Bookkeeping for Startups: Everything You Need to Know

Bookkeeping for Startups: Everything You Need to Know

You just spent weeks, months, or years on developing a product or service. As a new business owner, your passion is likely focused on the success of your unique business idea. For many entrepreneurs, bookkeeping, accounting, and keeping the books balanced is not the first thing that comes to mind when growing a business.

As a company founder, it will behoove you to learn how accounting, bookkeeping, and financial reports can work for your business’s benefit. Early-stage accounting can help set your business up for successful tax benefits. Proper bookkeeping can save you, and your accountant headaches come tax season. To run a successful business in 2021, you will want to learn more about how you can use these metrics to your benefit.

Many tasks of bookkeeping can be done in house or by the small business founders themselves. However, having skilled experts in bookkeeping and accounting on your side will help you keep clean books and run useful financial reports. You will want to decide if it is best to save money by doing it yourself or spending a little more on a professional so you can focus on growing the business in other ways.

If your startup is sprouting, this article will teach you all things bookkeeping and accounting. You will also learn about the benefits to your bottom line from understanding the business.

Accounting and Bookkeeping, What is the Difference?

Accounting and bookkeeping services seem similar because they are related. However, there are differences between the two.

Accounting is deciphering your financial records for everything from paying the right taxes to strategic business decision making. While bookkeeping is there to ensure the process of tracking all financial records is complete. Mainly a bookkeeper will look at income and expenses.

No matter the size of your business, all businesses have uses for accounting and bookkeeping services. When gathering investors to help you fund and run your business, they will need your financial reports. A good accountant can help you put together these essential reports. Great bookkeeping can ensure the data required to create the reports is ready to use.

Choosing a Business Entity

Before accounting comes into play, you must select a business structure. We recommend talking to an accountant or lawyer to discuss what business entity would be best for your organization.

The right choice may vary, whether you intend to run an eCommerce or more specifically Amazon FBA startup, a service business, or a software company for instance.

There are five primary business entities:

Choosing an Accounting Method

Cash basis and accrual basis are the two accounting methods your business will need to choose from to submit your first tax return.

The simplest type of accounting for your tax return is cash basis accounting. Cash basis will track income when it is received and expenses when they payout.

Accrual basis accounting counts money and expenses when it is earned instead of received. This type of accounting is more involved but will give you a clearer outlook of the business’s future picture.

We recommend talking to a CPA before choosing between a cash-based or accrual accounting method for your business. A CPA will help you decide which accounting method makes the most sense for your business and what will give you the best tax breaks.

Smart bookkeeping. Powered by professionals. Backed by technology.

Bookkeeping for Startups: Everything You Need to Know

Let us do it all for you!

  • Reconcile your accounts
  • Provide you with clean books every month
  • Ensure accurate records for seamless tax filing
  • Track your business financial health

Financial Records to Keep

Choosing your business entity and knowing what your accounting methods are will be necessary to your business. Another major step in running a business is having proof of all of your financial records. If the IRS comes sniffing around, you need to prove that your tax return claims are legitimate.

You will want to keep track of all financial records. Any documents that show income, expenses, deductions, and credits shown on your tax returns will be stored.

The majority of these records you should store for at least three years in your documents. However, there are some records you may keep longer than three years to provide information for potential questions. It is better to be safe than sorry when it comes to proving your business to the IRS.

Checklist for Startup Bookkeeping

It is messy to procrastinate doing your books until tax season or courting a new investor. The following are tasks you will want for keeping precise books.

Tasks for Weekly Bookkeeping

Tasks for Monthly Bookkeeping

Success through financial statements

Financial statements will be the best friend to the business. Having a good CFO, accountant and bookkeeper will aid in tracking and utilizing financial statements. Accurate books will help you see that you have enough money coming in and out of business. It will also help you save time and make critical business decisions.

Balance Sheet

The balance sheet statement shows everything that your business owns (assets), owes (liabilities), and the value of the business owner’s investments (owner’s equity). This will show your team these values at specific points in time.

Cash Flow

A cash flow statement is a mandatory statement that will record the amount of cash a business has leaving and entering a startup. This financial document will let investors see the company’s management of finances and where the money is coming from.

Income Statement

An income statement will show how profitable your business is over a reported period. It displays a startup’s revenue subtracted from their expenses and losses.

Many small business owners create this statement when investors want to see how profitable the business is. Similar reports that are called profit and loss statements will be made too.

Net Profit Margin Ratio

The net profit margin ratio can be better known as profit margin. When your business wants to know how much earned profit there is for each dollar of revenue, you want to conduct a profit margin ratio. This number is essential to show startups if they are spending too much money.

It shows if startups need to raise prices or slash expenses. If startups bring in a ton of cash, this metric will help the business see if their finances are treading water or making a profit.

Cash Runway

A runway is a metric that shows how much cash is on hand compared with how much you spend each month. If you have $11,000 in the bank account and project to spend $1,000 per month, then you have 11 months of the runway if you do not make a penny in revenue.

Customer Whereabouts

Understanding where your transactions are coming from is vital to your startup. What geographical location are they in? If you know this metric, you can run geographical ads targeted in that area, have an office closer to your customer base, and more.

DIY Accounting or Hire in a Professional?

You can do your recordkeeping system yourself. Best practices will be to do journal entries yourself if cash is tight in an early startup. For newer teams, keeping business expenses low is the top priority.

In other cases, even if you are an educated accounting professional, you still might want to hire a professional to assist in your company’s accounting and bookkeeping system. Having an expert in business finances can help with journal entries and set up great accounting systems. They can give you and the other business owners the freedom to focus on your products and services’ growth path instead of slaving over tracking each line of data.

If your startup is being held back by you doing accounting that is over your head, you should bring in a bookkeeper or CPA. Bringing in a CPA will be most important for tax filings and other important financial matters. Ask yourself if you want to handle sorting out your income taxes and business taxes while running a business? Or is it better to outsource it to a pro who specializes in that field?

Early-stage questions like “what can be written off?” and “what accounting system would work well for this business?” are great questions that an accountant can help your startup with.

Beyond early-stage startup accounting, you will want to have an accountant during tax season to help with accounting services. Finding an accountant familiar with your industry can help you pay the least amount of taxes while protecting you from tax services.

Smart bookkeeping. Powered by professionals. Backed by technology.

Bookkeeping for Startups: Everything You Need to Know

Let us do it all for you!

  • Reconcile your accounts
  • Provide you with clean books every month
  • Ensure accurate records for seamless tax filing
  • Track your business financial health

All Startups are Different! Do What is Best for You!

After developing a product or service that will help people solve a problem, you have a new problem to solve. How will you balance your books for a successful future? You can hire an accountant. You can also hire a bookkeeper. What is the time/cost of doing it yourself vs. hiring it out to focus on other aspects of the business?

With the creation of your startup, it is easy to get caught up in product promotion excitement. Proper bookkeeping and accounting will help you ensure that your sprouting business has the funds necessary to succeed.

A cash flow statement will help you see the cash inflows and outflows. A cash runway shows you how much cash your startup has and how much money it can run through without taking in profit before it dries out. These statements and more will help you make strategic decisions that are not possible without solid accounting practices.

Have accounting and bookkeeping practices that are followed weekly and monthly to set your startup up for success. Enter in all data of transactions, reconcile your accounts, and keeping up on accounts receivable are all ways your business will keep up with accuracy and keep cash in the bank.

You should be excited about what your business is building towards in its future. What you should never do is put your books on the backburner. Accurate books will help your startup become more than just another startup. Excellent accounting will give you a leg up on your competition.