7-Step Guide to Doing Accounting in a Startup or SME

For any startup or small to medium-sized enterprise (SME), having a solid accounting foundation is critical to success. Proper financial management ensures that you can effectively track cash flow, budget efficiently, and remain compliant with tax regulations. Whether you're managing your accounting yourself or looking to scale with outside help, here’s a step-by-step guide to handling accounting in a startup or SME.

1. Separate Personal and Business Finances

One of the first and most important steps in startup accounting is keeping your personal and business finances separate. This makes tracking your business’s cash flow easier and ensures you’re ready for tax season. Open a separate bank account and business credit card to avoid mixing personal expenses with business-related ones.

Why it matters:

Without this separation, you risk muddling your financial records, which can make tax filing confusing and can lead to potential legal issues. Moreover, keeping things separate helps you get a clear picture of your business’s financial health.

2. Choose the Right Accounting Method

There are two primary accounting methods: cash basis accounting and accrual basis accounting.

- Cash basis accounting records revenues and expenses when cash changes hands.

- Accrual basis accounting records revenues and expenses when they’re incurred, regardless of when money actually exchanges hands.

For most startups and SMEs, the cash basis method works initially because of its simplicity. However, as your company grows, accrual accounting might become necessary for better financial tracking, particularly if you're raising venture capital or dealing with complex contracts.

3. Implement Cloud Accounting Software

Choosing and implementing cloud-based accounting software is crucial for modern startups and SMEs. Tools like QuickBooks, Xero, and FreshBooks help automate invoicing, track expenses, and generate financial reports in real time.

Why it matters:

Manual accounting using spreadsheets can lead to errors and is time-consuming. Cloud-based accounting systems save time, offer real-time insights, and allow you to access your financial data from anywhere, which is ideal for today’s fast-paced business environment.

4. Track Every Transaction

Whether it's a client payment or a minor business expense, every financial transaction should be tracked and recorded. Make sure you categorize transactions (e.g., travel expenses, office supplies, salaries) to keep your books organized.

Use tools to simplify tracking:

- Connect your accounting software to your bank account to automate expense tracking.

- Use receipt-tracking apps like Expensify to capture all small expenses on the go.

Why it matters:

Tracking every transaction helps you manage cash flow and ensure that you don’t miss out on any tax-deductible expenses. It also makes your financial reports more accurate, providing a better snapshot of your business’s performance.

5. Create a Budget and Stick to It

Budgeting is essential for startups and SMEs to ensure financial stability. Forecast your revenue and expenses for the next 6-12 months, taking into account fixed costs (e.g., rent, salaries) and variable costs (e.g., marketing, travel). Regularly revisit your budget to adjust for changes in your business.

Why it matters:

A solid budget prevents overspending and ensures you have enough cash on hand to handle unforeseen expenses. It also helps you manage cash flow better and make strategic decisions about scaling, hiring, or investing in growth initiatives.

6. Prepare for Tax Season Early

Tax season can be a stressful time for businesses, especially for startups that are handling their accounting themselves. Prepare early by staying organized throughout the year:

- Set aside a percentage of your revenue each month for taxes.

- Ensure all your financial records are up to date.

- Know the tax deductions your startup or SME is eligible for, such as home office expenses, travel, or even R&D tax credits in some countries.

You may also want to consider hiring a tax professional or a CPA for more complex filings, particularly as your business grows.

Why it matters:

Failing to file taxes properly can lead to penalties and legal issues, which could harm your business in the long run. Early preparation helps ensure you claim all eligible deductions and avoid unnecessary complications.

7. Regularly Review Financial Statements

The three main financial statements to review regularly are:

- Income Statement (Profit and Loss): Shows your revenue, expenses, and profitability over a period.

- Balance Sheet: Provides a snapshot of your company’s assets, liabilities, and equity.

- Cash Flow Statement: Tracks the flow of cash in and out of your business.

Review these statements monthly or quarterly to assess the financial health of your startup or SME. Regular reviews help you spot trends, make informed decisions, and identify areas for improvement.

Why it matters:

Staying on top of your financial statements ensures that your business remains healthy and sustainable. These reports also give you the information you need to present to potential investors or lenders if you're looking to raise capital or take out loans.

Good accounting practices are critical for startup and SME success. By following these seven steps, you’ll create a strong financial foundation that allows you to grow, attract investors, and stay compliant with regulations. Whether you're just starting out or scaling rapidly, solid accounting will ensure that your business stays on the right track.

MSME Strategy Consultants (global.msmestrategy.com ) specialize in helping startups and SMEs with tailored accounting and financial management strategies. With years of experience across industries, their consultants are ready to guide your business toward sustainable growth.