Successful accounting: tips for founders
Accounting is a rather tiresome duty for self-employed people and most entrepreneurs. We provide clarity and make proper accounting easier with our explanations and tips. Founders and start-ups in particular should work carefully here: because incorrect accounting can quickly get very expensive!
Before we get started: What is accounting anyway and what is it for?
Accounting is the term used to describe the organisational unit in a company that deals with bookkeeping. This in turn is the complete, chronologically and factually ordered recording of all business transactions. If your accounts are kept correctly, anyone who knows how to read them will be able to review and understand your entire business year in no time at all. However, if things remain unclear or errors are even found in the books, penalties may be imposed. All large companies and corporations in Germany are required to keep accounts. They must therefore keep so-called double-entry accounts and report regularly to the responsible tax office. These reports are important for the state, as they enable it to check whether a company is paying sufficient taxes. Most companies use the mandatory accounting system to their advantage as far as possible: they evaluate their own data and can make fact-based decisions for the future as a result. The precise view that accurate bookkeeping enables often reveals a company’s weaknesses or strengths that are not noticeable in normal day-to-day operations. Through this process of cost monitoring, which is usually referred to as controlling, companies ensure that they remain financially stable and successful in the long term. The bottom line is that bookkeeping and accounting serve two purposes: firstly, reporting to authorities and secondly, an overview of one's own company.
What do you have to do to keep proper accounts?
Whether you use an accounting software or a tax consultant, or do your own accounting: you have to comply with quite a bit and understand certain correlations. Otherwise there is a danger of a rude awakening during the next audit. We have put together 4 accounting tips that are particularly relevant to founders and start-ups but which offer added value to almost all companies. If you follow this advice, your bookkeeping will be much easier.
1. Learn the rules of the game
A great deal of importance is attached to correct procedures in Germany. There are precise regulations for which documents must be where and when. This ensures that business runs smoothly but sometimes poses a challenge for entrepreneurs. The good news is: You do not have to deal with the entire legal apparatus to run a successful business. But you should be very familiar with all the regulations that affect you, your business model and your company. There are also some requirements to be met with regard to accounting. Those who fail to do so must expect severe penalties. In particular, data protection and the "Principles for the proper keeping and storage of books, records and documents in electronic form and for data access (GoBD)" often lead to penalties. We have summarised the most important regulations in the GDPR (General Data Protection Regulation) and the GoBD in two short lists for you.
- Transparency: You must educate customers and partners about how you use their information.
- Purpose: You may not use any data for a purpose that one of the parties concerned has not agreed to.
- Data limitation: You may only obtain the necessary personal data.
- Erasure: You must be able to erase the data or parts of the data at any time if a data subject or the legislator so requires.
- Training: You must train your employees regularly to inform them about the GDPR requirements.
- Data protection officer: If your company has "substantial processing of personal data", you must appoint a data protection officer.
- Inalterability: From the time of the accounting entry, documents and data must be stored in such a way that they cannot be subsequently altered. Every change must be documented precisely and all versions must be retained in full.
- Completeness: All information relevant to tax must be retained in full.
- Traceability: All data must be ordered chronologically and logically in a comprehensible way.
- Retention periods: Balance sheets, receipts, preliminary and subsequent calculations must be retained for 10 years. A shorter period applies to commercial letters only, where 6 years is sufficient.
- Availability: All documents must be available in a machine readable format at all times over the required period.
- Punctuality: Accounting entries must usually be made within 8-10 days of the transaction. The final entry must be made by the end of the following month at the latest.
The following applies to GDPR and GoBD:
- Duty of disclosure: A company must be able to provide information at any time about how which data is stored, for what purpose, by whom, where and for how long and who has access to it. Not only can the data protection officer demand information but every customer can also ask at any time which of their data is stored and who has access to it. Also, under which conditions and within which period of time a data erasure takes or can take place must be communicated here. This duty of disclosure also applies with regard to bookkeeping: If an auditor asks how which data is stored by whom, where and for how long and who has access to it, the company must be able to provide this information.
Even if the GDPR has no direct influence on accounting, it must always be present at least in the back of your mind. Since a customer could always request the erasure of their own data, the accounting department must store all business transactions separately and the customer must be made aware of data which the company will continue to store for a long time for legal reasons. One simple example of this is the customer's bank details: this is personal and must be stored for 10 years due to the GoBD and must be in a machine readable format. If a customer requests that all data concerning them be erased, they must be made aware that this is only possible to a limited extent. Otherwise, this will result in gaps in the accounts, which may lead to severe penalties.
2. Learn the vocabulary
If accounting is new territory for you as a founder or start-up, you are in for quite a bit. You should prepare for this by learning business terms like the vocabulary of a foreign language. At the beginning there are dry definitions like "What is turnover?" or "What is a balance sheet?" and later the specific application: "How does turnover and profit differ and where do they appear on the balance sheet?"
If you can already answer these questions: good. But there is much more to learn. Most founders are already familiar with terms such as deposit, income, yield, performance, expenditure and costs from everyday life but sometimes they differ considerably in accounting. It is therefore important to have a good overview here. Even if you employ a tax consultant, you must be familiar with the use of technical terms to avoid misunderstandings. We have created an infographic for you, in which you can clearly recognise important accounting terms and their context.
3. Keep calm – work thoroughly
The most important thing in proper accounting is regularity. Many young entrepreneurs who do their own bookkeeping get into a sweat at the end of the year because they have not thought about their books all year round. If you have the discipline to do the bookkeeping on a daily basis right from the start, you can look forward to the end of the financial year with confidence. You should make every effort to book business transactions that occur during the day directly, report them to your tax advisor or at least document and classify them properly. In addition, you should check whether everything has really been properly documented at the end of each month. This will save you sleepless nights at the end of the year. Start-ups and founders can therefore already prevent the initial problems in accounting during the company’s early stages.
4. Get help
Hardly any entrepreneur can cope with accounting on their own, especially at the beginning of their career. For this reason, there are numerous tools and addresses that provide support. First the obvious: find a tax consultant you trust and/or use professional accounting programs to avoid mistakes. You are welcome to contact Invest in Bavaria: we will assist you in your search for partners. In general, you should not enforce a foundation on your own. This is also not necessary, as Bavaria offers numerous contact persons for this purpose. The BayStartUP and Gründerland Bayern initiatives, for example, support start-ups and young companies during the start-up phase. We, too, have already written tips on how you can be successful with your company in Bavaria. If you use all these contacts, then accounting is sure to present you with challenges as a founder or start-up but you will master them with flying colours.