Accounting Basics for Indian Startups: Compliances, Valuation and a Lot More

One must always record daily transactions on a real time basis…

Keeping a real time track of your transactions is a must as the last thing you want is to be stuck backtracking all your transactions that haven’t been recorded. It raises the scope for error and missing out on a single transaction could result in all your efforts going in vain.

Also, when you look at moving to an accounting system, you need to have enough data to feed into the software. There are several cloud based softwares such as Quickbooks that are very economical and have a great, user-friendly interface. If you have your excel sheets ready, a few clicks is all it takes to import them into Quickbooks.

Q: How to stay aware of all the compliances you need to follow?

You must have prior knowledge of all the compliances you need to follow. In order to do this, you must:

• Create a due date chart of all the various compliances and follow that chart diligently.
• Don’t just follow it on the due date itself, set reminders ten days in advance that let you know that you have a certain compliance coming up.
• Implement monthly reporting.
• You may not be consider yourself knowledgeable enough to maintain a balance sheet and profit and loss sheet but basic things like a revenue sheet and an expense sheet can definitely be managed without much effort.

Q: How to find out about all the compliances you need to adhere to?

Well, in order to achieve this you’ll need to perfectly understand your sector. You need to consider the compliances you need to adhere to, both at the current stage you’re in as well as when you grow and scale further in the future. For example, the best way to break it down is to think that if you were to be the number 1 in your sector, what all compliances would come into play and at what stage.

One trap that you mustn’t get stuck in is, use advice given from a professional who is an uncle or a family member to counter what your accountant is telling you. No doubt, it’s always great to get an opinion from other people. However, the uncle or family member probably won’t have as much exposure or knowledge about the startup ecosystem and hence, their opinions maybe slightly skewed and inaccurate. It’s always advisable to find someone who is aware of your sector/industry.

Q: Why having a revenue model from day 1 is necessary?

There are plenty of startups that have gotten funded but still have a very flawed revenue model. Entrepreneurs must have their revenue model in place from day one so that by the time they start seeking funding, they have nothing to worry about on the finance/accounting front. Things like how the whole cash flow, fund flow and revenue model is going to work must be figured out at the earliest. So often you see a company where the founder has tried to manage the finances on his own as opposed to outsourcing it or seeking help. The latter always has an edge and the option of scalability, unless of course one of the founders is an accounting wiz.

Another thing to keep in mind is that this is India, not Singapore or the US.

In India, just getting your company name registered could take days on end. Even getting your company incorporated involves so many things that you wouldn’t know about unless you’re an expert. Hence, our advice would be that even if you do have the basic knowledge, always get an expert on board. In your startup’s growth cycle, that particular resource may not be with you throughout your journey but getting that updation from that resource will be of great help.

Q: How accounting affects your valuation?

Valuation is something every founder is obsessed with and rightfully so. Finance and accounting plays a large role here too, as, in order to have a justifiable valuation you need to have your numbers in place or else the investor isn’t even going to entertain you and your projections. The only way you can create a valuation report that an investor won’t shun off is by having all your numbers in place and this entirely depends on your finance/accounts team. In financial terms you have something called a DCF (Discounted Cash Flow) which you use in order to derive an accurate valuation. You must keep updating these numbers real time as going back to create this report at the end of the month could lead to an inaccurate DCF.

Even if you don’t have any knowledge of compliances and of what debit and credit are, having knowledge of those revenue numbers and the model is very important for an entrepreneur. As this will help keep you aware of:

• The problem you’re solving with your product and how viable a product it is.
• How much money you have in your kitty and how much more is going to come in.
• Where are you going to spend your money and how; are you going to register as a proprietor, partnership or Pvt. Ltd. Company.
• At what stage will you need more money.
• Under the given resources, can you hire a resource to look at your accounts. If not, till what point can you manage on your own.

Hire An Accountant From Day 1!

Which of the two scenarios would you rather be in. One, where you have an accountant from day one, who knows your finances in and out and you approach an investor with him by your side to back you on anything related to your accounts and finances. Or two, you approach an investor without knowing your own numbers.

Do remember, an investor will always keep a keen eye out at how vigilant you are with your utilisation of resources and only your finance and accounting departments will be able to tell you exactly where each of your resources are being utilised. Having this information when approaching an investor is a big plus point!

In the case of a freelancer…

Freelancers usually go to a CA annually with a proper document that includes all their data and transactions for the year. However, one thing to be kept in mind is that an excel sheet made by you will make all the sense in the world to you (obviously) but could be absolute gibberish to somebody else. This may work out for a freelancer but rarely will in the case of a company. Hence, there is a basic level of knowledge that needs to be given to your accounts person so that you both are on the same page. Basically, you must know how to create your data in a way that’s viable for you and your accountant. For example, you have plenty of softwares like Quickbooks, where you literally just have to put in the description for the transaction and the software fills out the rest and creates an excel for you.

We hope these little nuggets of information prove to be useful to you and help you get your accounting and finance systems in order. We have another post in the works, so stay tuned for more.

[This post first appeared on 91springboard.com and has been reproduced with permission. 91springboard is a vibrant coworking community created for startups, freelancers and business owners with a startup mindset.]

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