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Your budget is tight during the early stages. That means you’re responsible for a ton of different facets of your business, even if you don’t have experience in the area. Now that your startup provides services or a product, transactions and financial data are rolling in daily. It’s a lot to handle.
There’s the general ledger to handle, the sub-ledgers for related accounts, and other numbers to keep track of – on top of everything else unrelated to bookkeeping. You know you need to organize your bookkeeping before it swallows your financial stability.
Disorganization goes beyond financial security, however. When you don't have structured bookkeeping practices, it's easy to lose critical information for future business decisions.
The great news is that managing your bookkeeping is manageable. You can attain financial accuracy by following bookkeeping best practices and using the right tools.
What is bookkeeping for startups?
Startup bookkeeping differs from larger businesses in setup and execution. With smaller teams, it's common for founders to take on the initial setup and execution of bookkeeping themselves. This can be challenging for startups, especially when founders lack a background in bookkeeping.
Bookkeeping is the process of recording, classifying, and organizing financial transactions systematically and consistently. It includes tracking money coming into your business and money going out. This can include sales, purchases, receipts, payments, salaries, and taxes.
To record these financial transactions, you'll need to use an accounting system, such as a general ledger, accounts payable and receivable registers, and a trial balance. In addition to recording financial transactions, bookkeeping also involves reconciling bank statements, preparing financial reports, and analyzing financial data.
An organized bookkeeping system can help you stay on top of your startup's finances while providing data-driven insights to inform future business decisions. Without a bookkeeping system, founders can easily miss out on important financial information that could help their business succeed. This includes tax deductions, cash flow projections, and financial trends.
What's the difference between accounting and bookkeeping?
While bookkeeping is the recording and organization of financial data, accounting is the analysis, interpretation, and reporting of that information for decision-making purposes.
Bookkeeping encompasses the basics of tracking expenses, invoices, and payroll. As your startup grows, these tasks become more complex, with the number of incoming and outgoing transactions increasing exponentially.
When you’re setting up a system for bookkeeping, you need to understand how accounting ties into proper bookkeeping. For accountants (or yourself) to use the data collected through bookkeeping, the data needs to be accurate.
Best bookkeeping practices for healthy financials
Bookkeeping should play an essential role in your business, allowing you to stay organized and make informed decisions. Developing strong bookkeeping practices and systems that work for your company is key to healthy finances.
Clean books are the foundation of accurate and reliable financial data. Here are seven easy bookkeeping practices to get you started.
1. Start a bookkeeping system
You'll need a bookkeeping system immediately to help you stay organized and avoid costly mistakes. Without adequately managed finances, you can find yourself dealing with missed payments and budget overspending.
When implementing a bookkeeping system, you need to construct a system that matches your specific business model. SaaS businesses, for example, need a bookkeeping system that includes MRR, ARR, and recurring revenue recognition.
Good financial records are also important for taxes and accurate tax returns — incorrect tax filings can lead to avoidable penalties and fines.
2. Separate personal finances from startup finances
Mixing your personal and business finances is a recipe for disaster. It can create confusion and make it difficult to stay organized. Generally Accepted Accounting Principles (GAAP) recommend keeping your personal and business finances separate.
If you use personal credit cards for business purchases, write them off on your taxes.
3. Optimize a chart of accounts
Creating a chart of accounts (COA) is the key to tracking your startup's financial health. A COA lists all the accounts a business uses in its general ledger broken into categories such as assets, liabilities, equity, expenses, and revenue. These subcategories help you gain an accurate picture of your financials.
4. Monitor AP and AR consistently
Monitoring your accounts payable (AP) and accounts receivable (AR) are integral to keeping your books healthy. AP records all the company's payments to debts and loans, while AR records payments customers owe the company from sales.
Monitoring both ensures you correctly account for debt and assets. Without a balanced AR and AP, you could be overspending or not receiving the appropriate payments.
5. Check for accuracy before reconciliation time
Reconciliation involves comparing two sets of financial records to ensure they match. At the end of each month, an accountant or founder will find the total of all entries made into a particular account and compare it to the balance in the bank statement or another secondary source.
Aligned financial records ensure accuracy and prevent fraud or mismanagement of funds. Checking for errors or discrepancies in the books before reconciling each month is best to safeguard your reconciliation process. You can adjust the books before it's time to reconcile by catching mistakes early.
6. Establish internal guidelines
It's important to set up internal guidelines for bookkeeping and establish systems for recording information. Solid guidelines help keep paperwork organized and streamline accounting processes.
Some policies include giving one person the responsibility of accepting and entering invoices and establishing consistent protocols for tracking and filing documents.
7. Schedule a time to do your books
Bookkeeping is a tedious but necessary task for all businesses. To ensure your finances stay on track, it's best to set aside time daily to review and update your books. Scheduling time will help you stay on top of transactions, catch errors, and provide accurate information for financial reports.
The importance of good bookkeeping practices
Strong bookkeeping practices allow startups to remain financially stable and scale effectively. Without clean books, making informed decisions and tracking your business's progress is difficult.
Establishing a solid system for bookkeeping will help your business remain competitive and organized. Investors and potential buyers will appreciate the discipline of your finances, and you'll be able to feel confident that your books are in order. Taking the time to practice good bookkeeping habits will help you stay on track and succeed.
Why does startup bookkeeping matter?
Startups manage their finances differently from larger corporations, but sound bookkeeping principles remain the same. Even a small team can misplace documents, overlook transactions, or make miscalculations.
After going through the hassle of doing our own bookkeeping for our first two startups, we learned that following a system of bookkeeping best practices is the key to monitoring financial health and ensuring accurate records.
Without the necessary steps, startups can experience cash flow issues and struggle to identify where money is going. With robust accounting processes, however, you can maintain an organized set of books and accurately track data for future decision-making.
The steps to successful bookkeeping include:
- Creating a system that is right for your business
- Keeping organized records
- Checking for accuracy before reconciliation time
With a well-managed set of books, you can confidently move forward and make sound decisions for your startup's future.
Even if you think bookkeeping isn't necessary right now, it will become essential as your business grows. The more records and data you have, the more likely you are to make mistakes that can be time-consuming and difficult to fix. Being proactive and setting up a system now will save you headaches in the long run.
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