Bookkeeping for startups: Everything you need to know

Whether you’re doing the bookkeeping yourself, a third party is taking care of it, or you have an in-house employee covering it, proper bookkeeping for startups is different from good bookkeeping for other types of businesses.

In this article, we'll help you understand the importance of hiring a bookkeeper for your startup.  We’ll also cover financial statement preparation, keeping track of the cost of goods sold, managing invoices, and tax preparation.

What is a bookkeeper?

A bookkeeper is a professional who will maintain accurate records of every sale and expenses from your company. 

This person (or service) helps establish and manage an effective bookkeeping system, keeping your company's general ledger up-to-date by recording all financial transactions into your expense tracking or accounting software.

Much of their time is spent on data entry and tracking down receipts for business expenses to ensure accurate books and a compliant financial record. 

A bookkeeper isn't someone who should take their job lightly, as much of a small business boils down to the all-important element of finances.

Why is accurate bookkeeping important?

The information a bookkeeper manages is also used to file taxes, do VC due diligence, secure debt financing or small business loans, and outline the overall financial health of the company. 

When the data is accurate and clear, the business owner can then look at those figures and have a better informed decision-making process.

These smart financial management choices go beyond spending a little here and saving a little there. Bookkeepers are also responsible for generating the financial statements you’ll eventually need for a board meeting or a potential investor.

The three most common reports bookkeepers generate on a monthly basis are:

• Profit & Loss Statements: The P&L statement, or income statement, outlines your revenue, costs and expenses over a period of time. These statements use financial data to give business leaders and investors an idea of the company’s financial performance.

• Balance Sheet: The balance sheet outlines your company's current financial position, reflecting the company's assets, liabilities and shareholder equity at a specific point in time. It helps you understand how much your business is currently worth.

• Cash Flow Statement: The cash flow statement is a comprehensive guide to how much cash is flowing in and out of your business during a period of time. It’s especially valuable if you follow accrual accounting rather than the cash accounting method since your P&L won’t provide insight into your cash flow management.

Bookkeepers vs. accountants: What's the difference?

The best way to look at it is that a bookkeeper will analyze, track and maintain records of your day-to-day transactions in your bookkeeping software. 

They get down into the nitty-gritty; we're talking the final dollars and cents. They'll also provide nifty financial reports that can help you get the lay of the land.

An accountant, however, provides large-scale overviews of a company. They'll offer evaluations and insights based on the information recorded by a bookkeeper. 

Accountants love to interpret complex financial reporting data and identify problem areas that may need to be addressed. If, say, you're considering a fundraise, an accountant would be able to give you a heads up on whether or not investors might consider you to be a viable candidate.

We think an all-in-one finance solution with expert bookkeepers, accountants, CPAs, tax advisors and CFOs is the best possible solution for fast-growing startups, which is what we've created at Zeni — more on this later.

How much time do you spend on your books?

Knowing how much time you spend with your head in the books will help you know if it's time to find a bookkeeper. If you're a sole proprietorship and you only conduct, say, 20 transactions a month, then you may be alright. 

It may be possible for you to see how much money goes in and out with ease; nothing may fall through the cracks.

But, what if you're a startup founder with three business partners and you're starting to conduct about 150 transactions a month? Then, that's over 300 instances of money coming in (as you accept payments) and money going out (as you, say, purchase new products to sell).

In this example, financial reporting details and the odd bookkeeping task may start to fall through the cracks. It's easy for well-meaning startup founders or small business leaders to make mistakes during the bookkeeping process. 

What if you gave someone a discount here or honored a bulk purchase there? Will you know exactly how much money is in your company's account in order to restock?

See also: Startup Bookkeeping: Common Mistakes VC-Backed Startups Make and How We're Solving Them

At this point, you may be spending several hours on your monthly bookkeeping, instead of a manageable portion of your day. The moment you start to feel things slipping through the cracks and out of your hands, it may be time to hire a bookkeeper. 

(Remember! Easy bookkeeping is the name of the game. You have a lot on your plate already.)

An efficient bookkeeper or finance team will use best practices to maintain accurate records and cut your time spent with the numbers. This can free up a host of opportunities for you to, for example, engage with new business leads to further grow your business.

Are you falling behind on invoices?

What if you've launched a SaaS startup that uses invoices to generate revenue? This is quite a different affair from someone who deals in automated online transactions. 

Invoices require the initial contact, clear payment terms, and the occasional follow-up email. This can be hard to maintain if you're not a natural stickler for to-do lists and calendar updates.

One of the primary functions of a bookkeeper — and a service available to all Full Service customers of Zeni — is to send out invoices and collect payment. 

Having someone keep track of those who don't pay on time (and those who do) can be a wonderful asset. Then, once your monies are collected, they'll be accurately annotated in the books.

‍See also: 8 Best Accounting Tools for Startups

Is it time to grow your team?

Do you foresee yourself advancing from your core team of five to an office of 10? That's great! It's nice to see your startup bulk up. In which case, get ready for a whole new class of paperwork.

First, there's the initial hiring paperwork. A bookkeeper can make sure all those employee W-2s or 1099s are in order. Then, there's the weekly or biweekly payroll hassle. 

If you spend a little time in payroll, you'll quickly see there's a lot to keep straight because you're dealing with people and their livelihoods. This is the time when a smart bookkeeper all but makes you want to kiss their feet!

After the initial hiring paperwork and the bi-weekly payroll, there may be other oddities that come into the mix. What if you need to reimburse an employee for their travel expenses? 

What if you need to maintain their receipts for rideshares, meals, trade shows, and hotel stays? Without question, this is the time to introduce your wonderful employees to your masterful keeper of the books.

Can you pinpoint your cost of goods sold?

We like to use this as a benchmark for the health of someone's books. Can you pinpoint what it costs to make or acquire the goods and services that you're selling? 

This may include the cost of the materials or labor performed (eg: sales, operations costs, etc.). And for SaaS and other service-based businesses, this can be tedious and difficult to compute.

The Cost of Goods Sold (COGS) is the element that often gets lost in the shuffle. Head honchos at startups can easily see what's coming in and going out. 

But, it's important to know your COGS because, if you can't subtract that from your revenue, then you won't have an accurate depiction of your profit.

Like your invoicing, if your COGS is falling behind, then this is a nice indicator that it's time to ask for some help (and that's okay); we all need it from time to time. Bookkeeper services can puzzle the numbers together and present you with a focused picture.

Customers of Zeni have support of the Zeni Finance team to monitor how their COGS vs Revenues are trending, and proactively keep them informed on a monthly basis.

Are your sales aligning with your cash flow?

Consider your cash flow. What's your cash runway? Do you maintain cash flow statements? They tell you what's owed to you and what you owe to others. Hopefully, more is coming in than what's going out, but are you sure?

One thing we often hear from burgeoning startups is that the cash flow looks healthy, but the profit margin looks weak. This may mean money is being overspent in a certain area and that area needs to be found.

The beauty of a bookkeeper is that he or she will be able to draw you a map to that problem area, and help startup founders make strategic business decisions according to cold hard facts.

See also: When Startups Should (And Shouldn't) Hire a Chief Financial Officer

How did last year's tax season go?

Certified Public Accountants (CPAs) are gifted at financial planning. They look at your earnings and can add, subtract, multiply, and divide like nobody's business to help inform your strategy. 

However, they need accurate financial reporting to work their magic. Last year, did you find yourself scrambling for receipts to allocate expenses? Did you struggle to pull accurate income numbers from your accounting software?

If so, hiring a bookkeeper this year can remove you from all that hubbub. Your accountant and bookkeeper can go on to become BFFs because bookkeepers generally package up everything the CPA needs in a tidy, red bow. 

They can provide proof of expenses, income, and everything else your accountant needs to make you right with Uncle Sam.

Best of all, you won't miss out on tax write-offs. One thing Uncle Sam is very gracious about is appropriate deductions. Certain bits of mileage to and from the office are deductible. 

Or, if you work from home, a certain amount of square footage is deductible. And don't forget those phone bills, internet bills, and educational classes you took. These write-offs can be a great relief in offsetting the amount you owe.

See also: Year-End Checklist for Busy Startup Founders‍

Are you ready to hire a bookkeeper?

What do you think? Are you ready to pass the baton? Hiring a bookkeeper doesn't have to be a full-time endeavor. 

You can simply outsource the pertinent data to a third party and sleep in peace at night, knowing the strategic business decisions you make are based on solid financial expertise.

Not all bookkeeping solutions are equal

There are pros and cons to working with a freelance or part-time bookkeeper, startup accounting firm, or bookkeeping service provider. We talk through some of these when reviewing the best accounting software solutions for startups in a blog post here.

We created Zeni to fulfill the bookkeeping and accounting service needs for startups. With different options to choose from, including a basic outsourced bookkeeping plan, full-service and CFO services plan, Zeni can help you maintain accurate books and manage all of the finance functions for your startup (plus so much more). 

You'll gain access to our finance team's collective 100+ years of experience -- from managing startup accounting in the tech industry to working for global public companies like Whatsapp and Apple -- and efficiencies driven by AI and machine learning.

With one team managing every aspect of your company's finances, Zeni provides best-in-class service and pricing for monthly startup accounting services, bookkeeping, invoicing, and even annual taxes. Learn more and try Zeni today.