Startups are the new normal in a changing world. Startups are successful in solving problems in non-traditional ways and quite successful in creating value for the investors. A startup ecosystem involves raising funds from enthusiastic potential investors in many rounds of fundraising. Entrepreneurs and startup founders build their companies so that potential big investors or businesses can acquire them at a later stage, thereby creating financial benefits for the team. Startups attract investors based on the innovative idea of solving problems, but the potential buyers would scrutinize the startup's financial health before investing. With regards to the financial and accounting soundness, the following are some of the accounting factors that startups should consider:
Books and Finances in Order
Big firms planning to take over Startups will thoroughly examine the company finances to ascertain if they are proper and in order. Startups must ensure that their company's accounting and bookkeeping practices are accurate and as per the required standards. In the UAE, all companies mandatorily must maintain the books of accounts not less than five years as per Federal Law No 2 of 2015 on Commercial Companies, the UAE VAT law and applicable free zone laws. In order to impress future investors, it is crucial to maintain the accounting books and records as per the applicable law.
Bookkeeping is the process of recording the day-to-day transactions in the companies and categorizing them in their heads, along with the reconciliation of banks with your accounts. For startups, the Bookkeeping function is done either by using Do It Yourself (DIY) or hiring an Inhouse Accountant. Outsource the Accounts to an experienced accountant can benefit the startups as it eliminates are irregularities in the accounting process.
Cash Flow Statements
A cash flow statement, in general, shows the account of the company's cash transactions with details about how much cash was generated and spent from various business transactions such as operations, investments and financing. As the company income statement does not indicate exclusive details regarding the cash flow during a period, the cash flow statement is prepared to gauge the cash related balances for the particular fiscal year.
A strong cash flow is instrumental for the startups to achieve growth and execute their business plans. Therefore, the cash flow statement shows the startup's capability to generate and utilize the cash. Prospective investors and acquisitors use the cash flow statement to ascertain a startup company's financial position. Any history of bad debts and customers making delayed payments affects the startup company's cash flow and is valued accordingly.
Financial Statements Audit
The Free zone companies must get their books of accounts audited by approved auditors in the UAE or emirates. To attract potential investors in the future, the startup should regularly get their accounting books audited by approved audit firms in the UAE. Investors and Acquisitors depend upon the audit reports to make a fair and accurate assessment of all the company's affairs. Moreover, audited accounts are free of any material misstatement or fraud, increasing the startup's trust.
Economic Substance Regulation (ESR)
The UAE has recently introduced regulations such as Economic Substance Regulation (ESR), Ultimate Beneficial Ownership (UBO), and Anti-Money Laundering (AML) laws in line with the European and international regulations and ensure transparency. Startups should check if these regulations apply to them. Startups failing to meet the regulations will attract penalties and face legal consequences. Such actions would make startups undesirable for any future investors.
All eligible taxable companies in the UAE must submit a collect VAT amount and file the VAT returns to the Federal Tax Authority (FTA) at the end of each predefined tax period in the UAE VAT Law. Late filing and non-filing of VAT returns make the startup liable for specific penalties imposed by the FTA. Therefore, potential investors would not deem it suitable to buy the startup that incurred VAT administrative penalties in the country.
How Can We Help?
Jaxa Chartered Accountants is an accounting and audit firms servicing the firms based in the UAE. We have an office in most UAE emirates that cater to the companies' accounting requirements. Our experts have experienced in guiding and setting up bookkeeping and accounting functions for many UAE startups. Please Contact Us for any questions on matters of accounting, tax and audit for startups. We'd be happy to help!