You’ve created a minimum viable product you’re proud of. You’re spending late nights with your pitch deck. You’re probably not lying awake at night wondering, “are my books balanced?”
Accounting and bookkeeping is 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 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.
Accounting vs. bookkeeping
Both are numbers-related, but bookkeeping and accounting are not quite the same thing. 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 as a startup you may have an additional need to keep good records. If you have investors, they’ll require that you provide financial reports. And if you are seeking fundraising, you’ll need clear and easy-to-read financials so that potential investors can make an informed decision about investing in your vision.
If you’re a brand new startup, read this
Before you can start accounting, you’ll need to make a few decisions about the structure of your business.
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.
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). For example, if you a 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 more accurately track a long-term picture of the business—something especially 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.
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:
- Bank and credit card statements
- Cancelled checks
- 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.
Bookkeeping checklist 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, 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 either “Yes,” or “time to make some changes.”
We recommend that you schedule dedicated time for handling your business’s financials. 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.
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, you can use your financials to make other decisions, too.
This key startup metric, at its simplest, is how much cash you have on hand vs. how much you spend each month. For example, if you have $50,000 in the bank and project to spend $5,000 per month then you have 10 months of runway even if you don’t make a dime in revenue.
Net profit margin ratio
Sometimes just known as “profit margin.” Put simply, this number tells you how much profit you are earning 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. 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.
Accounting and bookkeeping: should you DIY or outsource?
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.
Use an accountant. Early and often.
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 and hiring 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 just 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 our 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
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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