Rugged visionaries who pursue their dreams without asking permission from anyone may be what makes the world great. This is exactly what bootstrapping entrepreneurs do every day as they plug away at growing a startup. If you’re an entrepreneur in this category, you may already understand why every penny in or out needs to be scrutinized if you’re operating a bootstrapping startup. After all, you’re bringing a big idea to life with relatively no outside investment. The good news is that a good bootstrapping accounting strategy could bring significant value to the table with very little overhead involved. Let’s discuss some of the special considerations of bootstrapping bookkeeping when you’re growing a business using your own investment.
Updating or implementing an accounting system for tax purposes and meeting GAAP requirements for bootstrapping start-up companies contributes to growth with effective strategies. Bootstrap-funded businesses must maintain accurate financial records following the US generally accepted accounting principles and report income to the Internal Revenue Service. Accounting software, such as QuickBooks or NetSuite, is a solution that may help you on the journey of growing your company.
When bootstrapping funding a start-up company with multiple founders, problems can arise for unequal cash investment contributions. Suppose a founder takes an unequal equity amount for the amount of cash contributed the results can be tax consequences. Contributing disproportionate funds from one founder may become the fair market value, causing founders with lesser contributions to recognize a large amount of taxable income.
Under the IRS Code, Section 8(a), determining taxable income includes deducting cash contribution from the fair market value of equity received by the founder. Bootstrapping tax and accounting software can help streamline funding and withdrawal transactions of founders and partners for accurately reporting to IRS. Considering tax for bootstrapping funding is significant for setting up a chart of accounts, cash management, and payment management in your accounting system.
A Big Emphasis on Cost Accounting
What’s leftover after your sales are essentially fueling your ability to invest and reinvest in your business. That means that cost accounting may be what your business lives and dies by daily. A smart cost accounting strategy for a bootstrapping startup should consist of two veins. The first is a great set of procedures for recording and reporting all financial activities and measurements. The second is a platform that ingests and integrates everything.
Here’s a rundown of some key elements that should be incorporated into a bootstrapping bookkeeping strategy:
- Routine closes
- Statements and reports
- Custom chart of accounts
- Receipt matching
- Tax reporting
- Tax planning
Tax & Accounting Strategies
Managing your bootstrapping funding to aid in reducing tax liabilities and taking advantage of tax deductions, is one strategy that can contribute to company growth. Ensuring your bootstrapping-funded business has effective strategies for recording, processing, and managing financial transactions relies on accounting management technology. Your tax strategies should include:
- Tax management, planning, and reporting
- Payroll and human resource management
- Tax compliance
- Accounting standards and requirements
- Compensation and benefits planning
Cash basis may obviously be an important part of bootstrapping accounting because you need to know about revenues and expenses in real-time when you’re not pulling from investment reserves.
QuickBooks or NetSuite software is a reliable solution for bootstrap-funded companies to keep accurate records when accounting for bootstrapping funding. For small to medium businesses, QuickBooks is beneficial for collecting, processing, and organizing all your bootstrapping and financial information and data. If your bootstrap-funded company is a mid-sized or large business, NetSuite has robust features and functions for customizing security accessibility, risk management, and life-cycle management.
Whichever software you select as your accounting system, the expertise from a CPA or CFO is necessary for the implementation or updating of your existing system. Receiving tax advisory services may be beneficial for you and your partners to be consistently informed about new tax laws and amendments on taxable income. While NetSuite is expensive cloud-based software, QuickBooks is more cost-efficient for small businesses in the earlier stages.
Strategies Behind Smart Bootstrapping
A large number of small business entrepreneurs feel reluctant to beef up payroll because every salary they pay outcomes directly from their own pockets. It’s understandable. However, it’s also important to plan for a time when you will be ready to grow your team. Creating compensation and benefits plans that you can begin allocating resources, for now, may help you get in the position to court talent when you need it most. Additionally, it’s important to make sure you’re taking advantage of all tax benefits possible for a business owner running a self-funded business. Another aspect of bootstrapping tax planning is determining geographical tax obligations. If you do business in more than one state, you may need to address tax nexus.
It may be difficult to dedicate the time and resources needed to things like tax planning and financial reporting when you’re already wearing so many hats. Partnering with a full-time small business CPA may not be in the cards just yet but it could be a consideration soon. However, leaning on small business CFO business advisory services may help you to get those core financial tasks taken care of properly.
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.