Early-Stage technology startups have nuances compared to more traditional small businesses that they need to consider when putting together their financial statements and chart of accounts. Often I find that entrepreneurs have used a financial model to assist them in their fundraising efforts but this model can often differ wildly from their actual financial operations.
Having a good chart of accounts lays the foundation for having a clean set of financial statements that are easy to understand and contain information that the management teams can use to make important decisions. Founders sometimes can make the mistake of not paying enough attention to the chart of accounts, and in the opposite circumstance having too detailed of a chart of accounts that makes recording transactions an unpleasant chore that is time-consuming and of no real value-add.
We have created two sample charts of accounts based on our years of experience that we think can help early-stage tech founders and their accountants/bookkeepers with this crucial step. Here is the link to download. This chart of accounts is designed to uploaded into Quickbooks Online however the basic framework can be used for other G/L packages such Xero and Wave Apps.
The first chart of accounts is for an e-commerce startup that sells inventory, and the second one is for a Software as a Service (SAAS) company. The chart of accounts can be imported into a brand new Quickbooks Online by following instructions here. Using account numbers ensures that accounts ordered the way you want to see them presented.
E-Commerce Startups should make sure to record Inventory on their Balance Sheets. In the sample chart of accounts you will see we have created three accounts for Inventory including raw materials, work-in-progress, and finished goods. If your startup is selling few SKUs, it may be helpful to separate them out on the chart of accounts. However, past 5 or 6 SKUs the balance sheet will become cluttered with this information so using fewer accounts will lead to more clarity. The detail level can be maintained under the parent account.
Using the parent account and sub-account, you can view a more detailed breakdown of your transactions. For example, you can track your domestic and international contractors by creating sub-accounts under the parent account of Contractor. You can also track your employee reimbursements by various breakdowns such as travel, meals, office expenses, etc.
Early stage founders sometimes make the mistake of recording convertible debt and investments as revenue on the P&L. We have created some commonly used accounts such as SAFE Notes, Convertible Debt, and the various equity accounts which include common stock and preferred stock. If there are multiple rounds raised it is common to see a separate equity account for each round for instance - Preferred Stock - Series Seed, Preferred Stock - Series A etc.
For the revenue section, we have included e-commerce sales which can also be broken down further by channel for example - amazon sales, website sales, etc. Cost of services such as Amazon Web Services and other hosting costs should also be captured as part of the gross margin calculations.
Using account numbers comes in handy in Quickbooks Online especially when it comes to expenses as otherwise things are ordered alphabetically. Larger expenses such as salaries, rent, and subcontractor payments should come first.
For those of you have a finance background and want to calculate EBITDA (Earnings before interest, tax depreciation, and amortization) I would recommend ordering those accounts last.
We hope this guide and sample chart of accounts will be a good foundation for your company to start. As always customization is key to get the accounts to line-up the best way for your taste and ultimately to help you make decisions. We would very much recommend that you work with a CPA and Quickbooks ProAdvisor to help your startup get an optimum setup that is customized to your company. If you would like to schedule a time to speak to us regarding this please use link to my calendar to schedule a call.
To download the chart of accounts please see the link to download.