You just spent weeks, months, or years on developing a product or service. As a new business owner, your passion is likely focused on the success of your unique business idea. For many entrepreneurs, bookkeeping, accounting, and keeping the books balanced is not the first thing that comes to mind when growing a business.
As a company founder, it will behoove you to learn how accounting, bookkeeping, and financial reports can work for your business’s benefit. Early-stage accounting can help set your business up for successful tax benefits. Proper bookkeeping can save you, and your accountant headaches come tax season. To run a successful business in 2021, you will want to learn more about how you can use these metrics to your benefit.
Many tasks of bookkeeping can be done in house or by the small business founders themselves. However, having skilled experts in bookkeeping and accounting on your side will help you keep clean books and run useful financial reports. You will want to decide if it is best to save money by doing it yourself or spending a little more on a professional so you can focus on growing the business in other ways.
If your startup is sprouting, this article will teach you all things bookkeeping and accounting. You will also learn about the benefits to your bottom line from understanding the business.
Smart bookkeeping. Powered by professionals. Backed by technology.
Let us do it all for you!
- Reconcile your accounts
- Provide you with clean books every month
- Ensure accurate records for seamless tax filing
- Track your business financial health
Accounting and Bookkeeping, What is the Difference?
Accounting and bookkeeping services seem similar because they are related. However, there are differences between the two.
Accounting is deciphering your financial records for everything from paying the right taxes to strategic business decision making. While bookkeeping is there to ensure the process of tracking all financial records is complete. Mainly a bookkeeper will look at income and expenses.
No matter the size of your business, all businesses have uses for accounting and bookkeeping services. When gathering investors to help you fund and run your business, they will need your financial reports. A good accountant can help you put together these essential reports. Great bookkeeping can ensure the data required to create the reports is ready to use.
Choosing a Business Entity
Before accounting comes into play, you must select a business structure. We recommend talking to an accountant or lawyer to discuss what business entity would be best for your organization.
The right choice may vary, whether you intend to run an eCommerce or more specifically Amazon FBA startup, a service business, or a software company for instance.
There are five primary business entities:
- Sole proprietorship- A sole proprietorship is a good option for businesses that are considered low-risk. If your business is still testing out its ideas, it can be an excellent choice to try before becoming a more formal business.
- Limited liability company (LLC)- An LLC is a good option for a medium to higher risk business with personal assets that you want to be protected. It can also provide lower tax rates than a corporation.
- C corporation- C corporations can be the right choice for a medium to higher risk business looking to raise money, a company that needs more cash, and a startup that wants to go public or will be up for sale soon.
- S corporation- S corporations are great for corporations that are better suited not being a C corporation. If the business owners are looking to avoid double taxation, an S corporation might be the right choice for your business.
- Partnership- Partnerships are a good option for companies with multiple owners and professional groups like lawyers. If your business is still testing out ideas, it can be a great choice to try before becoming a more formal business entity.
Choosing an Accounting Method
Cash basis and accrual basis are the two accounting methods your business will need to choose from to submit your first tax return.
The simplest type of accounting for your tax return is cash basis accounting. Cash basis will track income when it is received and expenses when they payout.
Accrual basis accounting counts money and expenses when it is earned instead of received. This type of accounting is more involved but will give you a clearer outlook of the business’s future picture.
We recommend talking to a CPA before choosing between a cash-based or accrual accounting method for your business. A CPA will help you decide which accounting method makes the most sense for your business and what will give you the best tax breaks.
Financial Records to Keep
Choosing your business entity and knowing what your accounting methods are will be necessary to your business. Another major step in running a business is having proof of all of your financial records. If the IRS comes sniffing around, you need to prove that your tax return claims are legitimate.
You will want to keep track of all financial records. Any documents that show income, expenses, deductions, and credits shown on your tax returns will be stored.
- Invoices
- Bills
- Receipts
- Credit card and bank statements
- Financial statements from your bookkeeper
- Proof of payments
- Canceled checks
- Previous tax returns
- W2 and 1099 forms
- Any document that will give evidence that supports an item of deduction, income, or credit shown on your tax return.
The majority of these records you should store for at least three years in your documents. However, there are some records you may keep longer than three years to provide information for potential questions. It is better to be safe than sorry when it comes to proving your business to the IRS.
Checklist for Startup Bookkeeping
It is messy to procrastinate doing your books until tax season or courting a new investor. The following are tasks you will want for keeping precise books.
Tasks for Weekly Bookkeeping
- Use your bookkeeping software or an Excel spreadsheet to enter all of your transactions. Integrated financial accounts make this more comfortable, but you still want to document every cash transaction.
- Transactions need to be categorized weekly as well. If you went to the store to pick up office supplies or a new sign for your booth at the tradeshow? Those items will be in different categories on your tax return. Recording these records daily or weekly will help you keep track with the most accuracy.
- Receipts should be filed or digitized. Filing or digitizing receipts is essential so that your business does not lose them. Keeping those receipts on file is vital for proving certain expense deductions if there is an audit.
Tasks for Monthly Bookkeeping
- Bank accounts must be reconciled monthly. This step safeguards your startup against expenses or income slipping through your fingers. Bank reconciliations are not easy, but once you make them a habit, it gets easier.
- Send and prepare invoices as soon as possible. Invoices should be sent and prepped at least monthly. However, the more you are on top of preparing invoices, the better off your business will be.
- Pay your vendors and other bills monthly. If you put off bills, you risk spending more on late payments and interest. Your business credit score can also be affected by making payments late. Instead of putting it off, make the payments as soon as possible to remain in good standing with your vendors and lenders.
- You must also look into who has not paid you yet on your outstanding invoices. Follow up with unpaid invoices to help create a smooth accounts receivable process. A clean accounts receivable process is vital for healthy business growth. If you are not getting paid, it won’t be easy to manage your cash flow.
- Reviewing the financial health of your business should also be checked monthly. A question every founder asks is, “do we have enough money to keep operating?” Looking into your financial standing will help your company see if it has enough cash coming in or if it is time to make changes.
Smart bookkeeping. Powered by professionals. Backed by technology.
Let us do it all for you!
- Reconcile your accounts
- Provide you with clean books every month
- Ensure accurate records for seamless tax filing
- Track your business financial health
Success through financial statements
Financial statements will be the best friend to the business. Having a good CFO, accountant and bookkeeper will aid in tracking and utilizing financial statements. Accurate books will help you see that you have enough money coming in and out of business. It will also help you save time and make critical business decisions.
Balance Sheet
The balance sheet statement shows everything that your business owns (assets), owes (liabilities), and the value of the business owner’s investments (owner’s equity). This will show your team these values at specific points in time.
Cash Flow
A cash flow statement is a mandatory statement that will record the amount of cash a business has leaving and entering a startup. This financial document will let investors see the company’s management of finances and where the money is coming from.
Income Statement
An income statement will show how profitable your business is over a reported period. It displays a startup’s revenue subtracted from their expenses and losses.
Many small business owners create this statement when investors want to see how profitable the business is. Similar reports that are called profit and loss statements will be made too.
Net Profit Margin Ratio
The net profit margin ratio can be better known as profit margin. When your business wants to know how much earned profit there is for each dollar of revenue, you want to conduct a profit margin ratio. This number is essential to show startups if they are spending too much money.
It shows if startups need to raise prices or slash expenses. If startups bring in a ton of cash, this metric will help the business see if their finances are treading water or making a profit.
Cash Runway
A runway is a metric that shows how much cash is on hand compared with how much you spend each month. If you have $11,000 in the bank account and project to spend $1,000 per month, then you have 11 months of the runway if you do not make a penny in revenue.
Customer Whereabouts
Understanding where your transactions are coming from is vital to your startup. What geographical location are they in? If you know this metric, you can run geographical ads targeted in that area, have an office closer to your customer base, and more.
DIY Accounting or Hire in a Professional?
You can do your recordkeeping system yourself. Best practices will be to do journal entries yourself if cash is tight in an early startup. For newer teams, keeping business expenses low is the top priority.
In other cases, even if you are an educated accounting professional, you still might want to hire a professional to assist in your company’s accounting and bookkeeping system. Having an expert in business finances can help with journal entries and set up great accounting systems. They can give you and the other business owners the freedom to focus on your products and services’ growth path instead of slaving over tracking each line of data.
If your startup is being held back by you doing accounting that is over your head, you should bring in a bookkeeper or CPA. Bringing in a CPA will be most important for tax filings and other important financial matters. Ask yourself if you want to handle sorting out your income taxes and business taxes while running a business? Or is it better to outsource it to a pro who specializes in that field?
Early-stage questions like “what can be written off?” and “what accounting system would work well for this business?” are great questions that an accountant can help your startup with.
Beyond early-stage startup accounting, you will want to have an accountant during tax season to help with accounting services. Finding an accountant familiar with your industry can help you pay the least amount of taxes while protecting you from tax services.
All Startups are Different! Do What is Best for You!
After developing a product or service that will help people solve a problem, you have a new problem to solve. How will you balance your books for a successful future? You can hire an accountant. You can also hire a bookkeeper. What is the time/cost of doing it yourself vs. hiring it out to focus on other aspects of the business?
With the creation of your startup, it is easy to get caught up in product promotion excitement. Proper bookkeeping and accounting will help you ensure that your sprouting business has the funds necessary to succeed.
A cash flow statement will help you see the cash inflows and outflows. A cash runway shows you how much cash your startup has and how much money it can run through without taking in profit before it dries out. These statements and more will help you make strategic decisions that are not possible without solid accounting practices.
Have accounting and bookkeeping practices that are followed weekly and monthly to set your startup up for success. Enter in all data of transactions, reconcile your accounts, and keeping up on accounts receivable are all ways your business will keep up with accuracy and keep cash in the bank.
You should be excited about what your business is building towards in its future. What you should never do is put your books on the backburner. Accurate books will help your startup become more than just another startup. Excellent accounting will give you a leg up on your competition.
Smart bookkeeping. Powered by professionals. Backed by technology.
Let us do it all for you!
- Reconcile your accounts
- Provide you with clean books every month
- Ensure accurate records for seamless tax filing
- Track your business financial health