You have created a viable product you are proud of. You are spending late nights with your pitch deck. You are probably not lying awake at night wondering, “Are my books balanced?”
Accounting and bookkeeping is not as urgent as, say, finding a technical cofounder or figuring out your cash runway. However, that does not mean it is not foundational to the health of your business. In addition, without accounting, how would you figure out cash runway, or budget for another salary?
If you are the founder of a budding start-up, this guide will inform you of everything you need to know about bookkeeping and accounting, as well as some unexpectedly profitable benefits of thoroughly knowing your numbers.
Before you can start accounting, you will need to make a few decisions about the structure of your business.
Choose a business entity
Your business entity determines how you are taxed, how you can pay yourself, your potential business liability, and more.
The five main types of business entities are:
- Sole proprietorship
- Limited liability company
What financial records should a start-up keep?
Therefore, you have picked an entity and accounting method and your business is rolling along. What types of financial records do you actually need to keep track of?
Keep track of documentation that shows income, expenses, deductions, and credits shown on your tax returns. These can include:
- Bank and credit card statements
- Cancelled checks
- Proof of payments
- Financial statements from your Accountant
- Previous tax returns
- Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return
In addition, do not just keep these items until you turn your forms over to the tax collector. You will want to hang on to most records for at least seven years.
Bookkeeping checklist for start-ups
One thing you want to avoid is only cracking your business’s books when you are forced to—such as at tax time or when courting a new investor. Here is a bookkeeper-recommended checklist for keeping precise books:
Weekly Bookkeeping Tasks
Enter all transactions into your bookkeeping software or Excel spreadsheet
Even if you integrate your financial accounts with software, be sure to enter everything else, such as cash transactions.
Categorize your transactions
Was that trip to Staples for office supplies or to pick up a new banner for your tradeshow booth? These two items are categorized differently on your tax return, so record the category while transactions are fresh in your mind.
File or digitize receipts
We recommend filing (or digitizing) your receipts and old invoices weekly. Otherwise, you will lose them, and might not be able to prove certain expense deductions if you are audited.
Monthly bookkeeping tasks
Reconcile your bank accounts
This step is vital, and safeguards you against any income or expenses slipping through your fingers. Bank reconciliations can be tricky until you get into the habit. To help you out, we have written a user-friendly guide to bank reconciliations.
Prepare and send invoices (if applicable)
Be religious about sending invoices as soon as you can.
Pay vendors and other bills
Just get it over with. Otherwise, you risk giving your vendors free money in late payment interest. Late payments could also affect your business credit score.
Review outstanding invoices
See who hasn’t paid you yet, and follow-up. A smooth accounts receivable process is the lifeblood of your cash flow.
Review your financial standing
Any business’s prime question is “Do I have enough money to keep operating?” Reviewing how much cash you have in the bank, and how much cash you expect to come in, will tell you either “Yes,” or “time to make some changes.”
We recommend that you schedule dedicated time for handling your business’s financials. Keeping good records also means that your life will be easier when it comes to quarterly and annual income taxes for your business. Last but not least, with confident knowledge of your books you will be armed to make good financial decisions on behalf of your start-up.
Financial statements: A start-up’s secret weapon
This is the part where accounting becomes your best friend. Not only can you use well-kept books to ensure that you have more money coming in than leaving, you can use your financials to make other decisions, too.
This key start-up metric, at its simplest, is how much cash you have on hand vs. how much you spend each month. For example, if you have $50,000 in the bank and project to spend $5,000 per month then you have 10 months of runway even if you do not make a dime in revenue.
Net profit margin ratio
Sometimes just known as “profit margin.” Put simply, this number tells you how much profit you are earning for each dollar of revenue. In other words, are you overspending? Do you need to raise prices or cut expenses? You may be depositing bundles of money in the bank, but this number shows if you are truly making a profit or just treading water.
A good accountant can help generate these reports and get a handle on your business’s financial health.
You will not find this info in a traditional financial statement, but if you keep organized records, you can find some gems like:
Where are your customers?
Are most of your customers in a certain geographic area like the Pacific Northwest? You will want to find out why, and make business decisions based on your findings. You might decide to run ads geographically targeted to that area, or open an office there for easier access to your prime demographic.
Who are your biggest customers?
The Pareto Principle states that 80% of effect comes from 20% of causes. Are one or two big, loyal customers keeping the lights on? Find out what makes them tick so you can retain them longer, and find more just like them.
Who are your top vendors?
Are you somebody else’s best customer? Use that data to negotiate volume discounts or to shop around for a better price on that service. Reducing costs will allow you to stretch your business’s dollars even further.
Use an accountant. Early and often.
It is never too early for a founder to speak with an accountant. Even when you choose to do your own weekly and monthly bookkeeping tasks, an accountant can provide guidance on early-stage questions such as “Which expenses can I write off?” and “What accounting method should I choose?”
You will also likely want an accountant on your side for tax time. Business taxes are much trickier than personal incomes taxes. An accountant familiar with your industry will help you pay the least amount of taxes possible, and protect you from the CRA limelight.