As difficult as it is to swallow, the majority of startups don’t last very long. There are lots of reasons why new companies tend to fold within the first three years, but principal among them is poor financial management. It often takes startups 2-3 years before they begin to turn a profit, which means that in order to survive, your business’s finances must be absolutely watertight. Accounting in startups is therefore key to success.
Contents
- A beginner’s guide to startup accounting
- Practical approaches to accounting for startups
- Conclusion: What to look for when hiring an accountant
A beginner’s guide to startup accounting
Even the greatest, most groundbreaking startup ideas in the world can fail without proper accounting to help see them through those first few years. For example, before Spotify monopolised global music streaming, there was another equally promising startup called Crowdmix, which, despite $14M in funding, failed due to poor financial management.
The difference between opening your ‘2026 Spotify Unwrapped’ versus a ‘2026 Crowdmix Unwrapped’ lies in the state of your startup’s finances, so let’s get to it: why is startup accounting so important and what does it actually involve?
Why is accounting in startups so important?
Quality accounting is key to the survival and growth of any startup. Here’s why:
- Quality accounting helps shore up potential cash flow problems: As we’ve already mentioned, one of the most common causes of business failure is financial mismanagement. Good accounting practices help to ensure that your business always has enough cash available to keep the lights on.
- Quality accounting ensures your business fully complies with UK law: All UK businesses, including startups, must comply with tax law and financial regulations as set by His Majesty’s Revenue & Customs (HMRC). Compliance with corporation tax, Pay as You Earn payroll (PAYE) and Value Added Tax (VAT) is made possible through accurate accounting.
- Quality accounting can help you to secure more investment: The second most common cause of startup failure is insufficient funding. Most startups will require a mix of funding, loans, and grants to see them through the first few unprofitable years and “into the black.” Solid startup accounting helps prove to potential investors that:
- 1) You know what you’re doing, and
- 2) You have a clear financial roadmap to profitability, so they know when they can expect to see a return on their investment.
- Quality accounting helps you to make the best decisions possible for your startup: Accounting ensures that you know exactly where your business’s finances stand, so that you can make sensible, data-backed decisions which improve and grow your company.
What does startup accounting involve?
At its most basic, startup accounting is the process of recording the money your business makes against the money it spends, and making decisions and projections based on these records.
For a startup to be successful, it must make more money (over time) than it spends. It must also manage its cash flow well enough to ensure that there is always ‘working capital’ (i.e., cash) to cover operational expenses like loan repayments, utilities, business rates, and staff wages.
I’ll show you some practical ways to achieve these goals later.
Understanding key accounting terms for small businesses
Here’s a quick look at some definitions of key accounting terms, to help you wrap your head around the jargon:
- Cash flow: The balance of cash moving in and out of your business during your chosen accounting period.
- Accounting period: A specific length of time covered by your business’s financial statements, often a fiscal year which you set in alignment with your business cycles.
- Gross profit: The total revenue your business generates across each accounting period, minus the cost of goods or services sold.
- Net profit: The amount of profit you’re left with after deducting operating expenses (like staff wages, business rates, rent, etc.) from your gross profit.
- Capital allowances: Capital allowances refers to the purchase of goods, assets and equipment (such as plant and machinery) for exclusive use by your business, which HMRC deems tax deductible—meaning you can deduct the cost of these purchases from your net profit before paying tax.
- Taxable profit: The amount of profit you’re left with after capital allowances are deducted. This is the amount which HMRC will tax you on.
- Corporation Tax: The tax businesses pay on taxable profit at the end of their accounting period. The corporation tax rate is currently set at 19% for small business profits under £50,000 per year, and 25% for larger business profits over £250,000.
- Loss: ‘Loss’ refers to when a business’s profits are in the negative—i.e., the business made less money over the accounting period than it spent. Losses can typically be carried forward to help reduce future tax bills.
- Debit: A type of accounting entry that increases your business’s assets whilst decreasing its liabilities, or what it owes—basically, “cash in”.
- Credit: A type of accounting entry which decreases your business’s assets whilst increasing its liabilities, or what it owes—basically, “cash out”.
Do startup businesses need to hire an accountant?
There’s a chance you’ve reached this point in our guide and are asking yourself whether you have what it takes to run a business and its accounts. After all, small business owners are responsible for every aspect of their startup’s operations, from recruitment and staff management to advertising, marketing, sales generation and more.
Keeping your accounts accurate, up-to-date and solvent can take a lot of time and practice. That’s why around 80% of UK SMEs prefer hiring a professional accountant to doing startup accounting DIY. Check out my article on DIY vs professional accountancy for limited companies if you’d like more help in making the decision for your own startup.
Practical approaches to accounting for startups
Here are some top tips for startup accounting, which I think you’ll find useful, whether you opt for DIY accounting or outsourcing to the professionals.
Set up a business bank account
Small businesses can suffer from a lack of distinction between personal and business finances, especially if you’re a sole trader or the owner of a really small startup. My first top accounting tip to you is simple: open a separate business account to handle all of your business finances.
Choose your preferred accounting method
Next, it’s time to choose between cash accounting or accrual accounting. Cash accounting records transactions only when cash actually changes hands (for example, only when an invoice of yours is paid by the customer). Accrual accounting records transactions when they occur (for example, on the date an invoice is created, rather than when it’s actually paid).
Cash accounting is handy for small businesses with fairly straightforward accounting needs. Accrual accounting is more suited to larger companies, which require a clearer picture of their accounts on a day-by-day basis.
Keep all receipts and invoices on file
Accurate records are absolutely fundamental to accounting in startups. UK law requires businesses to keep financial records, including receipts and invoices, for example, for a minimum of six years.
Consider purchasing accounting software
There is a plethora of really useful, user-friendly accounting software out there for you to use. If you plan on conducting your accounting in-house, it’s well worth investing in some Cloud-based accounting software like Xero or QuickBooks. These programmes can help to automate time-consuming processes like invoicing, expense tracking and payroll. HMRC has also recently introduced their new ‘Making Tax Digital’ initiative, which will soon require sole traders and VAT-registered businesses to complete their tax returns digitally—accounting software like those programmes mentioned above make complying with MTD a breeze.
Get to grips with allowable expenses
Knowing what expenses HMRC considers tax-deductible (such as capital allowances) will help you to minimise your corporation tax bill year-on-year. Offsetting key operational costs via allowable expenses will likely prove crucial to your survival through those challenging first few years.
Learn to understand VAT
Businesses that generate over £90,000 turnover a year are legally required to register for VAT in the UK, though you can also opt to voluntarily register for VAT if you feel doing so might benefit your business financially. VAT can get complicated, so reading up on it early on is advised.
Budget, budget, budget
Prior preparation prevents poor performance, which in the context of small business accounting means drafting a solid, realistic budget to help you meet your financial goals.
Set aside money for taxes and emergencies
I always advise UWM client businesses to set aside 20-30% of their income each year for the purpose of paying their corporation tax bill. It’s also well worth putting aside a little extra in case of emergencies.
Conclusion: What to look for when hiring an accountant
Quality accounting is essential if your startup is to succeed, and whilst you could go down the DIY route, I would tend to recommend—and the majority of small UK business owners would agree—outsourcing your accounting needs to a professional.
When hiring an accountant, it’s important to look at their track record in the UK, as well as their familiarity with UK startup laws and regulations. Smaller, local accountancy firms are more likely to have your best interests at heart versus bigger conglomerates. Transparent fees are also obviously important, so you know what you’re getting for your money, whilst accountants with experience using cloud software will be able to give you the most transparent and effective service.
If you’d like to learn more about how a small, dedicated team of English accountants can help to make your startup dreams a reality, get in touch with Xero Gold Partner, UWM Accountants, today.
