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Accounting and bookkeeping are not as urgent as, say, finding a technical cofounder or figuring out your cash runway. But that doesn’t mean it’s not foundational to the health of your business. Plus, without accounting, how would you figure out your cash runway or budget for another salary?
If you’re the founder of a budding startup, this article will guide you through everything you need to know about bookkeeping and accounting, as well as some unexpectedly profitable benefits of thoroughly knowing your numbers.
What startups need to know about accounting
Accounting may not seem as urgent as finding your first customers or refining your product, but it’s just as critical to your success. Without a solid accounting foundation, you risk losing sight of your financial health, which can derail your growth. Here's why accounting matters for startups and how to get started.
Why good accounting for startups matters
Accounting isn’t just a backend task—it’s key to your startup’s survival. Good accounting helps you understand your cash flow, avoid financial pitfalls, and make informed decisions. Investors expect organized financials, and tax compliance relies on accurate record-keeping. It also ensures you’re ready to scale when the time comes.
Neglecting accounting early on can lead to costly mistakes that may hurt your ability to grow, secure funding, or stay compliant.
How to start accounting or bookkeeping for a startup
- Open a Business Bank Account: Keep personal and business finances separate to simplify bookkeeping and tax prep.
- Pick an Accounting System: Choose software like QuickBooks or a simple spreadsheet to track income and expenses.
- DIY or Outsource: Do your own books for a hands-on understanding, or save time by hiring a bookkeeper or using a service like Bench Accounting.
- Track Every Transaction: Log all income and expenses consistently to maintain clean, reliable records.
- Monitor Cash Flow: Regularly review your inflows and outflows to ensure you have enough runway.
- Get Expert Advice: Consult an accountant early to set up your system and explore tax-saving opportunities.
Starting with solid accounting practices ensures your startup is ready to face challenges, impress investors, and grow confidently. Meantime, before you can start accounting, you’ll need to make a few decisions about your business structure.
Choose a business entity
Your business entity determines how you are taxed, how you can pay yourself, your potential business liability, and more.
The five main types of business entities are:
If you haven’t landed on an entity type yet, you can read more about choosing the right business entity for your startup here.
How to choose an accounting method
Before filing your first business tax return, you’ll need to choose one of two possible accounting methods.
1. Cash basis accounting
The simplest form of accounting, cash basis accounting tracks income when it is actually received and expenses when they are actually paid.
2. Accrual basis accounting
Accrual basis accounting counts money when it’s “earned” rather than received (and the same with expenses). So, for example, if your customer signs a big contract, you’d consider the money earned, even if they haven’t paid you yet. This method is more complex, but it allows you to track a long-term picture of the business more accurately—something particularly useful when reporting to investors or making fast-paced scaling decisions.
Read more here about which accounting method is right for your startup.
Entity types and accounting methods can get pretty complex. We recommend chatting with a CPA before you make any firm decisions.
Accounting vs. bookkeeping
Both are numbers-related, but bookkeeping and accounting are not quite the same things. Bookkeeping is the process of tracking all financial records—mainly income and expenses. The term dates back to the olden days when business owners tracked finances in paper books.
Accounting is the process of interpreting your financial records for everything, from making sure you pay the right amount in taxes to making strategic business decisions based on your business’s numbers.
Both bookkeeping and accounting are vital to every business’s success, but you may have an additional need to keep good records as a startup. If you have investors, they’ll require that you provide financial reports. And if you are trying to get a business loan, you’ll need clear and easy-to-read financials so that potential investors can make an informed decision about investing in your vision.
Further reading: What is Outsourced Accounting and How Could it Help You?
What financial records should a startup keep?
So you’ve picked an entity and accounting method, and your business is rolling along. What types of financial records do you actually need to keep track of?
Short answer: everything.
Longer answer: Keep track of documentation that shows income, expenses, deductions, and credits shown on your tax returns. These can include:
- Receipts
- Bank and credit card statements
- Bills
- Cancelled checks
- Invoices
- Proof of payments
- Financial statements from Bench or your bookkeeper
- Previous tax returns
- W2 and 1099 forms
- Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return
And don’t just keep these items until you turn your forms over to the tax collector. You’ll want to hang on to most records for at least three years, though there are exceptions where you may want to keep your business’s financial records longer.
Further reading: Business Start up Costs (Examples and Rules)
Bookkeeping for startups
One thing you want to avoid is only cracking your business’s books when you’re forced to—such as at tax time or when courting a new investor. Here’s a bookkeeper-recommended checklist for keeping precise books.
Weekly Bookkeeping Tasks
Enter all transactions into your bookkeeping software or Excel spreadsheet
Even if you integrate your financial accounts with software or an Excel spreadsheet, be sure to enter everything else, such as cash transactions.
Categorize your transactions
Was that trip to Staples for office supplies or to pick up a new banner for your tradeshow booth? These two items are categorized differently on your tax return, so record the category while transactions are fresh in your mind.
File or digitize receipts
We recommend filing (or digitizing) your receipts and old invoices weekly. Otherwise, you’ll lose them and might not be able to prove certain expense deductions if you get audited.
Monthly bookkeeping tasks
Reconcile your bank accounts
This step is vital and safeguards you against any income or expenses slipping through your fingers. Bank reconciliations can be tricky until you get into the habit. To help you out, we’ve written a user-friendly guide to bank reconciliations.
Prepare and send invoices (if applicable)
Be religious about sending invoices as soon as you can.
Pay vendors and other bills
Just get it over with. Otherwise, you risk giving your vendors free money in late payment interest. Late payments could also affect your business credit score.
Review outstanding invoices
See who hasn’t paid you yet, and follow up. A smooth accounts receivable process is the lifeblood of your cash flow.
Review your financial standing
Any business’s prime question is, “Do I have enough money to keep operating?” Reviewing how much cash you have in the bank and how much cash you expect to come in will tell you: it’s either “Yes” or “Time to make some changes.”
Keeping good records also means that your life will be easier when it comes to quarterly and annual income taxes for your business. And last but not least, with confident knowledge of your books, you’ll be armed to make good financial decisions on behalf of your startup.
Accounting records every new business needs
Proper record-keeping is the backbone of good accounting. Here are two essential types of records every new business should maintain:
- Invoices & receipts: Keep a detailed record of every invoice you issue and receipt you receive. Invoices track income, while receipts validate your expenses. Both are crucial for managing cash flow, preparing taxes, and providing proof in case of an audit.
- Expenses: Document all business-related expenses, from office supplies to marketing costs. Categorizing expenses consistently ensures accurate financial reporting and helps you claim the right deductions at tax time.
Staying on top of these records will save you headaches and set your business up for financial clarity and compliance.
Financial statements: A startup’s secret weapon
This is the part where accounting becomes your best friend. Not only can you use well-kept books to ensure that you have more money coming in than leaving, but you can also use your financials to make other decisions too.
Runway
This key startup metric, at its simplest, is how much cash you have on hand vs. how much you spend each month. So, for example, if you have $50,000 in the bank and project spending $5,000 per month, you have ten months of runway even if you don’t make a dime in revenue. Similarly, your burn rate tells you how long you have until you need to start turning a profit.
Net profit margin ratio
Sometimes just known as “profit margin,” this number tells you how much profit you earn for each dollar of revenue. In other words, are you overspending? Do you need to raise prices or cut expenses? You may be depositing bundles of money in the bank, but this number shows if you’re truly making a profit or just treading water.
A good accountant, or your Bench bookkeeper, can help generate these reports and get a handle on your business’s financial health.
You won’t find this info in a traditional financial statement, but if you keep organized records, you can find some gems like:
Where are your customers?
Are most of your customers in a certain geographic area, like the Pacific Northwest? You’ll want to find out why and make business decisions based on your findings. For example, you might decide to run ads geographically targeted to that area or open an office there for easier access to your prime demographic.
Who are your biggest customers?
The Pareto Principle states that 80% of effect comes from 20% of causes. Are one or two big, loyal customers keeping the lights on? Find out what makes them tick so you can retain them longer and find more just like them.
Who are your top vendors?
Are you somebody else’s best customer? Use that data to negotiate volume discounts or to shop around for a better price on that service. Reducing costs will allow you to stretch your business’s dollars even further.
Does your startup need an accountant or bookkeeper?
As a startup founder, you’ll need to choose early on whether to spend your valuable time on accounting and bookkeeping tasks, or to outsource to the experts. Let’s explore your options.
The value of hiring an accountant
It’s never too early for a founder to speak with an accountant. Even when you choose to do your own weekly and monthly bookkeeping tasks, an accountant can provide guidance on early-stage questions such as “Which expenses can I write off?” and “What accounting method should I choose?”
You’ll also likely want an accountant on your side for tax time. Business taxes are much trickier than personal incomes taxes. An accountant familiar with your industry will help you pay the least amount of taxes possible and protect you from the IRS limelight.
Don’t have an accountant yet? Read our guide on finding the right accountant.
You can do your own books (if you have time)
When your startup is in its early stage, chances are your budget will be tight. In this case, you may want to consider managing your business’s books yourself.
As an added benefit, handling your own financials will allow you to truly grasp how money flows in and out of your business. You’ll feel more confident about your financial standing and the many rapid-fire financial decisions a startup founder has to make.
If you opt for the DIY accounting approach, you can check out our free Excel income statement template for a jumpstart.
You can outsource your bookkeeping
If the demands of startup life mean you don’t have time to learn QuickBooks, or if you’d rather leave bookkeeping to a pro, try Bench (that’s us).
We give you a team of bookkeepers to do your books and simple software to keep track of your financials. You get anytime access to your own bookkeeper, monthly financial statements, and a Year End Financial Package that will let our accountant file your taxes without a million back and forth emails.
Further reading: How to Dump Spreadsheets and Outsource Your Bookkeeping
The DIY approach
If you’re working with a tight budget, you might manage your own bookkeeping using tools like QuickBooks or a simple spreadsheet. This hands-on approach not only saves money but also gives you a deeper understanding of your startup’s financial health.
Outsourcing options
For founders short on time or not confident in handling financials, outsourcing is a smart option. Services like Bench Accounting provide dedicated bookkeepers and user-friendly tools to keep your records organized, freeing you to focus on growing your business.
Additional considerations for startup accounting
Taxes
Staying on top of taxes is critical for startups to remain compliant and avoid penalties. Here are three key areas to consider:
Sales taxes:
If you sell products or services, you may be required to collect and remit sales taxes, depending on your location and where your customers are based. Research your state or regional regulations and use sales tax software to automate calculations and filings.
Payroll taxes:
Once you start hiring employees, you’ll need to withhold and remit payroll taxes, including Social Security, Medicare, and state unemployment taxes. Many startups use payroll services like Gusto to simplify compliance.
Tax deductions:
Properly tracking and categorizing expenses can save your business thousands of dollars. Common deductions include home office expenses, travel, and startup costs. Consult an accountant to identify all deductions applicable to your business.
Funding and investor relations
Strong financial records are essential for attracting and retaining investors. Here’s what to focus on:
Financial reports: Investors want a clear view of your startup’s financial health. Reports like income statements, balance sheets, and cash flow statements provide transparency and help build confidence in your business.
Tracking equity ownership: As your startup grows, keeping an accurate record of who owns what is vital. Tracking equity ownership ensures there’s no confusion about shares, especially during funding rounds or exits.
Cap table management: A cap table (capitalization table) is a summary of your startup’s equity ownership, including founders, investors, and employees. Use software like Carta or Pulley to manage your cap table and avoid errors that could impact future funding rounds.
Growth and scale
As your startup gains traction, you’ll need financial strategies to sustain and accelerate growth.
Budget management: Regularly reviewing and adjusting your budget helps ensure you’re allocating resources effectively. Track spending against your projections and make adjustments based on your startup’s changing priorities.
Forecasting techniques: Basic financial forecasting can help you plan for future growth. Start by projecting revenue based on past performance, and pair it with an estimate of expenses. Tools like Excel or accounting software can simplify this process, enabling you to predict your cash flow and prepare for scaling opportunities.
By maintaining a focus on these financial strategies, you’ll be well-positioned to manage challenges and capitalize on growth opportunities as your startup scales.
Accounting and Bookkeeping Services for Startups
Startups have unique accounting and bookkeeping needs, and choosing the right service can make a significant difference. Here’s an overview of the options available:
Accounting software:
For early-stage startups, tools like QuickBooks, Xero, or Wave offer cost-effective solutions for managing basic accounting tasks. They include features like invoicing, expense tracking, and financial reporting, making them a great DIY option for founders with time to spare.
Outsourced bookkeeping services: If you’re short on time or lack confidence in your bookkeeping skills, services like Bench Accounting can handle your financial records. These solutions provide dedicated bookkeepers and easy-to-use dashboards, ensuring your books are accurate and up to date.
CPA firms: Certified Public Accountants (CPAs) specialize in tax preparation and financial planning. Working with a CPA firm is especially helpful for complex tax scenarios, such as handling multiple funding rounds, navigating tax compliance in different states, or preparing for audits.
All-in-one solutions: Some platforms, like Gusto or Zoho Books, combine accounting, payroll, and tax filing into a single service. These integrated solutions are ideal for startups looking to streamline multiple financial functions.
Industry-specific services: Certain industries, such as e-commerce or SaaS, have specialized needs. Look for accounting services or software tailored to your sector to ensure you’re capturing the right data and taking advantage of relevant features.
Investing in the right accounting and bookkeeping service early on can save you time, reduce errors, and help you focus on what matters most—growing your business.
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Want a more comprehensive look at how to set up the accounting and finances for your startup? Check out our in-depth guide, Small Business Accounting 101.
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