The importance of Bookkeeping & Accounting for Startups (or any Business really) & Useful Tips
Most startups are formed when a founder or group of founders has an idea or a desire to solve a problem or need. Many times, this founder(s) doesn’t have an accounting background and managing the accounting side of the business can seem to be an intimidating task. Some of the most basic aspects of accounting, such as bookkeeping, can get complicated if not setup and managed properly from the beginning.
Startups and any businesses should keep their financials in top condition and working order for many reasons.
- Properly prepared financial statements allow for regular updates to your key stakeholders (i.e. investors, key management, creditors, board) on your current financial position. It is extremely valuable to keep your stakeholders in the know early on in your startups life cycle to alleviate difficult conversations down the road.
- Current and accurate financial statements are crucial for a smooth tax filing season, and will help make sure you’re maximizing your tax deductions for year end. You don’t want to leave money on the table in the form of missed tax deductions or other tax planning benefits (loopholes)
- Well organized financial statements allow for powerful internal analysis, such as calculating burn rate (how fast you are burning through your cash) and the amount of runway for your startup to become profitable. They can also provide valuable insights to products or services.
Regardless of everything you just read, this remains to be one of the major issues facing startups, after they have gotten off the ground. To help understand the importance, let’s look at what basic bookkeeping entails, why it is important, what are some options for bookkeeping, how to set it up, to outsource or not, and some best practices for the DIY startup.
What exactly is bookkeeping?
Fundamentally, it is the systematically recording, categorizing, and reporting of the transactions of a business. In summary bookkeeping activities could include, the receiving, recording and paying of bills, as well as the creating, recording and sending of invoices to customers or clients. It can also include bank reconciliation and journal entries, and may include recording of depreciation of fixed assets. Assuming, the above list of duties is entered accurately and timely, a set of financial statements can be prepared at the end of the period. The statements tell the story of what happened in your business.
Why is it so important?
As mentioned above, it is critical for startups, most importantly for stakeholders. You basically have 3 stakeholders at this point.
- Management – use the statements to make strategic decisions, such as expansions or cuts in services or product lines. Borrowing capacity, working capital expansion etc..
- Investors and creditors – Investors are probably looking at revenue growth and cash flow, while creditors are looking at balance sheet items for debt covenants as well as cash flow to meet terms.
- Government – The statements will be used to prepare tax returns at the local, state and federal levels. They may also be used for bonds, if applicable.
Can I do it myself or should I outsource?
Generally, for a startup, it makes sense to outsource rather than tackle it yourself. Let’s face it, you are the founder of the company that does something amazing, and I am certain you can figure out this whole bookkeeping thing, but your time is better spent doing what you do best and that is running this business, not keeping the books. Not only does it free up your time, but outsourcing to a reputable firm, provides you insight into much more than just bookkeeping. The firm should have vast knowledge of business landscape and be able to help you with many areas of your business not just books.
If you do choose to do it yourself, there are certainly options out there to smooth this learning curve. Remember to start by opening a business checking account and credit cards or cards in the business name to separate business from personal accounts to keep everything clean. There are several bookkeeping software packages on the market – Quickbooks, Xero, or Wave, just to name a few.
How to setup a bookkeeping system?
So, you have decided to DIY and want some advice on setting up the system. Keep in mind that each business will be different, and some business may be more complicated than others. The following is a good starting place after you have selected a software to use. If accounting is entirely new to you, call a CPA friend to have them review this after you are done to ensure you are on the right track.
- Create your chart of accounts specific to your business type
- Connect your bank accounts
- Import or create your customers
- Import or create your vendors
- Review the opening balances of your accounts
- Once imported, reconcile all balance sheet accounts
If this list sounds like a foreign language, please take a deep breath and ask for help. This can become a nightmare and you will end up paying much more in fees to have it cleaned up on the backend than you would have spent to do it right from the beginning.
Bookkeeping for startups and small business as discussed is crucial to the long-term success of the business. You will often find a correlation between the success and failure of a business and the records they keep. All too often business owners choose to ignore accounting until they have to focus on it and many times it is too late. Make this a priority or at least outsource it and you will be thanking yourself for many years to come.
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