The Importance of Bookkeeping for Startups

For new startups and their founders, managing the accounting for their business can be an intimidating, and seemingly daunting task. Even some of the most basic aspects of accounting, such as bookkeeping, can get complicated. It is important for startups to keep their financial records in pristine condition, as having clean financials serve a multitude of purposes. Having properly prepared financial statements allows for regularly updating your stakeholders (i.e. investors, management, creditors) on your current financial position. In addition, it is crucial for a smooth tax filing season, and will help make sure you’re maximizing your tax deductions for year end. Finally, having well organized financial statements allows for powerful internal analysis, such as calculating burn rate and runway for your startup. Despite the importance of bookkeeping for startups, it still remains one of the most common issues that I’ve helped startups with over the years. To help understand the importance of bookkeeping for startups, lets examine what bookkeeping is, why it’s important, what some of the different options are for bookkeeping, how to set it up, whether or not to outsource your bookkeeping to a professional, and some best practices if you decide to DIY.

What is bookkeeping?

Bookkeeping can be defined as the systematic recording, categorization and reporting of the financial data of an organization. In other words, bookkeeping is your company’s way of “storytelling with financial data.” Bookkeeping will track the transactional activity of your business, such as receiving, recording and paying bills or creating, recording and sending invoices for services rendered. In addition, it can include performing bank reconciliations, making adjusting journal entries and tracking the depreciation of your different asset accounts. There are generally two approaches to accounting a bookkeeping will follow– cash basis and accrual basis. Cash basis is essentially recording transactions when cash exchanges hands, whereas the accrual basis records transactions when they are constructively earned (revenues) or incurred (expenses). Most small businesses and startups will generally follow the cash basis of accounting due to the simpler nature of it, but there are some exceptions, and it is recommended that you speak with a Certified Public Accountant prior to determining which accounting method you’ll employ.

Why is it important?

Bookkeeping for startups is critically important, mostly for the purposes of appeasing your different stakeholders. In general, you’ll be performing bookkeeping for three main stakeholders, listed below:

Management
Investors/Creditors
The IRS

Each one of these stakeholders uses your financial information differently. Management will use the financial data to make strategic decisions for the business. Examples of such strategic business decisions include expansion efforts, cutting specific service offerings or product lines, profitability by business segment and many others. Your investors and/or creditors may look at the financial statements a bit differently. For example, investors may be most concerned with your company’s revenue growth, or your cash flow. Creditors may be most interested in your balance sheet, and making sure you’re abiding by debt covenants set forth in the terms of your loan. Finally, you’ll use your financial statements to report your business incomes (or losses) to the IRS and pay any tax obligations that may arise.

What are my options?

When determining how to manage the bookkeeping for your startup, I always advise that a new startup or small business starts by opening a separate bank account (and credit card, if necessary) that will be used strictly for business purposes. There are legal reasons for this, but it also makes bookkeeping much simpler and more organized. Once a separate bank account is established, you have to decide whether or not you’ll use bookkeeping software, such as Quickbooks Online, Xero, or Wave, or if you’ll simply track your income and expenses by using a spreadsheet. Using an accounting software is usually my first recommendation, but if the cost of these software packages is prohibitive, make sure you’re using an Excel spreadsheet at a very minimum. For more guidance on deciding what option is best for you and your startup, consult a CPA.

How to set up a bookkeeping system

If you’ve decided to implement a bookkeeping system through an online accounting software, there are a few steps you should take. While this is not an exhaustive list, it’s at least a good baseline off of which to work. Setting up bookkeeping software will be different for every business type, and some business types are more complicated than others. If you have somewhat of an accounting background, you may be able to do this yourself. However, if accounting is entirely new to you, you’ll want to at least have a professional review your work, or handle it altogether.

Establish your chart of accounts and tailor it to your business type
Connect your bank account and credit cards
Import your existing customers
Import your existing vendors
Review the opening balances of your accounts (particularly your equity accounts)
Perform bank reconciliations to ensure completeness of your records

If the above list sounds a bit like a foreign language to you, pause your efforts and get some help from a professional. Poor bookkeeping can snowball, and become much more costly to fix down the road.

Do I need to hire a bookkeeper, or can I do it myself?

As a general rule of thumb, I usually recommend outsourcing your bookkeeping whenever possible. If either of the two below criteria apply to you, you should consider outsourcing your bookkeeping to a professional:

You have concerns about the accuracy of your books
You’re spending more than an hour a week performing bookkeeping activities

If you’re concerned that your financial statements don’t look right, they probably aren’t. Hiring the right bookkeeper, or accounting firm, can help alleviate the stress of that uncertainty. They’ll be able to identify any existing issues, and make suggestions for improving your bookkeeping processes moving forward.

In addition, if you’re spending more than an hour a week doing bookkeeping, it is probably not worth your time. For example, lets set the value of your time at $50 an hour, which is a conservative number. That amounts to a total of $200 worth of your time spent each month. Outsourcing your accounting to an affordable company will free up your valuable time to spend focusing on other income generating activities.

Best practices for bookkeeping

If you’ve decided not to hire a bookkeeper for your startup or small business, it is crucial that you’re sticking to some best practices for maintaining your accounting. Below are some recommended best practices:

Stick to a pre-determined frequency of bookkeeping. This may be daily, weekly or monthly, but it is crucial that you don’t wait until the end of the year to try and sort things out.
Perform monthly bank reconciliations
Regularly review your financial statements for any issues
Monitor your cash balances and ensure you can meet your outstanding obligations
Develop monthly close procedures
Ask your CPA if you have questions about specific transactions

Bookkeeping for startups, as established throughout this article, is crucial to a startup’s long term success. Throughout my time advising startups and small businesses, there is almost always a correlation with success and sound bookkeeping practices. On the flip side, sweeping your accounting under the rug until year end can be disastrous, and make for a much more stressful tax time with your CPA. Make bookkeeping a priority, not an afterthought, and you’ll be thanking yourself down the road.

Curt Mastio