Accounting might not seem like the most exciting part of running a startup, but it’s undoubtedly fundamental for long-term success.

Getting your startup’s finances in order is non-negotiable, from setting up robust financial systems to managing cashflow and meeting tax regulations.

In this guide, we’ll explore the essential accounting strategies and best practices you need to master. That includes:

• setting up your accounting systems 
• mastering cashflow and key financial metrics
• understanding tax responsibilities
• R&D tax credits
• raising funding.

By the end, you’ll be equipped to make astute decisions, mitigate risks and build a thriving company that stands the test of time.

 

Setting up accounting systems: building a robust financial foundation

Your startup’s accounting system is the foundation of your financial operations. 

A well-designed, efficient accounting system is crucial for managing your finances, ensuring compliance with regulations and providing the insights you need to make informed business decisions.

Here’s a step-by-step guide to setting up a robust accounting system.

Choose the right accounting software

Start by selecting a cloud-based accounting platform that aligns with your startup’s needs and budget. 

Popular options include Xero, QuickBooks Online, FreeAgent and Sage Business Cloud. These platforms offer features such as automated bank feeds, invoicing, expense tracking and financial reporting. 

Ensure the software you choose complies with Making Tax Digital (MTD), which requires digital record-keeping and submission of VAT returns. All the leading cloud accounting tools, including those above, are MTD-compliant.

Establish a chart of accounts and financial controls

Create a well-structured chart of accounts that reflects your startup’s financial activities and aligns with accounting standards (FRS 102 or IFRS). Your chart of accounts should include categories for assets, liabilities, equity, income and expenses. 

From there, you should establish robust financial controls and documented processes to ensure the integrity and accuracy of your financial data. This includes:

• establishing approval workflows for expenses and payments
• regularly reconciling bank accounts and credit card statements within your cloud accounting software
• maintaining accurate and up-to-date records of all financial transactions
• conducting periodic internal audits to identify and address any discrepancies.

Set up payroll and HR systems

If you have employees (or are planning to), you’ll need to establish a Pay As You Earn (PAYE) system to manage income tax and national insurance (NI) contributions. 

Use HMRC-approved payroll software or outsource to a reputable payroll provider. 

Ensure compliance with employment laws, including minimum wage requirements, pension auto-enrollment and statutory benefits.

Seek professional advice

Working with a qualified accountant or financial adviser who specialises in working with tech startups can be a huge asset. 

They can provide valuable guidance on setting up your accounting system, ensuring compliance with regulations, and optimising your financial processes. 

You can also consider outsourcing your bookkeeping and accounting functions to free up your time and focus on growing your business.

Richardsons specialises in startup accounting and financial management, offering the following.

• Business setup: We offer company formation assistance, business bank account setup, HMRC and Companies House registrations, and VAT registration.
• Financial planning: Cashflow management, budgeting and forecasting, business plan creation, and funding advice.
• Compliance and reporting: Tax-return preparation and filing, Companies House compliance, Making Tax Digital support, and management accounts preparation.
• Ongoing support: Payroll services, VAT compliance, regular financial advice, and scalable accounting solutions.

By working with us, you can focus on building your company while we handle the financial nitty-gritty. 

Mastering cashflow and other metrics

Cashflow is the lifeblood of any startup. It refers to the inflow and outflow of cash in your business over a specific period. 

Understanding your cashflow also helps you calculate other financial metrics that measure your business’s financial status and progress. 

 

Develop a robust cashflow forecast

There are three steps to building a simple yet robust cashflow forecast.

1. Create a comprehensive cashflow forecast that projects your expected cash inflows and outflows over the next 12 to 18 months. 
2. Include revenue projections, operating expenses, capital expenditures, and any anticipated financing activities. 
3. You should regularly update your forecast based on actual results and changes in your business environment.
4. You can use your accounting software to help you do this. 

Monitor key cashflow metrics

Keep a close eye on critical cashflow metrics to assess your startup’s financial health and identify potential issues early on. Key metrics to track include the following.

• Burn rate: The rate at which your business consumes cash each month. Calculate your burn rate by subtracting your monthly cash outflows from your monthly cash inflows.
• Cash runway: This is the number of months your startup can continue operating before running out of cash, based on your current burn rate and cash reserves.
• Working capital: The difference between your current assets (for example, cash, accounts receivable, inventory) and current liabilities (for example, accounts payable, short-term debt). Positive working capital indicates your ability to meet short-term obligations.

Manage your burn rate

To extend your cash runway – which is paramount for early-stage startups – you’ll need to closely monitor and control your startup’s burn rate. That means reviewing your expenses and optimising costs. 

To extend your runway, proactively address any cashflow gaps by increasing revenue, reducing costs or securing additional funding.

Tax guide for tech startups

Getting to grips with your tax responsibilities early is essential. Here’s what you need to know.

Corporation tax

If your startup is incorporated as a limited company, you’ll be subject to corporation tax on your taxable profits. 

As of 2024, the corporation tax rate is 25% for companies with profits over £250,000, while companies with profits under £50,000 will pay a lower rate of 19%. 

Those with profits between £50,000 and £250,000 will pay a tapered rate. Here’s how to manage your corporation tax obligations.

• Keep accurate records of your income, expenses and investments.
• Consider hiring an accountant experienced in working with startups to help you calculate your taxable profits and claim available deductions and reliefs.
• File your company tax return (CT600) and pay any tax due within nine months and one day of your accounting period end date.

Value-added tax (VAT)

As of April 2024, if your startup’s annual turnover exceeds the VAT registration threshold of £90,000, you must register for VAT with HM Revenue and Customs (HMRC). 

Once registered, you’ll need to charge VAT on your taxable goods and services and file VAT returns, typically on a quarterly basis. To navigate VAT effectively you’ll need to do the following.

• Monitor your turnover closely and register for VAT promptly once you exceed the threshold.
• Consider the impact of VAT on your pricing strategy and cashflow.
• Keep detailed records of your VAT-related transactions, including sales and purchases.
• Explore the various VAT schemes available, such as the flat rate or cash accounting schemes, to determine which best suits your startup’s needs.
• Ensure timely filing of your VAT returns and payment of any VAT due to avoid penalties and interest charges.

Employment taxes

If your startup has employees, you’ll need to manage pay as you earn (PAYE) income tax and national insurance contributions (NICs). 

As an employer, you’re responsible for deducting these taxes from your employees’ salaries and paying them monthly to HMRC. Here’s how to handle employment taxes effectively.

• Register as an employer with HMRC and set up a PAYE scheme.
• Ensure you have the necessary systems and processes to calculate and deduct the correct income tax and NICs from your employees’ pay.
• Keep accurate records of your employees’ pay, deductions, and benefits or expenses.
• File your full payment submission (FPS) to HMRC on or before each payday.

Self-assessment

If you are a director of a limited company, you may need to file a self-assessment tax return. 

The deadline for submitting your online self-assessment return and paying any tax due is typically 31 January following the end of the tax year. To manage your self-assessment obligations you need to:

• keep accurate records of your personal income and expenses
• understand which expenses you can claim as deductions against your income
• consider engaging an accountant to help you prepare and file your self-assessment return
• plan ahead for your self assessment tax liability and set aside funds to cover the payment.

Tax-efficient employee benefits

Offering tax-efficient employee benefits can help you attract and retain talented individuals while managing your startup’s tax liabilities. Some options to consider include the following.

• Enterprise management incentive (EMI) share options: This is a tax-advantaged scheme that allows you to grant share options to key employees, giving them a stake in your startup’s success.
• Cycle-to-work scheme: This scheme allows your employees to purchase bicycles and related equipment through a salary sacrifice arrangement, providing tax and national insurance savings.

Maximising your startup’s potential with R&D tax relief

Research and development (R&D) could be a key part of your growth strategy. 

The good news is that the government offers generous tax incentives through the R&D tax relief scheme to encourage and support innovation. 

By claiming R&D tax relief, you can reduce your tax bill or receive a cash credit, providing a valuable boost to your startup’s financial position.

Understand the eligibility criteria

To qualify for R&D tax relief, your startup must be engaged in projects that seek to advance in science or technology by resolving scientific or technological uncertainties. 

The project must relate to your startup’s trade and involve a systematic approach to problem-solving. Typical eligible projects can include developing new products, processes or services and improving existing ones.

Identify qualifying R&D activities

Keep detailed records of your R&D activities, including project plans, timesheets and expenditures. Qualifying R&D activities can include:

• software development
• product design and engineering
• testing and prototyping
• feasibility studies
• subcontracted R&D work.

Calculate your eligible R&D expenditure

Eligible R&D expenditure includes costs directly related to your R&D projects, such as:

• staff salaries and wages
• employer’s national insurance contributions and pension contributions
• materials and consumables
• utility costs
• software licences
• subcontractor costs.

Prepare and submit your R&D tax relief claim

Compile your R&D tax relief claim, including a detailed technical report that outlines your R&D projects, the scientific or technological uncertainties you sought to overcome, and the advances achieved. 

Keep meticulous records of your R&D activities and expenditures, and consider seeking professional advice to ensure you’re maximising your claim and complying with HMRC’s requirements.

Securing the fuel for growth

Securing adequate funding is essential for the growth and success of your business.

There are numerous ways to raise business capital these days, from angel investors and venture capitalists (VCs) to crowdfunding. Let’s examine the main options.

Bootstrapping

Bootstrapping involves funding your startup through your own savings, revenue generated from early sales, or support from family and friends. It allows you to retain full control and ownership of your business and secure early progress. 

Angel investors

Angel investors are high-net-worth individuals investing their money in early-stage startups in exchange for equity. They often provide financial support, valuable mentorship, industry connections and strategic advice. 

To attract angel investors:

• develop a compelling pitch highlighting your startup’s unique value proposition, market potential and growth strategy
• attend startup events and pitch competitions to locate angel investors (you can also look online and approach them directly)
• be prepared to negotiate terms and give up a portion of your equity in exchange for their investment and support.

Venture capital (VC)

VC firms invest in high-growth startups with significant market potential, typically in exchange for a substantial equity stake. 

VC funding is usually more suitable for later-stage startups that have already demonstrated traction and are ready to scale rapidly. To secure VC funding:

• refine your business plan and financial projections to demonstrate your startup’s scalability and potential for high returns
• research and target VC firms that specialise in your industry or stage of development
• be prepared for a rigorous due diligence process and to give up a portion of your equity and control.

Crowdfunding

Crowdfunding platforms such as Kickstarter, Indiegogo and Crowdcube allow startups to raise funds from potentially hundreds of thousands of individuals, usually in exchange for rewards or even equity or debt. 

Crowdfunding can validate your product or service, build brand awareness and engage with potential customers. To run a successful crowdfunding campaign:

• choose the right platform based on your goals, target audience and funding needs
• develop a compelling campaign page with a clear value proposition, engaging video and attractive rewards or investment terms
• promote your campaign through social media, email marketing and press outreach to drive traffic and contributions.

Debt financing

Debt financing involves borrowing money from lenders, such as banks or alternative finance providers, and repaying it with interest over a set period. 

Debt financing can provide the capital you need without diluting your equity, but it also involves taking on financial risk and may require collateral or personal guarantees. To secure debt financing:

• develop a strong business plan and financial projections to demonstrate your ability to repay the loan
• explore various debt options, such as term loans, lines of credit or equipment financing, to find the best fit for your needs
• compare multiple lenders’ rates, terms and eligibility requirements to secure the most favourable deal.

EIS and SEIS: tax-efficient investment schemes

While exploring these funding options, startups have an additional ace up their sleeve: the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). 

These government-backed programmes offer tax incentives to investors, making your business a more appealing investment prospect.

Seed Enterprise Investment Scheme (SEIS)

SEIS is designed for very early-stage companies. It allows investors to claim up to 50% income tax relief on investments up to £100,000 per tax year. You can raise up to £150,000 under SEIS. To qualify your company must:

• be UK-based and less than two years old
• have fewer than 25 employees
• Have gross assets under £200,000.

Enterprise Investment Scheme (EIS)

EIS is for slightly more established businesses. Investors can claim 30% income tax relief on investments up to £1m per tax year. You can raise up to £5m per year, with a £12m lifetime limit. To qualify your company must:

• be UK-based and trading for less than seven years
• have fewer than 250 employees
• have gross assets under £15m.

Making the most of EIS/SEIS

You should do the following to use these schemes effectively alongside your other funding strategies.

• Ensure your company meets all eligibility criteria before approaching investors.
• Obtain advance assurance from HMRC to reassure potential investors.
• Highlight the tax benefits in your pitch to make your investment opportunity more attractive, especially when courting angel investors or setting up a crowdfunding campaign.
• Keep meticulous records to comply with HMRC requirements.

While EIS/SEIS can make your startup more appealing to investors, you’ll still need a solid business plan and growth strategy to secure funding. 

Don’t be afraid to combine different funding sources to create a diversified and sustainable funding mix.

The bottom line

And there we have it – the basic ingredients of startup success! 

Keep in mind that mastering your startup’s finances is an ongoing process that requires continuous learning and adaptation. 

Laws and regulations change often – you must be diligent to avoid getting caught out. 

While there’s a lot to learn, every successful startup founder once stood where you are now. 

By embracing your business’s financial characteristics, you’ll be well-equipped to make informed decisions and seize opportunities as they arise.

Are you ready to take your startup’s finances to the next level? Richardsons is here to help. 

Our expert team specialises in guiding startups through every stage of their financial journey. 

View our business startup services here or contact us, and let’s build your financial future together.