Bookkeeping, Shares, Accounting- ABC of Startup Funding
| 9 minutes read
It is often a difficult task to establish an adequate financial infrastructure, especially when you are starting a startup. At the initial stage, entrepreneurs are facing complexities of bookkeeping, accounting, and taxes.
The truth is that managing your startup finances is not that difficult, because you can operate on a low budget while keeping track of your financial activities with tools. For example, a simple Excel sheet can assist you in tracking your cash inflows and outflows.
What if an entrepreneur has sufficient funds, but he is not sure how to utilize it? First of all, congratulations, 70 percent of the problem is already solved. Next, you need to manage and track all the expenses and invest in those who can help to grow your startup.
We care and support your startup; that’s why we have researched and found a few financial tips for your business. Also, kindly read further to understand the overall concept, steps, and complete financial procedure in a startup.
At the initial stages of business, it is essential to keep your fixed costs as low as possible. Expenses are the basic requirements that are necessary to fulfill the overall needs but also make sure to keep it minimum because it maintains your gross revenue from going straight into your piggy bank.
Calculate and plan a year ahead for large expenses such as rent, payrolls, taxes, interest, cost materials for goods and products, debts, utilities, and other operating expenses that can help you in reducing the financial load. This would also aid you in ensuring your cash flow position stays strong even in the tight budget months.
Maintain and Differentiate Between Personal and Business Finances
Once you confirm with the selection of your business name and registration, you need to open a commercial bank account. Personal savings and corporate bank accounts should be kept separate. Differentiating between these two finances will provide you with a more straightforward accounting at the end of the financial year for tax ascertainment purposes. It would also remove the cash crunch situations in business caused due to withdrawals for personal expenditure.
Keep Track on Your Cash Flow
It doesn’t matter how small your company is; you must have your payment terms outlined succinctly and efficiently for managing small business finances. Even though it is difficult in today’s business world, you need to take into account both the financial and legal side of your monetary transactions and track all the movements of your capital regularly.
Keeping track of how your company is managing will help you figure out which areas perform most efficiently and in which department you need to control your funds.
Negotiate with Vendors Before Confirming a Contract
It is always an excellent option to negotiate with the vendors before signing a contract and ask for a good bargain. Successful negotiators know before they begin negotiating what their goals are and what they want to achieve during the negotiation.
What is Bookkeeping?
Bookkeeping is an organized method to track and record the information related to a business’s income and expenses, using bookkeeping software or spreadsheets like Excel. All people who earn money from their self-employed activities, and those who operate as sole proprietors are “in business” and need to have a sound bookkeeping system to track their finances.
Bookkeeping is part of the full accounting process that gets the business accounts up-to-date, starting from the initial financial transactions to filing tax returns. For incorporated businesses, the preparation of year ending account statements is done by a Chartered Accountant.
There are various methods of bookkeeping. The most common and widely used methods are the double-entry system and the single-entry system. Other techniques involved in the process of recording financial transactions in any manner are acceptable in bookkeeping systems.
What are the objectives of bookkeeping?
The primary objective of bookkeeping is to keep a complete and correct record of all the financial transactions logically. This confirms that the financial effects of these transactions are recorded in the books of accounts.
The other main objective is to determine the overall effect of all recorded transactions on the company’s final statement. Bookkeeping will ultimately control the company’s final accounts, namely the Profit and Loss Account and the Balance Sheet.
Why do you need Bookkeeping?
There is a need for business records that can be maintained to show the financial position of every head/account of income and expenditure. Through Bookkeeping, detailed information about each transaction could be obtained immediately.
As per the government, the maintenance of books of accounts and financial statements is a legal procedure. In the case of companies or banks or insurance companies, some acts require such companies to keep and maintain financial records. In such cases, Bookkeeping becomes compulsory.
Activities of Bookkeeping
Book-keeping includes a lot of functions and activities bundled together. Some such activities are:
- Recording all financial transactions
- Posting debit and credits in the particular ledgers
- Generating and organizing all source documents such as invoices
- Payroll accounting and upkeep may also be clubbed in with Bookkeeping
What is an Accounting Ledger?
An accounting ledger is an account that is used to store bookkeeping entries for balance-sheet and income-statement transactions. Accounting ledger journal entries can include accounts like cash, accounts receivable, investments, inventory, accrued expenses, and customer deposits. Accounting ledgers are upheld for all types of balance sheet and income declaration transactions. Balance sheet ledgers include asset ledgers such as cash. On the other side, income statement ledgers include registers such as revenue and expenses.
The accounting ledger – often called the general ledger – provides an integrated source to collect all account data rolled up from sub-ledgers, making it the backbone of any corporate financial system.
The accounting ledger is commonly used to generate the financial statements, and the statement includes the income statement, cash flow statement, and balance sheet for the company. You can consider the accounting ledger as a collection of the accounts’ chart, which is where all accounting journal entries end up.
What are Accounts Payable?
When a company purchases any goods and services from a supplier on credit that needs to be paid back in a limited period, the accounting entry is known as Accounts Payable (AP). On a balance sheet, it appears under current liabilities. In a company, an AP department is accountable for making payments owed by the company to suppliers and other creditors.
What Is the Role of Accounts Payable?
The accounts payable departments are responsible for paying incoming bills and invoices. Accounts Payable are usually there in larger companies, but business accounts payable and receivable tasks are generally combined in small companies.
While the size of the business eventually determines the role accounts payable plays, AP fulfills at least three essential functions in addition to paying bills.
- Business Travel Expenses
Officials who travel for business purposes may have their AP department manage their travel expenses. The travel management by the AP department might include making advance airline bookings, car rental, and hotel reservations. Depending on the company’s controls, the account payable might process requests and distribute funds to cover travel expenses. After business travel has occurred, AP would be responsible for settling funds distributed to process travel reimbursement requests.
- Vendor Payments
Accounts Payable classifies and maintains vendor contact information, payment terms, and Internal Revenue Service (IRS) information by using a computer database. Depending on a company’s internal controls, an AP department either handles pre-approved purchase orders or accounts payable to verify purchases after a purchase is made. The AP department also handles those reports that let management know how much the business currently owes.
What is Tax?
A tax is a compulsory fee or financial charge levied by any government on an individual or an organization to collect revenue for public work for providing the best facilities and infrastructure. The accumulated fund is then used to fund various public expenditure programs. If one fails to pay the taxes or refuse to contribute, then he/she may face some severe consequences under the pre-defined law.
Types of Taxes
Be it an individual or any organization, all have to pay the respective taxes in various forms. These taxes are further categorized into direct and indirect taxes, depending on how they are paid to the taxation authorities. Let us investigate deeper:
1. Direct Tax
The definition of direct tax is concealed in its name, which implies that this tax is paid directly to the government by the taxpayer. The general examples of this type of tax in India are Income Tax and Wealth Tax.
From the government’s viewpoint, estimating tax earnings from direct taxes is relatively easy as it bears a direct correlation to the income or wealth of the registered taxpayers.
2. Indirect Tax
Indirect taxes are marginally different from direct taxes, and the collection method is also a bit different. These taxes are consumption-based that are imposed on goods or services when they are bought and sold.
The government receives indirect tax payment from the seller of goods and services. In turn, the seller passes the tax on to the end-user, i.e., the buyer of the goods and service.
Some common examples of indirect tax include sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc.
3. Recent Reforms in Taxes
The government introduced Goods and Services Tax (GST) in 2017, which is considered to be the most revolutionary tax reform in independent India to date. The problem with the earlier reforms was that the taxation process was complicated, and the contradicting rules enabled some people to dodge taxes through loopholes in the system. After the introduction of GST, a higher percentage of assessees was brought under the one roof taxation process, and it took a toll on evaders as escaping from paying taxes became more difficult.
Shares can be termed as the financial instrument issued by the company to raise funds from the public. A share specifies a portion of ownership in a particular company. Thus, a share is the smallest unit of the company’s overall net worth.
What are the different types of shares?
Generally, there are two- Equity shares and Preference shares.
1. Equity shares
Equity shares are also referred to as ordinary/regular shares. They are one of the most common kinds of shares. These stocks are documents that give investors ownership rights of the company. Equity shareholders bear the highest risk. Owners of these shares get the advantage of voting on various company matters. Equity shares are also transferable, and the dividend paid is a proportion of profit. One thing to understand is that equity shareholders are not entitled to a fixed dividend. The liability of an equity shareholder is limited to the amount of their investment.
Equity shares are classified as per the type of share capital.
- Authorized share capital: This is the maximum amount of capital a company can issue. It can grow from time to time. For this, a company needs to fulfill some formalities and also pay the required fees to legal entities.
- Issued share capital: This is the portion of authorized capital which a company offers to its investors.
- Paid-up capital: This refers to the portion of the subscribed capital for which the investors pay. Since most companies accept the full subscription amount at one go, issued, subscribed, and paid capital are the same thing.
2. Preference shares
In preference shares, when a company is liquidated, the shareholders who hold preference shares are paid off first. They also have the right to receive profits from the company before the ordinary/regular shareholders.
Cumulative and non-cumulative preference shares
In the case of cumulative preference share, when the company does not declare dividends for a particular year, it is carried forward and accrued. Whenever the company earns profits in the future, these accumulated dividends are paid first. In the case of non-cumulative preference shares, dividends do not get accumulated, which means when there are no future profits, no dividends are paid.
Convertible and non- convertible preference shares
Here, the shareholders have the right to convert these shares into ordinary equity shares. For this, specific terms and conditions need to be met. Non-convertible preference shares do not have a right to be converted into equity shares.
What is Share Dilution?
Share dilution occurs when a company issues new shares such as in a future round of investment, or perhaps on the exercise of share options granted. The issuance of new shares will dilute the percentage of an existing shareholder’s interest in the company, although the number of shares they own remains the same.
For example, suppose if a company initially issues 100 shares, and shareholder A owns 10 shares, they hold 10% relative ownership in the company. However, if in the second round of investment the company issues a further 100 new shares, shareholder A will now hold 5% relative ownership of the company’s new total issued share capital of 200 shares. This is known as the percentage dilution.
Share dilution can be an area of concern for potential investors as it can reduce their control over the company due to the declining ability to influence decisions that the issuance of new shares will inherently cause. There are protective measures that can be taken to prevent this from occurring. However, these do not always support the long-term interests of the company.
What is a Dividend?
A dividend is defined as a transaction made by a corporation to its shareholders. Usually, these payments are made in cash (called cash dividends), but sometimes companies may also distribute stock dividends, whereby additional stock shares are distributed to shareholders.
What is Stock Splits?
Stock splits increases the number of shares outstanding while lowering the share price. Stock splits are accompanied by arithmetic calculations, such as “2-for-1” or “3-for-2.” As with many things in life, pizza can help.
For example, imagine a company’s value represented by an entire pizza. For simplicity’s sake, let’s say the pizza was divided into eight slices, and you owned one share.
If a company announces a 2-for-1 split, the number of shares doubles, so the original pie will be divided into 16 slices. Whereas you owned one-eighth of the company before, you’ll now own two-sixteenths as a result of the split—the same amount of pizza, just a different number of slices.
Tools like QuickBooks, Khatabook (mobile app), and many others, is a business accounting software program that businesses use to accomplish income and expenses and keep track of the financial health of their business. You can use it for invoicing customers, paying bills, and preparing for taxes. It includes several solutions that work for everyone, from a solo-preneur to mid-sized business.
How Small Businesses can use these tools?
Startup owners typically use accounting software programs to manage their invoices and track their cash flows. They also use it to generate month- and year-end financial reports as well as to prepare for annual business taxes. It’s easy and common for business entrepreneurs to track finances.