Generally speaking, entrepreneurs launch businesses with the goal of the business breaking into the black at some point. Nonetheless, while going revenue positive is a key milestone for any startup, figuring out how to handle the money once your firm has it can be a bit daunting.
Enter the accountant to save the day. While we in our profession know of our status as business Swiss Army knives, those founders making their first forays into business management might be a bit in the dark as to the myriad of ways that accountants can help set up shop. A little bit numbers, a little bit regulatory whiz, and a little bit therapist: Just as early hires at a startup often find themselves wearing many hats, the modern accountant’s multifaceted approach to financial management can help guide startups on many levels and across issues. And while neither entrepreneurs nor accountants can say with any certainty how balance sheets will look in the future, an accountant can help a founder be ready for whatever comes down the pike.
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Recognizing future revenue for your startup
Before a startup can take steps to prepare for going revenue-positive, a business needs to be able to know when that point will happen. For companies that invoice clients, sales numbers do not necessarily equal cash flow. Accountants can guide small business owners on developing payment terms that both provide enough leeway to develop and retain a customer base, yet provide for steady flow into a company’s coffers. Along these lines, getting a process in place to follow up on outstanding invoices can help insure that cash is, indeed, coming in to ensure that your other business expenses get covered.
A major concern during normal times and an expense that perhaps many businesses see expendable amid the pandemic’s push to work from home — especially for businesses that are on the cusp of going revenue-positive — the costs of office space or warehousing can be a major cash flow concern. Many commercial leases are for five to 10 years, with often a few months of abatement over the first few months and rents ticking upward every year by a few percentage points. Many new entrepreneurs might not realize that GAAP compliance requires building out a lease schedule to figure out the total amount due each month and amortize it into a straight line, even expense throughout the life of the lease.
Predicting startup revenue and expenses, now and later
Speaking of property rental, when going revenue positive, startups have to take steps to insure their investment. Part and parcel of that is paying for business insurance such as general liability coverage and owner’s insurance. Most of these costs are incurred and paid for either upfront or monthly but you have to amortize them over the life of the policy. An accountant for a new startup needs to set up the books so that the business’s profit and loss statements don’t take the hit for an entire year’s worth of insurance in one month.
And there are some business expenses that are just an exercise in predicting the unpredictable. Imagine you just launched a new Etsy store. There are lines on your cash flow sheet that make sense but an entrepreneur might, amid the stress and excitement of running a new business, might overlook, such as office supplies or raw materials for your item. But depending on how much you’re selling, your shipping costs might go up or down depending on the volume rate you can negotiate. What you first thought might cost $8 to ship might actually cost $22.
For most businesses, that kind of change in a material cost-line item can make the difference between profitable or breaking even — if not losing money on the sale. As this type of information tends to be buried in the numbers, an accountant can spot this discrepancy and bring this up as a place to cut costs. A harried new business owner might not even realize the leverage they could wield. Most vendors are more than willing to cut deals for long-term volume customers, compared to one-off, walk-in customers.
Along the lines of shipping, the costs of accepting returns and replacements can add up: suddenly that incoming revenue is going back out. That damaged item suddenly became revenue negative after you had to send a replacement. These expenses required the best educated estimate an accountant can make. Usually by year two or three, however, patterns begin to emerge, and planning for such business trends becomes much easier. Often, you can use the historic annual percentage of returns and replacements multiplied by the projected revenue for the future year(s).
Identifying the state (or municipality) of your business
While it might seem obvious, early-stage businesses need to make sure that they are registered in the state where they operate. Many entrepreneurs hear that incorporating in Delaware despite living in and primarily operating in New York, for example, could have tax benefits. Yet the paperwork involved might not necessarily mean that move makes the most sense. In this instance, the business would need to be registered as a foreign entity in the state where it primarily operates, New York. Additionally, it will need to stay in compliance with any annual filing requirements for both jurisdictions. More registrations follow: businesses that sell taxable goods need sales tax authorization and account numbers, plus any applicable business licenses. An accountant can provide advice right off the bat as to the course of action that will be most efficient in terms of paperwork and being tax-favorable.
Once that business is up and running, there comes the little issue of sales tax. It’s perhaps the biggest tax concern for a revenue-generating small business that sells consumer goods or services that are taxable. And if you do not report sales tax or make the payments, it often comes with pretty heavy penalties, an audit, and being on the radar of the local / state sales tax department.
A small business owner can spend hours reading through the rules and still miss some nuance; or alternatively, they can save themselves some headache and find a tax accountant to navigate the rules in their city and state, as well as any destination-state shipping taxes. New small business owners might not realize or forget that sales tax rules and rates can vary widely not just from state to state, but also from city to city. Within the five boroughs of New York City, the sales tax is 8.875 percent; elsewhere in the state, rates might be as low as 4 percent. In Chicago, sales tax rates are 10.25 percent, though the Illinois state sales tax rate is 6.25 percent. States might even have reciprocity with sales tax; in any case, this means paperwork that an accountant can handle with expertise.
This being said, state and local tax authorities can offer great help to new businesses, such as waiving income taxes for the first year of business. Consult your local small business or economic development office to see what programs are offered: tax incentives for certain municipalities and hiring thresholds abound, as well as grant programs for entrepreneurs and new startups. Many states and cities offer tax credits for businesses if the startup anticipates growing by a certain headcount in a set period of time. Some will even provide loans that are forgiven once you meet the growth milestones agreed upon. An accountant who has deep experience working with startups will, more likely than not, be familiar with commonly used programs in the area. So ask one!
Accountants: Street smarts for startup revenue
Moreover, an accountant who’s familiar with the workings of a general city or region will be familiar with the local going rate for expenses such as capital, property, and vendors — and profitability rates as accordingly, For example, an accountant familiar with New York will be able to tell a prospective boutique owner that projected sales of $50 per square foot will more likely than not fall short of the average cost of $75+ per square foot in Manhattan commercial rent. An accountant can advise on what items and how much stock to put on the floor, item price points, or on seeking potential lower-rent locations for the store.
Along similar lines, an accountant with local savvy can advise well-intentioned but perhaps naive entrepreneurs when they’re at risk of getting ripped off, including doing reviews of contracts. I often quip that accountants can do much of the same work as lawyers, though for cheaper.
On that note, shouldn’t the question be whether or not a new startup can afford an accountant? Considering the hours of paperwork, bookkeeping, and price comparison involved, accounting should be a top-line item for new entrepreneurs.