Bookkeeping is the foundation of any business’s financial health. However, with the fast pace and quick growth of startups, financial recording often falls through the cracks. This leads to issues during tax time, audits, funding applications and cash flow problems.
By implementing solid bookkeeping practices right from the start, entrepreneurs can focus on higher-value activities, access funding more easily and set their venture up for success.
In this blog post guide, we will cover the top 10 bookkeeping best practices vital for startups and early-stage businesses. Whether doing your own books or working with an accountant, these principles will help you organize finances, achieve reporting accuracy and make smarter management decisions leading to fruitful growth.
Table of Contents
Set Up An Accounting System Right Away
The first step to organizing your finances is establishing a bookkeeping system that forms the foundation to record every business transaction. Cloud accounting software like QuickBooks Online and Xero provide an easy way for business owners to accomplish this with services priced for early-stage companies.
Key things to cover when setting up your accounting system:
• Chart of accounts – This outlines ledger accounts to classify transactions like assets, liabilities, equity, revenue and expenses. Must match needs of your business model and industry.
• Accounting workflows – Map processes to record income, enter bills, collect receipts, manage payroll etc. Provides structure.
• Financial statements – Use correct formats for profit and loss statements, balance sheets, cash flows. Enables reporting.
• Invoices and expenses – Set up processes for tracking accounts receivable, accounts payable etc. Essential for cash flow.
Getting expert help early on will help customize your accounting processes to facilitate easy bookkeeping and insightful reporting on your company’s performance.
Log Every Expense From Day 1
Even if income is slow-going initially, start tracking every penny spent right from your startup’s first transaction. Whether it is a large capital purchase or a $5 coffee meeting, recording it correctly is vital for financial visibility.
Follow these expense logging best practices:
• Collect supporting documents – File receipts, vendor invoices, mileage logs digitally for easy access.
• Classify charges accurately – Assign account categories consistently using your chart of accounts.
• Capture descriptions – Brief memos help identify charges correctly during reviews.
• Enter details promptly – Logging expenses as they occur prevents missing any and eases recap.
Making expense logging a habit from the beginning saves headaches during tax prep, audits and especially when pursuing funding based on financials.
Institute Controls Through Strong Invoicing
Having an organized invoicing process is non-negotiable. Apart from enabling you to get paid quickly, it greatly enhances ability to collect on receivables – a major pain point for service businesses.
Tips for creating a fail-proof invoicing system:
• Invoice template – Include company logo, branded colors, numbered invoices, structured layout.
• Invoice process – Build workflow for invoicing that fits business model whether one-time, recurring, deposits etc.
• Invoice reminders – Follow up if unpaid after due date to prevent defaults using email/text automation.
• Payment terms and methods – Define standard payment duration and methods you accept like cards, bank transfers etc.
• Invoice tracking – Log date, amount and payment status of all invoices for better cash flow control.
Accurate invoicing establishes professional credibility with clients while tight receivables management ensures smooth cash availability to operate.
Institute Expense Reporting For Employees
For service startups with a distributed workforce, instituting mandatory expense reporting protects against incorrect claims while facilitating analysis of project costs.
Follow these best practices:
• Categorize expenses appropriately into travel, office supplies, meetings, field work etc. Helps identify spending patterns.
• Require detailed expense reports with receipts from all staff by a set date like 5th of each month. Enables prompt processing.
• Establish approval authority limits e.g. expense claims above $100 must be authorized by director level and above. Deters fraud.
• Build report review and reimbursem*nt workflow including requesting missing info from filers. Speeds processing.
• Use expense software that extracts key details from images and organizes data automatically. Boosts efficiency.
Consistent expense reporting affects employee productivity minimally while greatly enhancing financial integrity.
Never Mix Personal and Business Finances
Keeping business and personal finances completely separate is non-negotiable. Even solopreneurs should have a designated business bank account and credit card from inception. This strict separation greatly eases accounting, prevents murky record-keeping and provides credibility during funding discussions.
Tips to maintain financial separation:
• Open a free small business bank account and get a credit card solely for company use. Helps classify transactions correctly during expense logging.
• Avoid dealing in cash for business transactions as far as possible. Increases transparency in bookkeeping system with records of every payment source and destination.
• If withdrawing cash from personal account for company use e.g. petty expenses, log it explicitly as an owner’s investment. Maintains clear contributes vs payouts record.
• Do not pay suppliers and expenses from personal credit cards except in temporary emergencies with intention to promptly classify and reimburse amount to correct account. Blending finances causes major issues during taxes, company valuation and prevents accurately determining capital requirements.
Keeping business and personal finances distinctly segregated requires some administrative effort initially but pays off hugely in long run.
Perform Regular Bank Reconciliations
While meticulously recording every expense is important, tallying it against actual bank and credit card statements regularly through reconciliation ensures nothing is missed. This should be done at least monthly.
Follow this simple bank reconciliation process:
• Log in to accounting system and download most recent bank statement for company’s operating account.
• Compare line items on bank statement vs expenses logged for same period in accounting software.
• Add any missed transactions like automatic payments for consistent record.
• Investigate and void any unauthorized charges.
• Identify discrepancy if any in ending balance between accounting system and bank after above steps.
• Make adjusting entry or correct errors until amounts align. This signifies every transaction accounted for accurately.
Regular bank reconciliation supplemented by occasional reviews of primary expenses provides a checkpoint that bookkeeping system reflects reality. This builds confidence in financial reports used for management decisions.
Create and Analyze Financial Statements
Merely tracking income and expenses is not enough. Compiling them into standard quarterly/annual financial statements is essential for deeper insight through trend analysis to enhance management decisions.
Must-have financial statements include:
• Income Statement – Shows revenues, costs, main expense categories and net profit/loss for specific period. Indicates business health and growth areas needing focus through year-on-year comparisons.
• Balance Sheet – Provides snapshot of asset vs liability position of company on given date. Helps assess working capital needs.
• Cash Flow Statement – Outlines actual cash earned and spent during period vs just accruals. Critical for small business to prevent cash crunches.
Today’s accounting systems automate generation of beautifully formatted statements for easy periodic review. Analyzing them also aids enormously during funding discussions by providing key company financials.
Budget Thoroughly and Monitor Diligently
Budgeting based on historical financials is invaluable for startups to make strategic resource allocation decisions aligned with growth plans for upcoming year. It also enables measuring actual monthly results against budgets to quickly address unexpected deviations.
Effective budgeting process tips:
• Involve leadership team in finalizing budgets for their respective departments based on goals for next year. Increases buy-in.
• Build budgets bottom-up starting from monthly revenue and cost projections. Account for seasonality fluctuations known in advance. Provides granular plans.
• Analyze previous years’ financials to inform budget targets that are ambitious yet realistic. Justifies numbers used.
• Assign clear budget owners accountable for monitoring and explaining their area’s variances every month. Drives performance consciousness.
• Revisit budgets quarterly and adjust categories flexibly based on business developments maintaining overall profitability goals. Ensures relevance.
The visibility and control provided through diligent budgeting and monitoring establishes financial discipline early on – something investors love seeing.
Make Optimal Use of Financial Technology
Leveraging modern fintech tailored for startups greatly enhances financial oversight and control without increasing accounting headcount significantly. Forward-thinking entrepreneurs implement such solutions proactively even before substantial scale to build scalable processes.
Fintech solutions offering highest ROI for early stage companies include:
• Automated payments collection through recurring credit card or direct bank charges. Allows managing cash inflow predictably.
• Workflow software that ensures compliance requirements are met in accounts payable processes. Reduces audit risks due to gaps.
• Corporate cards providing detailed categorization of expenses. Facilitates correct recording during reconciliation.
• AI powered optical character recognition extracting key details from unstructured expense documentation. Minimizes manual data entry.
• Predictive analytics for cash flow forecasting by analyzing historical income/expense seasonal patterns automatically. Enhances financial planning and working capital decisions.
The optimal application of the above emerging technologies cost-effectively establishes a financial infrastructure poised for scalability.
Leverage Qualified Accounting Help
While disciplined founders can implement much of the above themselves initially, as the company grows, consider hiring in-house bookkeeping staff or at minimum getting guidance from a qualified accountant.
Areas that require specialized accounting expertise include:
• Choosing appropriate corporate structure whether C-Corp, S-Corp, Partnership or Sole Proprietorships considering factors like funding plans, investor mix, profit sharing ratios and tax implications.
• Ensuring all state, central and local authority registrations and reporting requirements are continually met to avoid nasty fines or issues later. Includes guidance on business permits, sales tax collection or remission, payroll taxes, corporate income tax and other compliance.
• Actively looking out for and utilizing eligible tax credits or government incentives that save costs for activities like R&D, hiring certain profiles of employees, export programs etc.
Seeking qualified accounting expertise upfront saves ample heartburn over risky compliance gaps as operations evolve.
Conclusion
There is undeniable power in practicing consistent, technology-enhanced financial discipline – however boring it may seem initially alongside the thrill of advancing core startup objectives like product development and customer acquisition.
However, building business longevity requires paying equal attention to creating accurate, scalable accounting processes that provide real-time visibility over profitability and cash availability.
Implementing appropriate bookkeeping systems diligently from day one establishes the strong financial foundation vital for any high-growth business to fund innovations and pivot nimbly when needed. The time and money invested here pay exponential dividends over the entire lifecycle of a lean startup poised for success.
