How to set up a bookkeeping system for your startup

Editor's Note — This article is written by Svitlana Grankovska, an experienced Fractional CFO with over 20 years of expertise in bookkeeping and financial management. Having guided numerous startups through building accurate financial records and strategic frameworks, she shares essential insights on how to effectively manage books, track expenses, and prepare for future revenue and growth with confidence.

Whether you’re a first-time founder laying the groundwork for a startup or a small business owner trying to reorganize your business’s finances, this bookkeeping setup checklist will guide you through the steps to create a basic bookkeeping system. 

9 steps to build a startup bookkeeping system

https://www.zeni.ai/blog/14-best-startup-credit-cards-to-consider-in-2024#1-zeni-business-credit-card

1. Choose either cash or accrual accounting method
2. Open a business bank account
3. Set up accounting software
4. Connect a payment collection system
5. Set up a payroll system
6. Begin regular bank reconciliation
7. Build key reports
8. Establish a company expense policy
9. Decide whether to hire a bookkeeper

Build a bookkeeping system that works for you

Each business’s bookkeeping system should suit its unique revenue model, the size of the team, and its plans for growth. To build a bookkeeping system that works for your startup, you’ll need to make several key decisions about the tools to use and the approach to take. 

1. Choose either cash or accrual accounting method

Choosing whether to use the cash or accrual accounting method establishes how and when your business handles recording transactions. 

Cash basis accounting records expenses and income when cash changes hands, while accrual accounting recognizes revenue or expenses at the time of delivery of goods or services.

For small businesses that want an easy bookkeeping system and don’t plan to scale, cash accounting is a simple way to keep track of payments. However, for startups that intend to grow, it makes sense to use accrual accounting from day one. 

If raising venture capital is part of your business plan, investors will expect to see reports that reflect accrual and GAAP methods, and businesses with more than $5 million annual revenue are required by the IRS to use the accrual method. 

Accrual accounting also provides a more accurate picture of the business’s financial health and is the basis of proper financial modeling and projections. 

See also: 4 Reasons Startups Should Follow GAAP Accounting (and 2 Reason Why Some Delay) 

2. Open a business bank account

Separate the business’s cash from your personal funds by setting up separate bank accounts for business expenses. 

It’s easier to accurately monitor the business’s outgoings when you don’t need to sort them from personal purchases, deposits, or expenses—plus, you can identify potential business tax deductions and help streamline tax preparations.  

When choosing a bank account for your business, review each option with these considerations in mind: 

• Banking fees 
• Transaction limits
• Security level 
• Online or mobile banking capabilities
• Client support

See also: 5 Best Banks for Startups Compared: SVB vs Mercury vs Brex Cash vs First Republic Bank vs Wells Fargo 

3. Set up an accounting system

Some small business owners choose to learn how to do manual bookkeeping, but with the variety of software available to manage your accounts, this isn’t the most efficient bookkeeping system. 

It is possible to handle small business bookkeeping in a simple spreadsheet program like Google Sheets or Microsoft Excel if you only process a handful of journal entries or use single-entry bookkeeping.

However, it’s easy to make errors with manual bookkeeping entries—and if the business grows larger and more complex, it will soon take hours of work to cover the essentials. 

Alternatively, you can use business accounting software like Quickbooks Online to automate many double-entry bookkeeping processes—including categorizing expenses, generating invoices, and building reports—so your bookkeeping takes a fraction of the time. 

Because accounting software syncs all the data from bank accounts and credit cards onto one platform and offers integrations with other finance-related tools, you gain a full picture of your finances without needing to manually download the details from each account separately. 

For advice on how to choose the right accounting software for your business, take a look at our comparison guide of accounting software options for startups.

Whichever accounting software you choose, you will need to customize it to suit your business. This process includes first setting the software to use either cash or accrual basis accounting. 

Most accounting software programs includes a basic chart of accounts, but you should set up a chart of accounts that is specific to your business, including numbered expense accounts and categories for revenue. 

If your expenses are grouped into preset categories that don’t reflect your operations, it can take weeks to retrospectively organize the data and provide accurate reports for board members and investors. 

See also: 9 Advantages Of Accounting Software For Startups 

4. Connect a payment collection system

To make your business viable, you need a way for customers to pay. You can start accepting online payments almost immediately through payment gateways like Stripe or PayPal. 

These systems are familiar to many customers and only charge a small fee for each payment you process. 

For a more comprehensive accounts receivable solution that accepts multiple payment types (like ACH transfers and wire transfers) and processes international payments, advanced billing solutions like Chargebee or Recurly handle every step of the payment process from generating invoices to collecting customer details to sending receipts. 

Connect your billing system with your accounting software to automatically record these financial transactions. 

See also: Best SaaS Subscription Billing Solution: Chargebee vs. Recurly vs. Stripe Billing 

5. Set up a payroll system

Before you hire your first employee, you need a system in place to pay them. As well as ensuring paychecks are correct and timely, employers are also required to complete the following payroll processes:

• Check documents that show employee authorization to work in the U.S.
• Calculate and withhold payroll taxes from employee paychecks
• Register the business for payroll tax in each state where your employees reside
• File employment tax forms

Most businesses use either a payroll service or professional employee organization (PEO) to help them manage these tasks. A payroll service provider manages all aspects using payroll software to ensure employees are paid accurately and on time; a PEO provides more comprehensive HR solutions that include payroll. 

See also: Best Payroll For Startups: Gusto vs Justworks vs TriNet vs Rippling 

6. Begin regular bank reconciliation

Reconciliation is the process of matching the transactions on your bank statement to the transactions in the general ledger of your accounts. Some discrepancies between your bookkeeping and your banking might be the result of errors you can then identify and resolve. 

Other discrepancies between these records might be the result of outstanding payments to or from your bank—for example, a check you issued to a vendor they have not yet cashed would be recorded in your books but not debited from your account. 

Businesses should complete a bank reconciliation at least once per month, but if you have a complex banking setup or a large number of business transactions, consider reconciling your accounts every week or even every day. 

See also: 12 Signs of Bad Bookkeeping 

7. Build key reports

Financial reports show the business’s team, investors, and board members how you’re performing against startup metrics and goals and reveal trends in the data that help you make strategic business decisions. 

There are three financial statements that every business needs to generate as part of their double-entry accounting process: 

• The profit and loss statement (also known as the income statement or P&L) shows the business’s financial performance over a period of time.

• The balance sheet shows a snapshot of the company’s finances at a particular point in time, including all assets (facilitating inventory management) and liabilities.

• The cash flow statement shows how much the company spends and from where that money is earned. This report is particularly important for early-stage businesses in which cash is tight: The cash flow statement indicates when you are likely to need more investment—or run out of money at the current rate.

You can manually build these reports in a spreadsheet at the end of the month, but if you use small business accounting software, most platforms have built-in reporting modules that generate up-to-date financial statements in professional-looking formats, ready to present to investors or board members. 

See also: 27 SaaS Startup KPIs You Should Be Tracking 

8. Establish a company expense policy

Creating a foolproof expense tracking system is essential for cash flow and financial management. 

Whether you decide to issue employees a corporate credit card or facilitate employee reimbursements using a tool like Expensify, take the time to set up a company credit card policy, expense guidelines, and expense tracking and reporting protocol for your business. 

Keep your policy as clear and straight-forward as possible, making it simple for employees to comply.

Beyond keeping business expenses under control, a thorough corporate expense policy is important to implement and follow should your business undergo an audit down the line.

See also: 4 Tips To Optimize Expense Management For Startups 

9. Decide whether to hire a bookkeeper

Although some aspects of bookkeeping are fairly straightforward, they are often time-consuming and require attention to detail to deliver error-free data. 

Managing all the startup bookkeeping yourself may save you professional service fees, but remember to take into account the value of your time and the potential cost of any mistakes to your business. Handling even a single bookkeeping task incorrectly can be costly. 

Consider working with a professional bookkeeper who will complete these tasks for you, either by hiring an in-house bookkeeper or outsourcing this work to a virtual bookkeeping business. 

Having a bookkeeper on your team means they are focused on your business, but keep in mind that hiring an additional employee is usually much more expensive than outsourcing your bookkeeping tasks. 

See also: 4 Reasons Your Startup Should Use An Outsourced Bookkeeping Service

How Zeni helps startups build the best bookkeeping system for their business

The quickest, most efficient way to build the right finance processes for your business is to work with a professional to set up an effective bookkeeping system for your startup. 

At Zeni, our team has seen the bookkeeping challenges that startups face countless times, so we created a finance service that helps businesses avoid common bookkeeping errors and build the right financial foundation to grow. 

Zeni is a modern finance firm that combines AI and ML technology with human expertise to provide Certified Public Accountant, Chief Financial Officer, and bookkeeping services for startups. 

With Zeni’s Bookkeeping Plan, you get accurate, up-to-date books, and a service that is 10 times faster than other bookkeeping options thanks to Zeni’s AI-powered processes. 

The Zeni Dashboard provides 24/7 access to real-time financial information and key startup metrics, including your net burn, cash on hand, and cash zero date, so you can gain valuable insight instantly and at no extra cost. 

Plus, with Zeni, you’ll pay a set monthly fee based on the amount you spend to run your business, so it’s easy to budget for your bookkeeping costs, even as your business grows.