Startup Bookkeeping 101: Why You Need a Bookkeeper

Many business owners view bookkeeping as a task that must be done, often relegating it to a once-a-year chore that coincides with filing the tax return. While it may seem like a necessary evil, bookkeeping is a crucial part of running a business. Without proper bookkeeping, it becomes difficult to track financial health, make informed decisions, and ensure compliance with regulations. By leaving all of your bookkeeping to year end you may be missing out on valuable information that can be used to grow the business. 

Internal Benefits of Quality Bookkeeping for Startups

Monitoring

The primary internal benefit of proper bookkeeping for business owners is timely, accurate, and quality data on the health of the business. A quality bookkeeper will provide you with a Balance Sheet and Statement of Profit and Loss. The Balance Sheet will clearly show your assets and liabilities broken down into a logical, consistent, and easily understandable structure so you can see where your business is at a glance. The Profit and Loss will show you how you got there. Beyond simply cash in vs. cash out, a quality Profit and Loss will be structured to show where the revenue came from, how much it cost to generate it, any additional operating expenses, and other income and expenses incurred. You should be able to follow the story of the month, quarter, or year simply by going down the P&L line by line.

Both of these statements provide valuable information to any business owner or manager. They allow you to spot problems as soon as they arise, see trends over time, and provide an objective look at the state of the business. The P&L can be customized to fit your needs and is not one size fits all. Your bookkeeper should work with you to design a structure that matches how your business operates and gives you the best insight into your business.

Forecasting

The second benefit of good bookkeeping is it sets the stage for accurate forecasting. For early stage startups cash flow is king. Being able to accurately forecast your inflows and outflows can be the difference between success and closing down.  Accurate forecasting cannot be done if your bookkeeping is done once a year or if it is not done with care by a quality bookkeeper. Beyond the base financial statements a good bookkeeper will tag transactions with the correct clients and vendors so you can be very granular in your forecasting. Forecasting is much easier when you are working with specific historic payment amounts and dates while also having the most up to date invoices already entered for future payments.

After the immediate cash needs are taken care of you can move to the next level of forecasting. Here you will be forecasting revenue growth, the downstream effects on your expenses, and how many employees you need to secure and maintain that growth. Once again, accurate, quality bookkeeping provides the foundation for your forecasting needs. Revenue can be forecasted by grouping clients into tiers or categories by size. You can then use the historic revenue by client data to establish a baseline revenue per client for a given tier. From there you can simply combine that rate with you client acquisition model to determine what your revenue will look like under a variety of scenarios. Expenses can be handled the same way. Using historic data you can determine how your expenses may grow by client or by service volume. All of this is made possible by a quality bookkeeper accurately recording your transactions and tagging them with the correct client and vendor.

External Benefits of Quality Bookkeeping for Startups

Funding

A huge issue on the minds of many founders is how to obtain external funding. Most early stage startups will need some external funding whether that is a basic friends and family seed round or follow up rounds to keep the lights on while on the journey to profitability. Once again, quality bookkeeping can help solve this issue. Quality bookkeeping gives you the objective, quantitative foundation you need to show potential investors where you are and how you got here. In early rounds the Balance Sheet and Profit and Loss give you hard evidence this is a serious endeavor and tell your story so far. In later rounds the work done by a quality bookkeeper will stand up to audit scrutiny and verify your success. In both cases the forecasting benefits discussed earlier also apply here as they show your forecasts have a strong basis in truth.

Compliance

The final benefit for today is compliance. In most cases this will be basic tax and business license compliance but can include industry specific reporting. While bookkeepers do not by default handle these tasks the work done by a quality bookkeeper ensures the actual filings go smoothly. Instead of doing a year’s worth of work at once the financial data is ready for you when filing season comes around. At Woodham Bookkeeping I do prepare tax returns and other services can be discussed based on your specific situation. Similarly you should work with your bookkeeper to determine if they are able to handle any compliance work and free you up to grow your business. A good bookkeeper will take what can be a stressful time and make it simply another item to check off the list.

When Do You Need a Bookkeeper

I strongly recommend a bookkeeper for any startup founders who intend to make the business a career. Building a solid foundation as early as possible sets you up for success and eliminates problems down the road. If you are just starting out quarterly or even semiannual bookkeeping may be a good option. This will allow you to reduce your costs while still benefiting from regular reporting. A quality bookkeeper will be able to set your accounting system up for success from day one providing value beyond the basic financial reporting. If you are interested in learning more about the services I provide and how I can help you achieve all of the benefits listed here please contact me for a free consultation.