March 1, 2022 | 7-minute read (1344 words)
“Making good judgments when one has complete data, facts, and knowledge is not leadership - it’s bookkeeping.” - Dee Hock, founder, Visa Credit Card Association.
You just spent months — or even years — developing a new product or service. Your first instinct as a business owner is to pitch your idea to an investor, and your passion will remain directed to making your startup a success. But who will keep the track of bookkeeping?
For many entrepreneurs, bookkeeping, account files and balance sheets are not the first things that come to mind when growing a business. After all, as a new business owner, you have to stay focused on business strategy and operations. But you need someone who can keep track of your business’s financial activities on an ongoing basis. In short, you need a dedicated bookkeeper.
But what exactly is bookkeeping, and what does it encompass?
What is bookkeeping?
Many people are confused as to how bookkeeping and accounting differ. While they can be considered two sides of the same coin, they are vividly different.
Bookkeeping for a startup comprises recording its financial transactions into organized accounts daily. This includes even the tiniest financial transactions, from income and expenses to employee payroll. Accounting, on the other hand, is more subjective and is concerned with providing insights into your business’s financial health, based on bookkeeping information.
In short, bookkeeping is a comprehensive approach to your startup’s financial outlook. With updated financial records, you can generate accurate financial reports and drive better business performance. Detailed reports from bookkeeping for startups can also come in handy in the event of a tax audit.
What do bookkeepers do?
Bookkeeping professionals oversee and record all of your company's financial transactions. They ensure that your financial records are not only structured properly and complete, but also that they are accurate. To put it another way, bookkeepers act as a spell check for your finances. Apart from this, here are a few key duties that bookkeepers perform:
1. Reconcile your startup’s bank accounts
Account reconciliation is the most important job of the bookkeeper. Reconciliation is performed by checking recorded transactions against monthly statements from outside sources, such as a bank, a credit card firm or another financial organization, to ensure the figures are accurate and in agreement. To put it another way, the bookkeeper double-checks that the money leaving an account matches the money spent.
The reconciliation process also helps keep the transaction process transparent and highlights any discrepancies that might occur in the system.
2. Manage transactions
Another task for startup bookkeeping is managing all transactions in your bank’s feed. Each of these transactions must be classified to keep them organized at all times. While classification may appear to be a large (and time-consuming) task, banks can automatically categorize most transactions, so bookkeepers only need to keep an eye out for accuracy. Additionally, some transactions, such as written checks or cash payments, may require a human entry.
3. Maintain key financial statements
You'll need to have certain financial statements regularly on hand, whether you're preparing to meet with investors or simply developing a budget. Preparing these financial statements is a key part of a bookkeeper's job. The following are essential financial statements:
Cash flow statement: The cash flow statement shows how much money was made and spent over a specific period.
Balance sheet: A balance sheet depicts your company's financial situation at the end of a given period.
Income statement: Also known as the profit and loss statement, the income statement summarizes your startup's income and costs.
6 reasons bookkeeping is important for startups
1. Simplifies tax preparation
Your startup will likely file a tax return every year, which can be tough considering all the paperwork it entails. However, the filing process can be greatly simplified by implementing a bookkeeping function within your business.
As a startup owner, a large part of your income comes from your business, so a bookkeeper can also provide assistance with your personal tax returns. With a bookkeeping system in place, your financial information will already be in order for tax season. No more looking for receipts and invoices at tax time, since all of your financial information is already organized in one place.
2. Provides accurate analyses
Bookkeeping provides management with tools for analyzing business performance. Financial statements are the result of bookkeeping efforts, and they should be analyzed regularly.
Accurate bookkeeping allows you to trace your cash inflow and outflow by studying your startup’s financial statements. Bookkeeping records also reveal whether the business lines you are pursuing are profitable, so you can concentrate on your company's strengths while also addressing its faults.
3. Ensures regulatory requirements are met
Regulatory obligations set by the jurisdiction in which you operate can complicate business matters and should not be approached with a careless attitude. For example, failing to correctly record sales and payroll taxes can get you into hot water, jeopardizing your ability to run the business you worked so hard to develop. Your bookkeeping service will take of such legalities so you can focus on your startup.
4. Creates reports for investors
Investors will want to know about your startup’s financial performance to determine the value of their investment. The value of your company can be assessed by the balance sheet, income statement and cash flow statement, thanks to bookkeeping. In other words, their work enables investors to make better, more informed judgments.
5. Stabilizes cash flow
Cash flow problems are among the most common problems faced by entrepreneurs in the early stages of their business. While some cash flow concerns are uncontrollable, bookkeeping helps manage your essential expenditures while identifying cash flow blocks, like slow-paying customers.
6. Strategy preparation
As a startup owner, your energy is focused on tactical and strategic planning. You're constantly considering new methods to expand and enhance your company. Bookkeeping is a tool that helps you get closer to these short- and long-term goals. Getting closer to your goals requires using the knowledge provided by bookkeeping to fine-tune strategy. With the information provided by bookkeeping, you can track the results of your approach and adjust as needed.
Checklist for bookkeeping for startups
Now that you know how important bookkeeping can be for your startup, here is a basic checklist of what you can expect from bookkeeping:
• Keeping track of all transactions.
• Documenting all receipts.
• Keeping copies of invoices.
• Tracking any outstanding bills.
• Creating guidelines for invoices.
• Examining your stock.
• Processing payroll.
• Examining your tax obligations.
• Making and evaluating profit and loss statements.
• Producing monthly financial reports.
How to find the right bookkeeping service
A good bookkeeper can be a true partner for your startup. Here’s what you need to look for in a bookkeeping service:
1. The right experience
The correct experience is one of the first things you should look for in a bookkeeper. You want to work with someone who knows their way around the block and understands how the world works in real life, not simply what textbooks say. You also want to work with someone whose background corresponds to your business.
2. Meets budget requirements
Establishing your budget for bookkeeping services is an important element in determining your business's needs. A full-time, in-office bookkeeper will be far more expensive than a contract person who simply comes in a couple of days a week. Aim to strike the right balance between your requirements and your financial constraints.
3. Entrepreneurship driven
A professional bookkeeper should be dynamic and proactive in helping you to improve your business’s finances. They should be readily pointing out areas where you can save money and where a little more spending could increase growth.
A professional bookkeeping service may prove as indispensable as upper-level management for your company. The right bookkeeping service should assist you in making wise financial decisions for your company and ensuring that it is on the right track for success. If you follow the advice we've provided, you'll have a bookkeeping service that will help your company develop immensely.