex operations, substantial inventory, and detailed financial reporting needs.

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Be aware that switching accounting methods once you’ve started means changing financial records, may affect taxes, and must comply with accounting standards. You’ll likely need to call in an accounting professional for the transition.

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Keep records from the get-go

Good accounting practices rely on good record-keeping. Start keeping copies of all important financial records as early as possible. Documents to track include:

• Bank statements
• Credit card statements
• Tax invoices from purchases
• Payroll journals
• Articles of incorporation
• Commercial contracts
• Leases and title deeds

Accounting best practices for startups

Set up processes for actively managing your business’s finances. For example, make a clear decision about:

• How often you’ll gather, review, and report your financial records.
• Where and how you’ll track your sales income and sales tax.
• How to manage employee expenses through business credit cards, purchase cards, or corporate cards.

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Here are some best practices to consider to help with these choices. 

Commit to a cadence

Businesses should do their bookkeeping and accounting frequently and regularly. Long gaps can create problems, such as poor profit and loss management and inaccurate totals, underestimated operating expenses, and unexpected tax bills. Activities to prioritize include:

• Importing and updating business bank account feeds to keep track of transactions
• Reconciling all transactions into the correct categories and accounts
• Importing paid and unpaid invoices to keep your receivables up to date

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As your business grows, consider shortening your bookkeeping and accounting cadences even further. Accounting automation software like Ramp allows startups and small businesses to adopt a near real-time approach to managing their books. Current financials allow you to make decisions about billing, spending, and saving based on accurate data.

Stay on top of all income and expenses

Track all income and expenses early and often. This includes sales, tax, cash, invoices, bills, movements in and out of your bank accounts, fees, and interest payments. 

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You can do this manually, but accounting automation software can automate these tasks so they’re handled quickly, accurately, and efficiently. 

Review financial reporting

If you’re already using startup accounting software, you have a head start in maintaining clean, accurate financial records. Even so, you should review your three major financial statements regularly to ensure accuracy:

1. Balance sheet: Helps you understand current assets, liabilities, and equity
2. Income statement: Shows net income (or loss), revenue, and expenses over a specific accounting period. Also known as the profit and loss (P&L) statement.
3. Cash flow statement: Shows you how and when cash enters or leaves your business

Best accounting software tools for startups

The right software automates many of the tasks involved in accounting for startups, including invoicing, expense tracking, and bank reconciliation. This can save time and money and free up your team members to focus on other priorities.

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Integration with CRM software and other tools can help you streamline your operations and get a more complete picture of your financial performance. Here are three of the most popular accounting platforms.

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QuickBooks Online

Capterra: 4.3 out of 5 | G2: 4.0 out of 5

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Features: QuickBooks Online offers a variety of features to streamline such critical tasks as bookkeeping, invoicing, expense tracking, and tax preparation. Its tiered offerings include bookkeeping automation, tax deductions, invoicing and payments, cash flow, sales and sales tax, revenue recognition, and more.

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Pros

• Convenient access (anywhere with an internet connection)
• Impressive integration with third-party tools
• Ease of use

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Cons

• Payment processing fees higher than other offerings
• Overall expense for higher-level plans
• Payroll management can be manual

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Pricing

• Simple Start: $17.50/month—covers income and expenses, general reports, connection to 1 sales channel, and other comprehensive basics
• Essentials: $32.50/month—adds connections to 2 additional sales channels, multiple currencies, seats for 3, and time entry
• Plus: $49.50/month—adds connections to all sales channels, multiple currencies, seats for 5 users, inventory, project profitability, and financial planning
• Advanced: $117.50/month—adds seats for 25 users, auto-tracking of fixed assets, batch invoices and expenses, custom access controls, workflow automation, data restoration, and 24/7 support and training 

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Xero

Capterra: 4.4 out of 5 | G2: 4.3 out of 5

Features: All Xero plans include bank feeds and bank data imports, inventory tracking, customizable reporting, online payments, purchase-order functions, file storage, contact management, and automated sales tax handling. Features help automate administrative tasks and analyze trends for your business.

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Pros

• Ease of use
• Robust reporting
• Simple and effective for small businesses

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Cons

• Report customization can be clunky
• Mobile application lacks some desired features
• Pricing increases don’t sit well with some customers

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Pricing

• Early: $20/month—includes limited online invoices and customer quotes, limited bill tracking and payment scheduling, bank reconciliation, bill and receipt capture, sales tax, and more
• Growing: $47/month—adds unlimited online invoices, customer quotes, and bill tracking
• Established: $80/month—adds multiple currencies, project tracking, expenses, and advanced cash flow predictions

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FreshBooks

Capterra: 4.5 out of 5 | G2: 4.5 out of 5

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Features: FreshBooks includes the standard tools to create comprehensive financial reports, inform decision-making, ensure compliance, work with external accounts, take advantage of up-to-date insights, and increase your accounting capabilities as the needs of your business grow. Track future transactions, pay bills easily, and review all the numbers that are key to your organization’s health and progress.

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Pros

• Seamless expense tracking
• Customer support
• Easy invoicing

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Cons

• Reporting can be overly complex
• Electronic payment doesn’t work with all banks
• Frequent changes, and not all changes are welcome 

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Pricing

• Lite: $19/month—includes unlimited invoices for up to 5 clients, unlimited expenses and estimates, payment via credit card and ACH, tax reports
• Plus: $33/month—adds invoices for up to 50 clients, recurring invoices and retainers, automatic receipt capture, accountant access, additional reporting
• Premium: $60/month—adds invoicing for unlimited clients, project profitability, customized email templates with dynamic fields‍
• Select: Variable/month—adds simplified data migration, lower credit-card and ACH fees, removal of FreshBooks branding from client emails, 2 team-member accounts, and dedicated support

Outsourcing startup accounting vs. handling it in-house

Outsourcing accounting can be helpful in your early stages, but you don’t necessarily need to. You can likely rely on one of the software packages covered above to track your spending and do your financial reporting. But as you grow, an accountant can help you set up systems to grow with you and advise you on ways to improve accuracy, tax compliance, budgeting, and more.

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If you do your own accounting, make sure you understand the core principles of financial management, bookkeeping, taxes, and other basics. Doing your own accounting is a time commitment, and it requires regular tracking and updating to keep up with your finances. Once your business grows past a certain level, it’ll probably mean bringing in a professional.

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Depending on the size of your operation and the complexity of your financial situation, accountants may charge by the hour, by fee-per-service, or via a monthly retainer. Make sure you understand how each structure fits your budget, and agree on how you’ll be charged before any work begins.

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Ramp and Shortcut: How accounting automation helped a SaaS startup

SaaS startup Shortcut turned to Ramp when they needed to upgrade their expense management tools. Expense reports arrived late (often by months), receipts went missing, and some lacked approvals.

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By integrating Ramp with their existing QuickBooks implementation, Shortcut was able to:

• Connect bank accounts and start inviting team members within a day
• Automatically gather and match cardholder receipts and memos via email or SMS
• See what individuals and teams are purchasing with a single click click
• Review and plan for approved expenses in advance

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As a result, Shortcut now closes its books 5x faster every month.

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Explore how Ramp’s accounting automation software can help save your startup time and money.