Accounting
Accounting essentials for startups: key financial basics explained
Introduction
As a startup founder, your primary focus should be on building your product and growing your business—not getting bogged down in accounting and compliance. However, failing to set up proper financial processes can lead to cash flow issues, tax penalties, and problems with investors.
As a company director managing a business on behalf of investors, you have a legal duty to ensure your company meets financial and tax compliance requirements. While DIY accounting may work for a small, bootstrapped business, startups raising investment need professional accounting support to handle VAT, payroll, corporation tax, and investor reporting.
This guide will walk you through the accounting essentials every startup needs, along with pro tips and common mistakes to avoid.
Why Good Accounting Matters for Startups
A lack of financial management can cause even the most promising startup to fail.
Key reasons why accounting is crucial for startups:
Cash flow management – Poor planning leads to running out of money.
Investor confidence – Investors expect well-maintained financials.
Tax compliance – Late filings result in penalties and legal issues.
Funding readiness – Well-organized accounts make it easier to raise investment.
DIY Accounting vs. Hiring a Professional
Some founders choose to handle their own financials, but this only works if:
You have low transaction volume and a simple business model.
you're using accounting software like Xero or QuickBooks.
You have time to stay on top of tax deadlines and compliance rules.
However, as soon as you start raising investment or hiring employees, managing accounts becomes too complex to handle alone.
Pro tip: As an early-stage startup, you should get an accountant as soon as you start—especially once you begin raising funds.
Bookkeeping: The Foundation of Startup Accounting
Bookkeeping is the daily recording of financial transactions and the foundation of all accounting processes.
Best Practices for Startup Bookkeeping
Keep business and personal financials separate – Open a dedicated business bank account.
Track every transaction – Record income, expenses, and receipts properly.
Use cloud-based accounting software – Tools like Xero or QuickBooks automate financial tracking.
Reconcile accounts regularly – Ensure financial records match your bank statements.
Common Bookkeeping Mistakes to Avoid
Poor record-keeping – Leads to tax filing errors and missed deductions.
Forgetting to set aside tax money – Unexpected tax bills can cause cash flow issues.
Losing track of invoices – Late payments from customers can lead to financial shortfalls.
VAT for Startups: When and How to Register
VAT (Value Added Tax) applies once your turnover exceeds £85,000 per year, but startups can register voluntarily before reaching this threshold.
Pro Tip: Why Many Startups Should Register Voluntarily
Early-stage startups, particularly innovative startups, spend a lot before making sales. If you expect to have VAT to reclaim on business expenses, registering voluntarily can help with cash flow.
Monthly VAT Scheme – Instead of claiming VAT every 3 months, you can opt for monthly VAT returns to get refunds faster.
Common VAT Mistakes to Avoid
Missing the VAT registration deadline – Late registration can result in penalties.
Not claiming VAT on eligible expenses – You could be leaving money on the table.
Forgetting to charge VAT on sales – This can lead to unexpected tax bills.
Payroll for Startups: Paying Yourself and Employees the Right Way
Once you start hiring employees, payroll management becomes a legal requirement.
How to Pay Yourself as a Founder
Salary vs. Dividends – Early-stage founders rarely take dividends as most aren’t profitable, and investors typically don't allow dividend payouts. This means, unlike typical small company owners, you won't be taking a portion of your income as dividends and will be relying on paying yourself through payroll.
Key Payroll Responsibilities for Startups
Register for PAYE – Required for paying yourself and/or your employees a salary.
Deduct Income Tax & National Insurance – Directors' and employees' salaries must have tax deducted at source meaning the company is responsible for managing employee taxes.
Submit Real Time Information (RTI) Reports – HMRC requires payroll submissions every time employees are paid (usually monthly but can be more regularly depending on your business and payroll frequency).
Annual Accounts & Corporation Tax: What Startups Need to Know
Every UK company must file annual accounts and pay corporation tax on profits.
Corporation Tax Rates for Startups
19% on profits up to £50,000
Up to 25% on profits over £250,000
Most startups, especially in their early years, operate at a loss as they focus on product development and scaling. While loss-making companies don't owe corporation tax immediately, it is stil important that you have professional support keep you complaint.
Innovative startups may be eligible to claim R&D tax credits, allowing them to receive a cash refund from HMRC based on qualifying research and development activities.
Learn more about how R&D tax credits can benefit your startup.
When to Hire an Accountant (And What to Look For)
As soon as you start your business, you should have an accountant in place or at least have identified one that is suitable —especially if you're raising investment from external investors.
What to Look for in a Startup Accountant
Specializes in early-stage startups – Startups have unique needs compared to traditional small businesses.
Understands SEIS/EIS & investor reporting – Essential if you're raising funds.
Offers key services beyond compliance – Look for support with:
SEIS/EIS applications
Financial modelling for fundraising
Investor matching
Fractional CFO services
Need Expert Accounting Support?
Managing your startup’s financials doesn’t have to be overwhelming. Whether you need help with bookkeeping, tax compliance, or financial planning, Startup CFO is here to support your growth.
Beyond Accounting: How Startup CFO Can Help
SEIS/EIS Support – Ensure your startup qualifies for investment tax relief.
R&D Tax Credit Claims – Maximise cash refunds from HMRC for innovation.
Fractional CFO Services – Strategic financial leadership without the full-time cost.
Financial Modelling – Build investor-ready financial projections.
Investor Matching – Connect with the right investors to scale your business.
Introduction
As a startup founder, your primary focus should be on building your product and growing your business—not getting bogged down in accounting and compliance. However, failing to set up proper financial processes can lead to cash flow issues, tax penalties, and problems with investors.
As a company director managing a business on behalf of investors, you have a legal duty to ensure your company meets financial and tax compliance requirements. While DIY accounting may work for a small, bootstrapped business, startups raising investment need professional accounting support to handle VAT, payroll, corporation tax, and investor reporting.
This guide will walk you through the accounting essentials every startup needs, along with pro tips and common mistakes to avoid.
Why Good Accounting Matters for Startups
A lack of financial management can cause even the most promising startup to fail.
Key reasons why accounting is crucial for startups:
Cash flow management – Poor planning leads to running out of money.
Investor confidence – Investors expect well-maintained financials.
Tax compliance – Late filings result in penalties and legal issues.
Funding readiness – Well-organized accounts make it easier to raise investment.
DIY Accounting vs. Hiring a Professional
Some founders choose to handle their own financials, but this only works if:
You have low transaction volume and a simple business model.
you're using accounting software like Xero or QuickBooks.
You have time to stay on top of tax deadlines and compliance rules.
However, as soon as you start raising investment or hiring employees, managing accounts becomes too complex to handle alone.
Pro tip: As an early-stage startup, you should get an accountant as soon as you start—especially once you begin raising funds.
Bookkeeping: The Foundation of Startup Accounting
Bookkeeping is the daily recording of financial transactions and the foundation of all accounting processes.
Best Practices for Startup Bookkeeping
Keep business and personal financials separate – Open a dedicated business bank account.
Track every transaction – Record income, expenses, and receipts properly.
Use cloud-based accounting software – Tools like Xero or QuickBooks automate financial tracking.
Reconcile accounts regularly – Ensure financial records match your bank statements.
Common Bookkeeping Mistakes to Avoid
Poor record-keeping – Leads to tax filing errors and missed deductions.
Forgetting to set aside tax money – Unexpected tax bills can cause cash flow issues.
Losing track of invoices – Late payments from customers can lead to financial shortfalls.
VAT for Startups: When and How to Register
VAT (Value Added Tax) applies once your turnover exceeds £85,000 per year, but startups can register voluntarily before reaching this threshold.
Pro Tip: Why Many Startups Should Register Voluntarily
Early-stage startups, particularly innovative startups, spend a lot before making sales. If you expect to have VAT to reclaim on business expenses, registering voluntarily can help with cash flow.
Monthly VAT Scheme – Instead of claiming VAT every 3 months, you can opt for monthly VAT returns to get refunds faster.
Common VAT Mistakes to Avoid
Missing the VAT registration deadline – Late registration can result in penalties.
Not claiming VAT on eligible expenses – You could be leaving money on the table.
Forgetting to charge VAT on sales – This can lead to unexpected tax bills.
Payroll for Startups: Paying Yourself and Employees the Right Way
Once you start hiring employees, payroll management becomes a legal requirement.
How to Pay Yourself as a Founder
Salary vs. Dividends – Early-stage founders rarely take dividends as most aren’t profitable, and investors typically don't allow dividend payouts. This means, unlike typical small company owners, you won't be taking a portion of your income as dividends and will be relying on paying yourself through payroll.
Key Payroll Responsibilities for Startups
Register for PAYE – Required for paying yourself and/or your employees a salary.
Deduct Income Tax & National Insurance – Directors' and employees' salaries must have tax deducted at source meaning the company is responsible for managing employee taxes.
Submit Real Time Information (RTI) Reports – HMRC requires payroll submissions every time employees are paid (usually monthly but can be more regularly depending on your business and payroll frequency).
Annual Accounts & Corporation Tax: What Startups Need to Know
Every UK company must file annual accounts and pay corporation tax on profits.
Corporation Tax Rates for Startups
19% on profits up to £50,000
Up to 25% on profits over £250,000
Most startups, especially in their early years, operate at a loss as they focus on product development and scaling. While loss-making companies don't owe corporation tax immediately, it is stil important that you have professional support keep you complaint.
Innovative startups may be eligible to claim R&D tax credits, allowing them to receive a cash refund from HMRC based on qualifying research and development activities.
Learn more about how R&D tax credits can benefit your startup.
When to Hire an Accountant (And What to Look For)
As soon as you start your business, you should have an accountant in place or at least have identified one that is suitable —especially if you're raising investment from external investors.
What to Look for in a Startup Accountant
Specializes in early-stage startups – Startups have unique needs compared to traditional small businesses.
Understands SEIS/EIS & investor reporting – Essential if you're raising funds.
Offers key services beyond compliance – Look for support with:
SEIS/EIS applications
Financial modelling for fundraising
Investor matching
Fractional CFO services
Need Expert Accounting Support?
Managing your startup’s financials doesn’t have to be overwhelming. Whether you need help with bookkeeping, tax compliance, or financial planning, Startup CFO is here to support your growth.
Beyond Accounting: How Startup CFO Can Help
SEIS/EIS Support – Ensure your startup qualifies for investment tax relief.
R&D Tax Credit Claims – Maximise cash refunds from HMRC for innovation.
Fractional CFO Services – Strategic financial leadership without the full-time cost.
Financial Modelling – Build investor-ready financial projections.
Investor Matching – Connect with the right investors to scale your business.
Take control of your startup’s financials today.
Accounting mistakes can cost you funding and slow down growth. Get expert support to ensure your startup’s financials are compliant, efficient, and investor-ready. Book a free consultation now.