Accounting for founders: important facts and tools

Figure 1: Start-ups have a lot of work at the beginning and have to think about a lot of things. Things like writing invoices or keeping the books, monitoring incoming payments or filing tax returns on time are quickly forgotten. With the right tools it gets easier.

Every year people set out to become self-employed and face the challenges that come with it. Accounting is an important topic along the way. It is an obligation and, for many, a necessary evil. Depending on their legal form, young companies are subject to certain rules that are set out in the German Commercial Code, the GmbH Act, the Stock Corporation Act and also the German Civil Code. Companies that are subject to the HGB, for example, have an obligation to keep accounts. Sole traders are often subject to less strict rules. Accounting should not, however, be merely a tiresome obligation and a necessary evil. With the help of the figures from the accounts it is possible to run a company better, for example when customers do not pay their invoices or in order to avoid liquidity bottlenecks. Even in a small business, order in the books is important. But how does proper bookkeeping work? Are there electronic tools for it? How can the self-employed and entrepreneurs keep an overview of their finances?

Creating invoices correctly – it is quite simple

Figure 2: Bookkeeping is not only important for the tax return or because the law requires it. Entrepreneurs and the self-employed gain important data from it that helps with further planning.

Accounting begins as soon as you invoice your customers. Invoices have to contain certain elements. Sending invoices in an automated and efficient way saves a founder a lot of time and money. A legally sound dunning process is also important for companies. Here, a well-designed payment reminder can already move customers to settle outstanding invoices. It does not always have to be a formal reminder or a letter from a lawyer straight away. At the beginning, though, founders usually have quite different worries. Creating invoices correctly or planning the dunning process is right at the bottom of the priority list. But correct invoices are important, and that is why there is software that takes this part of the work off entrepreneurs’ hands in a legally compliant way. On comparison portals, the self-employed and entrepreneurs will find various invoicing programs compared, with plenty of tips and pointers on what matters when choosing the right program. It is important that invoices reach the customer on time and that customers then actually pay them. Late payers can put small and medium-sized companies in particular into serious payment difficulties. Cash flow and your own creditworthiness suffer as a result.

Tools for accounting

Alongside invoices, founders have another topic that is very unpopular. Even easy-to-use tools and accounting software do not change that. The programs do, however, have a few key advantages: they significantly reduce the time required and unnecessary errors. Here too, test reports can be very helpful in finding the right program for a start-up’s needs.

Since 2017, cash-intensive businesses, for example in the hospitality sector, have been required to work with an electronic till that has to meet certain requirements, according to aachen.ihk.de.

That does not make the work easier. But an electronic cash book also has advantages for founders. It speeds up processes and the data from the accounts is even more meaningful, because it is underpinned by additional data.

Tip: Additional data can be read from the figures in the cash book:

• Customer frequency
• Shop utilisation
• Peak times
• Which revenue arises when and where?

Order is half the battle

Figure 3: It is very important to always file tax returns on time. If all documents have already been pre-sorted, it is easy to find the necessary receipts and fill in the tax return.

That applies not only at home but especially in companies. Many self-employed people still work with time-honoured methods today, even though digitalisation could make it much easier. Business post and invoices go onto a pile of papers once they have been opened. As soon as important deadlines come up, such as the annual employee report or the tax return, the frantic search begins. Which pile holds the records for the salary payments? Where are all the important invoices for the annual VAT return? This method costs a lot of time and can become expensive if the tax office imposes penalty payments because tax returns are not filed on time (see vlh.de).

Tip: Organise documents as soon as they arrive – incoming and outgoing items can be collected monthly or quarterly and then filed neatly in the following period. The following filing compartments are helpful, for example:

• Outgoing payments (for example incoming invoices or fee notices)
• Incoming payments (invoices to customers)
• Employees
• Other (for example official letters, permits or similar)

A filing system reduces search times

By law, all merchants have an obligation to keep proper accounts. The aim is to present all business transactions clearly and make them verifiable. But entrepreneurs who are not subject to this obligation should also observe certain basic rules. Capturing all transactions is always the goal. A suitable system is needed for this. Order in incoming documents is only a first step. A good filing system is highly individual and has to fit the company’s needs. There are a few basic distinctions:

• Income
• Expenditure
  • Supplier invoices
  • Operating equipment
  • Rent/lease
  • Insurance
  • Communication/IT
  • Advertising and marketing
• Tax office
  • Advance tax returns
  • Tax assessments
  • Tax advisor
  • Correspondence with the tax office
• Employees
• Other

Important: Filing for everything concerning the current financial year, or still being processed for tax purposes, is important. But a filing system for all documents that entrepreneurs have to keep for years is just as important. Founders should give that some thought early on too.

Conclusion

Accounting, financial reporting and entrepreneurial thinking are closely connected. Only entrepreneurs with clear short-, medium- and long-term company goals are successful in the end. The data from the books is the basis for planning and business decisions. With good cash flow planning and a profitability forecast, the company’s future can be planned better. With a well-founded financial plan it is easier, for example, to obtain a loan from a bank. At the beginning it does not have to be that extensive at all. Companies not subject to the obligation to keep accounts can start with a simple cash-basis income statement, in which income is set against expenditure in order to calculate business success.

Credits: Figure 1: Pixabay © alexas_fotos (CC0 Public Domain) Figure 2: Pixabay © stevepb (CC0 Public Domain) Figure 3: Pixabay © webandi (CC0 Public Domain)