Bookkeeping for Startups: Best Practices, Steps, FAQs

As a startup, your biggest priority is to get your company up and running and to eventually watch it grow. While running a business and experiencing business growth is certainly a realistic goal, it can’t be done without a system in place to record and organize all of your financial information. An efficient bookkeeping system is the seed or foundation of any business, that if nurtured and taken care of, can sprout and turn your business into a world of possibilities.

Your bookkeeping system can actually set the stage for a successful business. That’s why it’s so important that all business owners should know the basics of accounting for startups, how to set up a startup accounting system, and why an efficient accounting system is so important.

Why is an efficient bookkeeping system so important for startups?

Developing good business habits is easier if done from the very beginning. This can start with the foundation of your business: your bookkeeping system. And an efficient accounting method can help you build good business habits.

Your bookkeeping system will be the roadmap and guide as to how your business will be run. You will depend on your financial records to show you where you can minimize expenses and maximize profit so that your business has the best chance of becoming a successful one.

When launching a business, it’s essential to develop an effective financial plan that will keep track of your finances. Additionally, understanding how accounting for startups works provides you with a comprehensive picture of your finances and how they relate to your business.

Do startups need a bookkeeper?

Creating and maintaining necessary financial records is an important aspect when it comes to accounting for startups. In the beginning, most startups don’t need a third-party bookkeeper since this will add even more to the startup cost.

It’s a good idea for the business owner to keep the books the first year so that he or she can gain a solid understanding of how accounting works in their specific industry and gain a comprehensive picture of how different accounting methods and aspects of finances affect the business.

After the first year, it makes sense to hand the books over to someone else who can provide bookkeeping services. That way, small business owners can focus solely on running and growing the business. In the meantime, accounting software designed for your specific industry can make the process a little less complex.

How does the business entity that I choose affect my bookkeeping?

Before you set up your accounting system, you will need to first choose a business entity. This will affect your bookkeeping system, mostly when it comes to dealing with taxes. The business structure you choose will have an effect on your finances and bookkeeping so you need to choose carefully or have a financial professional advise you.

Sole proprietorship

A sole proprietorship is not considered a separate business entity which means that your business liabilities and assets are not separate from your personal ones. You are liable for the obligations and debts of the business. Therefore, sole proprietorships are a good option for low-risk businesses.

Limited liability company (LLC)

An LLC provides protection on personal assets and is a good choice for a medium to higher risk businesses. LLCs also offer lower tax rates than a corporation because profits and losses can pass through your personal income taxes.

See also: Accounting for LLC: Best Practices, Steps, Resources, FAQs

C Corporation

A C corporation is separate from its owners. Corporations provide the strongest protection from a business owner’s personal assets. Here is where you will notice a significant difference where the bookkeeping is concerned. Corporations require a more detailed and extensive accounting process, reporting, and operational process. Corporations also have the option of raising capital through the sale of stock which affects the bookkeeping as well.

S corporation

S corps are an option for business owners who want to avoid double taxation. With C corps, profits are sometimes taxed twice: when the company earns a profit and when dividends are paid out to shareholders and are taxed on their personal returns. With S corps, profits can be passed on to the owners’ personal tax return so that it’s not subject to corporate rates.

Partnership

Partnerships are an option for companies with multiple owners or professionals such as lawyers. With partnerships, profits are passed on through personal returns.

Accounting and bookkeeping services can advise on the type of accounting method that would work best for your business, Envato

How should I choose an accounting method?

You will also need to decide which accounting method your business will use. The choice is between either cash accounting or the accrual accounting method.

Cash accounting

Cash basis accounting is the simplest method. With cash basis, income is tracked when it is received and expenses are recorded when they are paid.

Accrual accounting

Accrual basis accounting accounts for money and expenses when it is earned. This method is slightly more complex but gives a better outlook of the business in the future. It’s better suited for companies with accounts payable and accounts receivable.

What should bookkeeping for startups entail?

The goal of bookkeeping for startups is to record financial data and provide up-to-date and accurate financial reports that are used to manage cash flow and ultimately business growth. There are a few tasks that must be performed in order to reach these goals and maximize the performance of the business.

1. Open a business bank account

A business owner should open a bank account for his or her business that is separate from their personal account. This way you can avoid mixing investor funds or business expenses with your own personal funds. Keeping business funds in a separate business bank account will make tax time much easier as well when you or your accountant are trying to track down business deductions and credits.

2. Keep a record of all financial transactions

Every financial transaction that takes place in a business must be accounted for and recorded. A business is just like a puzzle. Every transaction represents a piece of the puzzle. If you’re missing a piece of the puzzle then you’re not getting the complete picture.

All of the transactions together project the overall snapshot of the financial health of a business. If one of those transactions is missing or is incorrect, then you’re not getting the full picture or an accurate account. Therefore, it’s important to accurately record every transaction so that it can be categorized and translated into financial statements that will reveal cash flow and the financial health of the business.

A chart of accounts, just like any other chart, shows you how much and where the money is going to

3. Set up a chart of accounts

Revenue and expenses are organized into accounts. The chart of accounts is a list of all of the business’s accounts. It’s a list of the places where your financial transactions will be recorded. The chart of accounts shows you how much money is going where.

4. Reconcile accounts

Reconciliation is an important part of the bookkeeping process. It’s essential that your financial records match all of your credit card and bank statements. Errors can paint an incorrect picture of your business’s financial position, so it’s better to catch the error sooner rather than later. You don’t want the error to snowball month after month to the point that it’s hard to rectify.

Remember, you may not be responsible for the error. Banks and financial institutions make mistakes too. If everything reconciles correctly, then you can be assured the financial picture reflected on the financial statements is accurate. Reconciling accounts is also a good way to detect fraud.

Staying on top of invoicing and paying bills will maximize your cash flow

5. Manage invoicing and pay bills

It’s important to monitor and stay on top of all bills and invoicing. Bills are entered into accounts payable where they can be tracked to make sure they are paid on time. The accounts payable account will keep you updated on how much you owe and to whom.

Bills need to be paid on time so that the business is not charged any late fees, interest, or both, which would add unnecessary costs to the business. You always want to minimize whatever costs you can in order to maximize your profit.

It’s important to stay on top of invoicing as well because your invoicing process can have a significant impact on your cash flow. Invoicing should occur as soon as the service is performed or order placed. The sooner you send the invoice out, the sooner you are likely to get paid. The more constant stream of revenue or incoming cash that you can maintain, the better the cash flow situation you will have. You should monitor account receivables and AP aging reports on a monthly basis and follow up on any accounts that are behind in payment.

An automated bill pay system that integrates into your accounting software will minimize the amount of data entry, and help you keep track of all bills.

6. Prepare financial statements

Financial statements are a summary of all of the business transactions that have taken place during a specified period of time. There are three important financial statements that should be prepared on a monthly basis: the balance sheet, income statement, and cash flow statement.

a. Balance sheet

The balance sheet reflects what your business owns, owes, and the value of the business owner’s investments through assets, liabilities, and owner’s equity, respectively.

b. Income statement

The income statement will show how profitable the business is during a specified period of time. The startup’s expenses and losses are subtracted from the revenue. Check out our article What Is Annual Revenue? Meaning, Formula & Examples to find out more about more about your business’s performance.

c. Cash flow statement

The cash flow statement records the amount of money entering and leaving the startup. This shows how much cash is coming in and where it is coming from and how much cash is flowing out of the startup and where it is going.

Bookkeeping software will create and print these monthly financial reports which makes the process much more efficient. Financial statements are a way for business owners to see what metrics are having the biggest impact on the startup’s strategic business decisions.

7. Prepare payroll

Payroll is time sensitive, and there’s a lot involved with this aspect of bookkeeping with multiple employees, employee turnover, varying hours, and all of the deductions.

Therefore, payroll is one of those things that does make sense to outsource or use an automated payroll system that integrates with your bookkeeping software, which will make running payroll a little less complicated.

What types of financial records should startups keep?

Another important task in starting and running a business is maintaining supporting documents for all of your business transactions. There may come a time, such as an audit, when you need to prove to the IRS that the financial information on your tax return is correct and accurate.

Any documents that would support any tax credits, tax deductions, expense deductions, or taxable income on tax returns filed, such as the following should be saved:

• Bank statements

• Credit card statements

• Receipts

• Bills

• Invoices

• Canceled checks

• W-2s

• 1099s

• Tax returns from previous years

• Proof of payments

• Financial records and statements

Consider using a receipt scanner for business owners to help you stay on top of your documentation.

Do startups need an accountant?

A bookkeeper can definitely be justified after the business is up and running and has been established for awhile. You will also definitely want a professional accountant to provide their accounting services during tax season to help with the startup’s tax requirements.A professional accountant like a CPA can oversee the startup accounting process, help to make sound financial decisions, file the business’s taxes, help the startup stay compliant, and will be a lifesaver if your startup is ever audited.

Frequently asked questions

Should a business owner hire an accountant for the startup accounting process?

When it comes to taxes, it’s always a good idea to hire a professional accountant. An accountant can help make important financial decisions regarding the business, help the business comply with tax regulations, and help you take advantage of all of the applicable tax deductions and credits, which will help you save money in the long run.

Why is accurate bookkeeping and accounting essential for a startup?

Accurate bookkeeping for startups is essential because it’s used to monitor your startup’s financial health and position and it helps improve cash management and flow.

What is the advantage of startups using cloud accounting software?

Cloud accounting software enables startups to streamline their bookkeeping and accounting processes and access their financial records from anywhere at any time.

In conclusion

As a business owner, an efficient bookkeeping system is your lifeline. Choose your business entity carefully, choose an accounting method, and set up your accounting system and soon you will be off and running. Additionally, take the extra steps to conduct an accounting cycle to analyze your financial health. Don’t forget, there are professional services out there who are trained and have the experience to help you make the most out of your business.

Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.

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• Bookkeeping for A Law Firm: Best Practices, FAQs

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