Startup Bookkeeping 101: An Introductory Guide

The average startup owner would probably prefer to focus on growing their business over maintaining their books, but you can’t afford to neglect your financial responsibilities.

Accurate, up-to-date records are necessary for many of your startup’s essential processes, including applying for financing and managing your tax obligations.

Here’s everything you should know about startup bookkeeping to optimize the function of your business.

Difference Between Accounting And Bookkeeping

Accounting and bookkeeping are intimately linked, but they’re not interchangeable. Understanding the difference between the two should help you clarify which financial responsibilities you can handle yourself and which you’ll need help with to complete.

In simple terms, bookkeeping involves maintaining records of your company’s day-to-day transactions. It’s less complex and more routine, requiring little more than fundamental financial skills in most cases.

Meanwhile, accounting refers to using bookkeeping records to refine or interpret financial statements for various purposes. For example, that would include filing a tax return, analyzing revenue trends, and investigating areas of overspending.

The primary difference between the two processes is that bookkeeping is an administrative task involving little critical thought. Meanwhile, accounting is more sophisticated and requires a higher level of expertise and analysis.

Many startup founders and small business owners do their own bookkeeping. It’s relatively simple, and software like the Lendio Bookkeeping Solution can automate a significant portion of the work.

However, accounting is usually too complex for you to do alone. You’ll typically need expert help to avoid making costly mistakes, in which case you can either outsource your accounting to a service provider or hire an accountant full-time.

How To Do Bookkeeping For A Startup

Startup bookkeeping is similar to bookkeeping for any small business. Here’s a step-by-step guide to establishing a bookkeeping system that you can follow to get off the ground.

Separate Your Business And Personal Accounts

One of the ways that startup founders most frequently create bookkeeping and accounting messes is by failing to open dedicated accounts for their business when they get started.

Eventually, someone in the organization realizes that no one knows which transactions are personal and which ones belong to the business.

As a result, the founder, accountant, or bookkeeper usually has to go back and review each financial transaction since operations began to isolate the business activity.

Fortunately, all of that trouble is easily avoidable. Before you do anything else, take the time to establish separate accounts for your business. Most startups opt for one dedicated bank account and one business credit card to start.

Connect Your Accounts To Bookkeeping Software

Some business owners still keep track of their transactions by hand, but there’s little reason to do so these days. It takes significantly more time and effort than bookkeeping software and exposes you to human error.

In addition, you don’t have to pay to get access to the software you need. Lendio offers free accounting software for small businesses that can automatically track your transactions.

Once you have a bank account and credit card dedicated to your business, you can connect them to the software. It’ll pull the activity directly from your accounts and use it to populate your transactions, even generating your income statement. 

Choose An Accounting Method

Contrary to popular belief, there are multiple ways you can choose to maintain your financial records. Startups typically use the cash or accrual accounting method to record their transactions.

The difference between the two methods comes down to timing. The cash basis recognizes revenues and expenses when money enters or leaves your account. It’s the easiest to follow, and your bookkeeping software should be able to handle it.

Meanwhile, the accrual method recognizes revenues when you earn them and expenses when you incur them. It requires that you track accounts receivable and accounts payable, which often means you have to do more bookkeeping work by hand.

While the cash basis is generally easier to employ, the accrual method is more accurate, especially for startups with high inventories.

Be aware that the Internal Revenue Service (IRS) may require that you use the accrual method once you average $25 million in gross receipts for three years.

Keep Digital Documentation

Fortunately, you don’t have to hold onto physical documents anymore. In fact, an accountant will probably be pretty annoyed with you if you bring them a shoebox full of crumpled paper receipts every year for tax purposes.

It’s perfectly acceptable and much more efficient to keep a digital copy of each receipt, invoice, or statement. You don’t have to worry about damaging or losing your documents, and you can transfer them to a bookkeeper or accountant more easily.

Fortunately, when you sign up for Lendio’s accounting software, our free small business accounting app lets you take pictures of physical documents and upload them automatically for future reference.

However, you typically don’t have to worry about keeping a copy of every receipt. In many cases, your bank account and credit card statements should provide sufficient supporting details for the average business expense.

Perform Regular Check-Ins

The best accounting software can automatically track your transactions and even categorize your startup expenses, but it’s not always perfect. It’s a good idea to check in with it regularly to ensure that your records are accurate.

Otherwise, you may open your books after six months of activity, find that your software has been miscategorizing certain transactions, and have to spend hours going back through it all to find the errors and fix them.

That doesn’t mean you need to monitor it constantly, but it’s a good idea to have a monthly and quarterly routine. Do enough each month to ensure no significant issues develop, then have a high-level check-in each quarter.

For example, it might be best to perform a bank account and credit card reconciliation and enter all cash transactions each month. Once a quarter, you could then review your financial statements and make adjusting journal entries as necessary.

Things A Startup Should Track On A Monthly Basis

Maintaining clean financial records is a lot like keeping a clean house. You’re better off doing a little bit of work consistently than putting it off for months and trying to get everything done at once.

Like housekeeping messes, bookkeeping issues tend to compound the more you procrastinate on them. That’s how mistakes get repeated for months, causing you to go back further to fix the damage.

Waiting too long also increases the chances you’ll forget the details of your activities. It can be a struggle to go back and record something accurately when it’s been weeks or months since you last thought about a transaction.

To prevent those issues, try to develop and stick to a monthly bookkeeping checklist. Here’s a list of some things you should do on a monthly basis:

• Enter any income and expenses that you’re not using software to track
• Reconcile to your bank and credit card statements
• Write down supporting detail to any unusual transactions you or your accountant may question in the future

Your monthly bookkeeping processes should prevent you from falling too far behind on anything. You want to avoid leaving any messes that will be overwhelming to you or your accountant in the future.

Which Financial Statements Should You Maintain?

As the founder of a startup, the three financial statements you should prioritize are the balance sheet, income statement, and statement of cash flows. Here’s what those are and how they work:

• Balance sheet: This documents your startup’s assets, liabilities, and equity on a fixed date, such as the end of the calendar year. It gives readers insight into the strength of your business’s financial position.
• Income statement: This documents your revenues and expenses over a period of time, such as the first quarter of the year. It gives readers insight into your business’s profitability.
• Statement of cash flows: This documents your net cash flows from your operations and your investing and financing activities. It helps readers understand where your dollars come from and where they go.

Your balance sheet and income statement capture your business’s fundamental financial information. They’re the two most important financial statements, and you’ll need them in every scenario where someone wants insight into your startup’s finances.

For example, prospective lenders and investors will always want to see your balance sheet and income statement before deciding to work with you. Your accountant will also need them to help you with tax planning.

In addition, these two financial statements can help company management make better decisions. Analyzing them can reveal your startup’s strengths, weaknesses, and growth opportunities.

Third parties may or may not require your cash flow statement, but it’s essential for informing management decisions. Running out of capital is one of the most significant dangers for startups, and a cash flow statement helps you see that coming.

Do Startups Need In-House Accountants?

One of the most common reasons startups fail is that they run out of capital and can’t secure more funding. As a result, company founders need to be highly strategic with their resource allocation, especially in their earliest days.

One significant decision startups face is whether to hire in-house accountants or outsource the function to an independent accounting firm.

While the best option depends on your circumstances, outsourced accounting is often superior for the following reasons:

• Cost savings: The primary reason to outsource your bookkeeping and accounting processes is to keep your costs low. Hiring full-time accountants and bringing the function in-house is often more expensive than it’s worth.
• Service flexibility: When you outsource your accounting, you choose what professional services you need. You can expand and reduce your accounting service as your cash flow or business needs change.
• Expert, niche advice: If you bring an accountant in-house, they’ll likely be lower-level. Hiring a full-time accounting expert for a startup costs more than most can afford. However, if you outsource, you can work directly with top talent.

Ultimately, it’s simply not necessary to pay extra for in-house accounting services for most startups. Outsourcing is cheaper and usually more than sufficient for your needs.

Typically, it only makes sense to hire an in-house accountant after your startup has expanded significantly. At that point, you’re likely to have more complex accounting needs each month and the cash flow necessary to afford full-time help.

How Lendio’s Bookkeeping Solution Can Help

Accounting software has made manual bookkeeping obsolete, but some small business owners record transactions by hand to save money. Most accounting software has a monthly subscription cost that may not seem worth it to a bootstrapped startup.

However, not every software forces you to open your wallet. Lendio offers free small business accounting software that can make bookkeeping a breeze for your startup. In addition to tracking your income and expenses, it can also:

• Sort your activities into appropriate categories
• Generate a professional-looking invoice in minutes
• Integrate with Gusto to calculate your payroll
• Create custom financial reports
• Analyze your cash flows trends
• Forecast your estimated tax burden

With Lendio, you get all the bookkeeping services you need for $0 per month, and you can chat with our bookkeeping experts to get help with any issues you may face. Give it a try today!

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.