Startup bookkeeping: what you need to know

Why do startups need bookkeeping?

Startup founders should focus on product development, customer feedback, and telling the company’s story to investors. But the reality is that startup businesses also need to complete other tasks related to day-to-day operations, including bookkeeping.

Why are accurate books important?

Founders need accurate and timely accounting information for a variety of reasons. Equity investors, lenders, regulators, and taxing authorities all need reliable financial data.

Revenue recognition

Venture capitalists assess startup businesses based on several criteria, including revenue. A startup needs a clearly defined revenue recognition policy for accounting transactions. The policy should be applied to each stream of revenue.

Cash and expense management

Founders closely monitor expenses and cash flows to determine the company’s burn rate. Categorizing expenses into the correct accounts makes it easier to identify wasteful spending. The burn rate impacts the runway and strategic business decisions about fundraising.

Budgeting

Startup businesses need a formal process for budgeting based on accurate accounting data. Managers rely on historical income statements (profit and loss statements) to make financial decisions and forecast growth.

Identify risks and opportunities

‍Reliable financial data can reveal opportunities to save on costs or to drive additional revenue. A startup may increase prices based on strong customer demand for a product or service.

Bookkeepers vs. accountants

Bookkeepers perform these tasks:

• Record detailed information: Use source documents (expense receipts, vendor invoices) to record data in the accounting system. 
• Organize and file source documents: Bookkeepers organize and file source documents. The information should be accessible for an audit or to research financial transactions.
• Management reports: Bookkeepers often produce reports for internal company use, such as cash flow projections and depreciation schedules for the tax return.                                           

On the other hand, accountants perform these tasks:

Setting up the accounting system 

Accountants put the accounting system in place so that transactions are properly recorded. When a new business is launched, everything you need to know about the system should already be determined. This includes the business structure (LLC, partnership, etc.) and each accounting method.

Once the system is in place, the accountant can determine the necessary accounting services, tax services, and bookkeeping services needed for the business. 

For example, income taxes for a partnership business structure are more complicated and the record-keeping requires more time. A good accountant knows that a partnership creates more work during tax season.

Establishing internal controls 

An accountant can establish internal controls to protect assets from theft and to reduce the risk of fraudulent transactions. 

Your bank account should be closely monitored and should be reconciled as soon as the monthly bank statement is available. Accounting software can quickly analyze each cash and credit card transaction.

Payroll accounting is complex, and businesses need strong controls to add employees. Payroll generates liabilities for federal, state, and possibly local payroll taxes. Startup firms can transfer payroll responsibility to an outsourced SaaS software provider at a reasonable cost.

Internal controls should be enforced to maintain the financial health of your business.

Create financial statements 

Accountants use the data posted by the bookkeeper to produce accurate financial statements, tax returns, and internal management reports. Accountants also determine the accounting methods used to generate financial statements.

Early-stage businesses, for example, generally should use the accrual accounting method, not cash accounting. This policy conforms with generally accepted accounting principles (GAAP), which stakeholders prefer for financial statements.

In a small organization, one person may fill the bookkeeper and accountant roles.

What does a startup bookkeeper do? 

A startup bookkeeper’s role can vary, depending on the size and complexity of the organization. 

To explain the bookkeeper’s role, assume that the firm receives a $10,000 invoice for IT hardware. Here are the steps in the accounting process, and the individual responsible for completing each task:

Process source documents

The bookkeeper receives the invoice and ensures the information is entered into the accounting system. The vendor contact information, a description of the items purchased, the dollar amount, and the due date are captured using accounting software and reviewed by the bookkeeper.

Posting journal entries

The bookkeeper posts a journal entry to increase the IT hardware account and to increase accounts payable for $10,000. The accountant determines the useful life and the depreciation method for IT hardware.

The accountant creates the chart of accounts and determines the accounting policies used to record journal entries. For example, assume that the company records revenue when goods are shipped to the customer. The bookkeeper verifies each shipment before recording revenue.

Managing payments and receivables

Bookkeepers monitor accounts payable and accounts receivable balances and send reports to the accountant. These accounts are monitored to prevent late vendor payments and to determine when late-paying customers are contacted.

Month-end and year-end close tasks

Bookkeepers may perform several duties for the month-end close and at year-end:

Account reconciliations

Each account should be reconciled at the end of each period.

Adjusting entries

Entries should be posted to record revenue and expenses in the correct period. At year-end, for example, the business should record depreciation expense for the IT hardware. The accountant may post adjusting entries if the bookkeeper is not experienced. 

Enforcing internal controls

Bookkeepers monitor accounting activity to ensure that internal controls are followed. Assume that the business requires two approvals for every payment over $5,000. The bookkeeper confirms proper approval for each of these transactions.

An accountant completes the remaining tasks.

Preparing the financial statements

The accountant reviews the bookkeeper’s work, including the adjusting entries. Accountants generate an adjusted trial balance and use the report to create the financial statements. An accountant also handles tax reporting and any reports required by regulatory agencies.

When should a startup get a bookkeeper?

A founder may handle bookkeeping and other tasks when the business is launched. At some point, the task should be handed off to a bookkeeper. Startup businesses often hire bookkeepers based on recommendations from an accounting firm.

Over time, the startup may hire an accountant and build a finance staff, eventually hiring a CFO. Use these factors to determine when your startup needs to hire a bookkeeper.

Too many transactions

As your business grows, so do the number of accounting transactions you process. 

• Adding employees: Payroll becomes more time-consuming as you hire more employees. Processing payroll is difficult, and payroll errors create financial problems for your staff. 
• Number of products and services offered: Each new product or service requires more account numbers in your chart of accounts, and managers need more financial information to track business expenses and revenue for each item.
• Vendors: When you add a new vendor, you should collect information so the vendor can be paid on time. 

These activities all increase the number of transactions and the complexity of your accounting system. Fortunately, you can hire a bookkeeper with years of experience and use technology to save time and reduce the risk of errors as you grow.

You can't pinpoint the cost of goods sold (COGS)

Every cost should be allocated to a product or service sold to a customer. If your accounting system doesn’t identify all costs, you can’t determine the cost of goods sold (COGS). 

A bookkeeper posts all transactions to the correct accounts. Managers can rely on the accounting records to calculate the true cost of an item. The profit margin and the selling price are calculated using accurate cost data.

Cash flow looks healthy but profit is weak

Entrepreneurs need to weigh cash flows with profitability. Products should be priced to generate a reasonable profit margin. At the same time, the price should be attractive to customers.

Some businesses price products below all competitors in the market. Sales increase, but the profit margin on sales is low. If a company grows sales rapidly but only generates a 4% profit margin, changes in the market can quickly eliminate all profits.

Use a bookkeeper to monitor cash inflows and outflows. Create a cash flow roll forward to project the beginning and ending cash balance for the next 12 months. 

Lost and missing documentation

Use automation to collect and file all of your startup accounting documentation. Train a bookkeeper on your electronic filing system, so you can quickly access documents for an audit or IRS tax filings. These steps reduce the risk of losing documents.

What to look for in a startup bookkeeper

Find a bookkeeper with experience in your industry. You’ll spend less time getting the bookkeeper familiar with your business, and the individual add more value.

Processing accounting transactions requires a sharp attention to detail and a strong work ethic. A bookkeeper may work long hours during the month-end and year-end close. You also need someone who is responsive and doesn’t fall behind on posting transactions.

You can find businesses that provide effective bookkeeping at a reasonable price.

Alternatives to hiring a bookkeeper

Some founders hire an accountant and give the accountant responsibility for hiring a bookkeeper. Consider this approach if your business is scaling quickly and you need an accountant’s expertise to manage growth.

Every business should fully automate accounting and business finances, regardless of who is on the accounting staff. Moving from a manual to an automated system becomes more difficult as the business grows. Put automation in place now so you can avoid more work down the road.

Advantages of a remote/fractional bookkeeper for startups

Small business owners need to hire professionals to complete certain tasks, while also controlling costs and the firm’s burn rate. A remote or fractional bookkeeper can handle some of the accounting process at a reasonable cost.

Accounting needs vary, depending on the number of financial transactions you record, and your firm’s industry. Some bookkeeping firms offer a free consultation to determine the bookkeeping needs of a potential client.

Detailed reporting

An experienced bookkeeper who understands your industry can generate financial management reports with metrics that are most useful for you. 

An e-commerce business needs to monitor the average order value and the percentage of website visitors who convert into customers. A bookkeeper can generate useful reports for decision-making.

Easier compliance and audits

Businesses need to file receipts, invoices, and other documents. If a regulator or an auditor needs documents, you need to provide the files quickly.  Bookkeepers can help you create an organized system to file and retrieve documents.

Tax preparation and planning

A CPA may ask a startup to create documentation to file taxes. For example, depreciation expense on fixed assets may differ between the accounting records and the tax return. A bookkeeper can handle the documentation of both depreciation methods. 

Insights into cash flow

A bookkeeper can notice trends in your accounting transactions. Assume, for example, that the accounts receivable balance increased by 15% in the third quarter, and sales increased by 4%. 

The bookkeeper identifies six new customers with unpaid invoices for 60 days or more. A bookkeeper’s knowledge of your business and the cash flow statement helps them provide insights into cash flow.  

Faster and easier financial reporting

A startup may need financial statements generated quickly for potential investors. A responsive bookkeeper can produce financial statements as needed for presentations.

FAQs about startup bookkeepers

Does company accounting have to be done by an accountant?

Founders often handle the accounting when the business starts and then hand off tasks to a bookkeeper. Eventually, startups should hire an accountant to review the bookkeeper’s work and generate accurate financial statements.

What's the difference between Xero and QuickBooks?

Xero’s platform allows users to pay bills, manage expenses, process payroll, and connect with the user’s bank. QuickBooks provides a similar platform for accounting tasks and offers more functionality.

However, neither company offers Rho’s integrated platform for accounting, checking accounts, corporate cards, and expense management.

What does a bookkeeper do?

Bookkeepers record detailed information from source documents (expense receipts, vendor invoices) in the accounting system. Bookkeepers post journal entries and generate management reports for internal company use.

What should a bookkeeper do every week?

Bookkeepers should ensure that all accounting transactions are posted and the supporting documents are properly filed. 

What should a bookkeeper do every month?

The same weekly requirement applies to a full month. Bookkeepers should ensure that all accounting transactions are posted and the supporting documents are properly filed. 

At month-end, the bookkeeper reconciles all accounts and uses bank statements to perform bank reconciliations. Bookkeepers assist the accountant when the financial statements are prepared. An experienced bookkeeper may post adjusting entries and generate the trial balance.

Wrap-Up: All about startup bookkeeping

An experienced bookkeeper can add value to a startup and free up the founder’s time. Bookkeepers post accounting transactions and file source documents. 

A veteran bookkeeper can perform accounting tasks, such as posting and adjusting entries and generating the trial balance. Startup bookkeeping allows your business to scale and keep accurate financial records.

Successfully generating accounting information necessitates clean data; however, obtaining this level of data can require numerous hours. Leverage technology to save time.

Manage all of your spending and cash using Rho’s automated platform. Rho is a business banking platform that offers the tools companies need to manage their cash and grow their businesses.

Backed by 24/7 customer support, Rho offers business checking accounts, savings accounts, and enterprise-grade spend management – accounts payable, corporate cards, and expense management – with no monthly fees.

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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