Startups will likely also have more difficulty determining a fair market value to grant equity in the business to investors and make attractive offer packages for new hires. These more complicated payment arrangements require the expertise of an accountant to ensure all federal regulations are being met to keep the business in good standing.
Furthermore, startups that have not yet determined how they will recognize revenue in a way that works with their business model will find enlisting the help of a professional accountant especially valuable. Service providers, in particular, should utilize a third-party accountant to oversee their contracts in order to find an advantageous revenue recognition model.
Success for startups is contingent upon being aware of these kinds of unique accounting considerations and actively managing them on a day-to-day basis.
Cash Flow Management
Cash is the lifeblood of any startup. Without cash a startup will fail no matter how sound the concept, which is why accounting functions should ruthlessly prioritize cash flow management. Tax planning should be geared towards retaining as much cash as possible right away to give the startup the funds it needs to invest in employees, equipment, technology, raw goods, marketing, and everything else needed to get the business of the ground. Additionally, an accountant should ensure that forecasting, budgeting, and spending are working together to keep cash in the business for as long as possible.
Startups are prone to giving equity to owners, partners, and investors to get the business off the ground. However, granting equity has significant tax implications, so entrepreneurs should consult with an accountant to understand these elements before issuing equity. Working with a professional can help business owners to follow the most advantageous path to granting equity, as well as meet all applicable requirements while doing so.
Startups often rely on creative compensation tactics like granting stock, warrants, and convertible debt to attract top talent into key business roles. Additional compensation tactics allow startups to compete with larger, more established competitors.
All companies hope to recognize revenue as quickly as possible, but this is vital for startups that are looking to secure funding or bring on investors because it makes the business look less risky. However, startups tend to get tripped up by revenue recognition more frequently than established businesses because they are more likely to engage in creative business deals to bring in early revenue. Creative sales strategies may include product discounts, longer payment terms, or increased support offerings.
For revenue to be recognized it must be earned and then realized. Typically, this means there is an agreed upon contract with fixed pricing, all obligations related to the sale have been fulfilled, and the ability to collect payment is reasonably likely. However, post-contract support and digital delivery can complicate accurate revenue recognition.
Startups that are seeking funding, looking to go public, or are the potential target of an acquisition or merger will have due diligence done on them. An experienced accountant can keep balance sheets, cash flow statements, P&L statements, and statements of shareholders’ equity in order to prepare for close inspection from potential investors. If additional information is requested during this process, an accountant can procure these items as well as help negotiate terms of a potential deal.
Whether you are in in the beginning stages of planning or well into a startup project, take a moment to contact Eric or Todd. The Accounting Solutions Partners team is very enthusiastic about supporting startups and understand the excitement of possibilities while staying practical with the accounting practices.
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