Accounting Thoughts for Startups

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Accounting Thoughts for Start-ups

• Presented by Randy Lieber
• of Abacube Accounting

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Bookkeepers, Accountants, CPAs ???

• Bookkeepers (least expensive)
• Can pay bills, send invoices, process payroll,
  reconcile bank accounts
• Not generally accountants
• Accountants (more expensive)
• Can do all that Bookkeepers do
• Have an accounting degree
• Generally understand basic GAAP (accounting
  rules)
• CPAs (most expensive)
• There are 2 types that should be used
  appropriately
• Accounting CPAs
• Understand complex accounting rules
• Tax CPAs
• Understand complex tax rules

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Key Issues for Start-ups

• Type of Organization
• Bookkeeping / Accounting
• Cash Management
• Office Space
• Eligible Expenses
• Correct and Timely Financial Statements
• Forecasting and Projections
• Payroll / HR / Compensation
• Stock option plans / ISOs and Non-Stat options
• Valuation (for investors and options)
• Obtaining Capital
• Preferred Stock Agreements
• Shareholder issues
• Revenue Recognition

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Type of Entity

• What is the purpose of your business?
• What is your exit Strategy?
• Limited Liability Company
• Single Member / Multi-Member
• C Corporation
• S Corporation
• What State to Incorporate in

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Accounting Systems or when is QuickBooks not
enough

• I know that QuickBooks or Peachtree works great
  when I am a start-up, but when should I change?
• When you need to have consolidated reporting
• If you have a large volume of sophisticated
  revenue transactions
• If you are integrating outside applications to
  the accounting system
• If you have foreign currency transaction/translati
  on needs
• If you have sophisticated inventory tracking
  needs
• Is it hard to convert from QuickBooks to another
  System?

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Cash versus Accrual Accounting

• I am a start-up. Does it matter? What is the
  difference?
• Cash accounting is just that record when you
  pay or receive
• Most cash accounting is actually a mixture
• Revenue is recorded when you invoice
• Expenses recorded when entered into accounts
  payable
• Accrual accounting matches revenue and expenses
  in the actual period when earned or services are
  provided
• Will be required for all external reporting
  purposes
• Lends credibility to your company

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How important are my Financial Statements?

• It depends on who they are for and what their
  purpose is.
• Management
• Board of Directors
• Banks
• Investors
• They can be a direct reflection on the
  credibility of the company and its management.
• If there are outside users, you dont want these
  to change.
• If you will need a review or audit, they should
  be as correct as possible.

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How important are my Financial Statements?

• Dont participate in Misrepresentation
• Businesses might be tempted to juggle the
  figures to get a bank or a vendor to lend money
  or to get an investor to contribute money. When
  this happens, the bank, vendor, or investor
  contributes money because of a lie. If the bank,
  vendor, or investor loses money or discovers
  youve lied, the business owner and accountant
  can end up in serious trouble. People do go to
  jail for this.

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Typical Adjustments to Financials

• Revenue and expenses recorded in wrong period.
• Revenue not being recorded correctly (not
  earned).
• Fixed assets and depreciation not done correctly.
• Accrued vacation not recorded.
• Rent is not recorded correctly.
• Insurance not recorded correctly.
• Loan and lease payments not recorded correctly.
• Warrants not recorded correctly.
• Stock issuance costs not recorded correctly.
• Stock option accounting not correct.
• Accrual for taxes (BO, sales, use, income) not
  recorded.
• Capitalized software (products and for internal
  use)

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We are Pre-Revenue what are our issues?

• Assume you will be successful
• Financial statements should be GAAP
• File all reports
• Payroll, LI
• BO, sales and use
• Annual Report
• Annual Corporate Tax Returns
• Collect information for 1099s
• Maintain personnel files
• Maintain support for expenses (expense reports)
• Use subcontractor agreements for consultants
• Tax planning
• Guaranteed payments, and tax return allocations

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We have Revenue now what?

• Is it revenue, or is it just an accounts
  receivable or a cash receipt?
• Does it meet revenue recognition rules?
• SOP 97-2
• SAB 104
• Is it collectible?
• Do you record it net or gross.
• Do you need to collect sales tax?
• You need to file BO tax returns.
• Allocation of net income to the shareholders and
  the ability to pay taxes.
• Corporate income tax payments
• Payment of estimated taxes

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Basic Management Tools

• Cash forecast reflects actual cash burn
• Budget (can be mitigated by PL Forecast)
• PL and Balance Sheet Forecast
• Monthly Financial Statements
• Monthly F/S side by side analysis
• Sales Pipeline
• For service companies, productivity reports

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Other Issues to Consider

• Insurance
• Employee location - Nexis
• Valuing Stock Compensation 83(b) elections
• Valuing Warrants
• Space Commitments
• Accounting for Barter Transactions
• Fixed Asset Capitalization Policy
• Use Tax buying items on the internet and not
  paying taxes.

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Payroll / HR Issues to Consider

• Wording in Offer Letter
• Wording in Employee Agreement non-compete
• Employee versus Consultant
• Is Employee Exempt?
• Out of State Employees
• Maintaining Employee Files
• Are Benefits to Employees Taxable?
• Effects of Comp time
• What Constitutes a work Day?
• Termination of Employees, protected classes

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Payroll Taxes

• Dont Borrow Payroll Tax Deposit Money
• Dont ever borrow the payroll tax deposit money.
  The IRS takes a very dim view of mishandling this
  money. If youre the owner, the bookkeeper or any
  other person and youve actively participated in
  borrowing the payroll tax deposit money, the IRS
  can collect the money from you. (The IRS assumes
  that this borrowing amounts to stealing and that,
  as an accomplice to the theft, you may as well be
  the one to pay.)