Intro

Welcome back to Thinkk's startup foundations course. Today, we're diving into a topic that might not be as exciting as marketing or product development, but trust me, it's absolutely crucial for your startup's success: tracking your expenses. At Thinkk, we've seen firsthand how proper financial management can make or break a young company, so let's get into it.

Setting Up Accounting Software

One of the first things you should do after starting your business is set up your accounting. I can't stress this enough - proper financial tracking from day one will save you countless headaches down the road.

At Thinkk, we always advise our clients to log all expenses related to their business. It's not just about being organized - it's necessary for tax season. And let me tell you, there are a ton of write-offs and deductibles that you might not be aware of.

For example, if you're working from home, you can deduct a home office. Your business formation expenses? Deductible. Those new computers and software you bought for your startup? Yep, those too. Even those business lunches where you discussed your company's future can be written off. Heck, you can even log the gas you used to drive to that networking event.

Now, I'm not an accountant, and this isn't meant to be accounting advice. But I've learned over the years that a great accountant is worth their weight in gold. They can help you navigate these waters and ensure you're taking advantage of every possible deduction.

Creating Accounting Categories

When it comes to categorizing your expenses, some accounting software will do this automatically, while others require manual input. At Thinkk, we've had great experiences with QuickBooks, which offers excellent automation features. On the other hand, software like Wave Payments requires more manual categorization.

If you're not sure which categories to use, here's a little hack we've found useful: ask ChatGPT to create a list of categories that relate to your specific business and are IRS tax compliant. This can save you a lot of headaches come tax season.

Understanding Cash Flow vs Net Profit

Now, let's talk about two crucial financial concepts: cash flow and net profit. At Thinkk, we always emphasize the importance of monitoring both.

Your balance sheet shows your assets and liabilities - things like your bank balance, any assets your business has bought (like machinery or computers), and any debt you've taken on. It's a snapshot of your financial position at a given time.

Interestingly, many businesses choose to take on debt because the interest is tax-deductible. But be careful with personally guaranteed loans - you'll be on the hook for those even if your business doesn't succeed.

Your profit and loss statement (P&L) shows what's left over after expenses are paid. This is the money that goes into your bank account, may be distributed to equity holders, and that you pay taxes on.

Here's where it gets tricky: you can have positive cash flow and negative profit, or positive profit and negative cash flow. Both scenarios can be problematic, which is why we monitor both closely.

Cash flow is the money coming in and going out of your business. It's crucial for day-to-day operations. If you see that you need a cash infusion, you might consider a working capital loan. These can be relatively easy to pay back if you have consistent money coming in the door.

Net profit, on the other hand, is what's left after all expenses and taxes have been paid. It's a key indicator of your business's financial health in the long term.

Automating Your Accounting

One of the best pieces of advice I can give you is to automate as much of your accounting as possible. If you have recurring expenses, like a monthly subscription to ChatGPT or your office rent, set up automatic payments and categorization. Trust me, it'll save you a ton of time and effort come tax season.

At Thinkk, we've seen how this simple step can free up countless hours that you can then invest back into growing your business. It's all about working smarter, not harder.

Preparing for Tax Season

When tax season rolls around, you'll want to have all your ducks in a row. Print out your P&L and any other necessary forms. These days, you can submit most of this electronically to the IRS, which is a huge time-saver.

If you're feeling overwhelmed (and believe me, many founders do), don't hesitate to bring in a professional. A good accountant can be a game-changer, helping you navigate complex tax laws and ensuring you're not leaving money on the table.

Wrapping Up

I know tracking expenses might not be the most thrilling part of running a startup, but it's absolutely essential. Proper financial management gives you a clear picture of your business's health and can help you make informed decisions about growth, hiring, and investment.

Remember, at Thinkk, we believe that a successful startup isn't just about having a great product or killer marketing strategy. It's about building a sustainable business, and that starts with solid financial practices.

In our next class, we'll be talking about building your team - another crucial step in scaling your startup. Until then, take some time to set up your accounting system. Trust me, your future self will thank you!