Several studies have indicated that firms with apt knowledge concerning the financial health of their business often manage to achieve success. Entrepreneurs can make the right decisions quickly as they can easily detect profit and loss instances. Thus, focusing on bookkeeping is critical for ensuring business operations remain in proper order.
What is Bookkeeping?
Recording the organization’s financial transactions is referred to as bookkeeping. It involves activities performed for handling cash flow coming in the business and the cash outflow as well. Bookkeeping helps firms in making financial, operational, and investment-related decisions from time to time.
Various regulatory bodies, investors, and financial institutions seek accurate bookkeeping for assessing the startup’s financial health. It also helps the firm in making solid decisions based on precise data.
The Importance of Bookkeeping for Startups
Ideally, the first step entrepreneurs should take after creating MVP is getting the math in place. However, finding a technical cofounder is often considered the most significant task by entrepreneurs.
Accounting and bookkeeping are probably the last things that the founding team will worry about. But, this doesn’t mean the finance part has nothing to do with the foundation of the business. Thoroughly knowing your numbers opens doors for several unexpected benefits.
The accounting needs of every startup vary, depending on their industry, the number of funds, and the availability of resources with the bookkeeping team. The elements that the business needs to interact with each day also differ from one another. Consumers, employees, vendors & suppliers, lenders & stakeholders, as well as local and state governments’ are elements that almost every organization deals with daily.
Most entrepreneurs start organizing their business books when it’s time for tax calculations or while attempting to win new investors. Experts suggest startups to avoid such a last-minute rush as accurate bookkeeping is crucial for the survival of the enterprise.
Here’s a checklist for bookkeeping basics recommended by most bookkeepers for ensuring precise books:
- Most common types of accounts.
- Setting up business software.
- The need to record every financial transaction.
- Categorizing transactions.
- Storing receipts and invoices on a weekly basis.
- Reconciliation of bank statements with the company’s balance sheet.
- Sending invoices on time.
- Setting up reminders for paying bills.
- Reviewing the firm’s financial standing every month.
How to Setup Bookkeeping for Your Small Business?
Records concerning cash account, bank account transactions, income accounts, assets & liabilities need to be maintained accurately. Besides these, forex exchange profit and loss, equity account, and accounts payable related data is also significant.
1. Setup a Business Software
In this era of the covid-19 pandemic, remote working is the key to any business’s success. So, manual accounting is not an option anymore as all the stakeholders need to be able to access, analyze, and update data while working remotely. Online accounting solutions like Wave, Xero, ZohoBooks, NetSuite ERP, Quickbooks, etc. allow capturing, storing, analyzing data in the best possible way.
The choice of cloud-based software needs to be made as per business needs. However, it is always better to go with a system that can be upgraded easily to support business growth with time. It must also integrate with the existing business systems. Most software solutions are easy to use and do not require advanced technical knowledge.
2. The Need to Record Every Financial Transaction
Experts recommend entrepreneurs to record every financial transaction, no matter if it is cash or any other mode. Capturing the same along with details for service charge, tax, incurred on the transaction is crucial.
It is always advisable to avoid reliance on memory as you may fail to record the transaction at a later stage. Cloud-based software solutions make transaction recording easy. Entries should be made immediately after making purchases or disbursement of funds.
3. Categorizing Transactions
Expenditure incurred on digital ad campaigns for live tradeshow events and purchasing office supplies are transactions categorized differently in tax records. Thus, recording them under relevant categories immediately after making the transaction can be a good idea.
4. Storing Receipts and Invoices on a Weekly Basis
No matter if the firm uses an excel spreadsheet or bookkeeping software, keeping a record of all the financial activities is important. Keep records for cash transactions as well. Depending on the financial analyst’s recommendation, startups can generate daily, weekly, monthly, or yearly statements. Technology allows you to download various reports and compare them to ensure your financial statements are accurate.
Auditors may seek physical copies of certain invoices and receipts during auditing. Thus, firms should either digitalize these receipts and invoices or file their physical copies on a weekly basis to avoid a last-minute rush.
5. Reconciliation of Bank Statements with the Company’s Balance Sheet
Reconciling both documents after a regular interval of time is crucial for ensuring the firm’s cash records are accurate, and there are no manipulations. The procedure can be tricky for entrepreneurs who do not have much experience in the same.
6. Sending Invoices on Time
Large organizations have a dedicated accounts payable team for processing invoices and ensuring they are sent on time. Small firms or startups often do not have such resources. Thus, they need to be religious when it comes to preparing and sending invoices on time every month.
Reviewing outstanding invoices (pending payments) and sending reminders to clients is also crucial. Failing to do so can result in severe cash flow issues for the organization.
7. Setting up Reminders for Paying Bills
Failure in paying vendors or creditors on time can lead to late payment charges. It can also impact the business’s image and ratings. Setting up reminders for vendors and other payments in the accounts and bookkeeping software can help.
8. Reviewing the Firm’s Financial Standing Every Month
No matter if it’s a medium-sized business or a small startup; both need sufficient amounts of cash in the bank to carry out day-to-day operations.
Reviewing the availability of cash in the bank and comparing the same with expected expenses (liabilities for the month) can help in assessing the company’s financial health. If the cash is insufficient, changes in financial planning can be made accordingly for the smooth functioning of the organization.
Can Startups Benefit by Outsourcing Bookkeeping?
In some cases, the bookkeeping needs of a startup might be different than a small or medium-sized business. Books may need to be compliant with sector-specific regulations and audit-ready during the given timeframe.
Some startups do not require full-time in-house accountant support. They can outsource bookkeeping and accounting tasks to virtual accountants who have experience in offering services to startups.
If your startup does not have a dedicated team of in-house accountants and financial analysts, you should consider outsourcing booking to professionals. Firms that provide bookkeeping services for a small business assign a dedicated team of experts to every client. They also offer tailor-made software solutions so that you can access and update the info in your books. You can also seek help in filing taxes, cess, and other levies.
8 Benefits of Outsourcing Your Accounting and Bookkeeping.
- Founders can focus on key functions and strategies.
- Assistance in planning and decision-making
- Ensuring compliance with taxation and other legal requirements
- Tracking growth and profits during initial stages
- Uncomplicating the auditing procedures
- Winning the trust of banks and stakeholders
- Information security
- Get the best out of the existing human resource
1. Founders Can Focus on Core Functions and Goals
When startups outsource their bookkeeping functions, its founders and cofounders can focus on the key goals rather than worrying about the maintenance of books. There won’t be a need to hire in-house financial experts and verify records or spend time on analysis.
2. Better Budget Planning and Overall Decision Making
A startup can plan its future budget based on data retrieved from organized accounts. Transactions become transparent when accurate accounts are maintained for each day. Profits and expenditure remain crystal clear, and an action plan for future spending can be drafted accordingly.
Virtual accountants simplify the data for income and expenses, profit margins, purchases, taxes, vendor payments, and debt. Entrepreneurs also get access to cloud-based software that helps in analyzing the simplified data. The management team can always remain well-aware of the company’s financial position and respond to the market demand with changes quickly.
3. Compliance with Taxation and Other Legal Requirements
Maintaining books of accounts in a specific format is a legal requirement in several countries. Entrepreneurs who wish to opt for government funding or tax cuts need to comply with the same. Storing accurate data for sales, purchases, and overall profit is compulsory.
Every startup is liable to pay direct and indirect taxes as well as cess in some cases. They are expected to file the same on or before the due dates to avoid penalties.
Startups with accurate accounts and bookkeeping do not face complications while calculating and filing various taxes. Detailed analysis for tax planning also becomes easy when accounts are maintained digitally.
4. Tracking Growth and Profit During the Initial Stages
Founders of a startup invest a significant amount of time and money. Thus, tracking the growth during its initial stages of operations is important. Bookkeeping provides a glimpse into the growth and profit of the enterprise. Such records play a significant role in attracting angel investors and co-founders.
Accounts and statements offer an accurate feel about the business operations and financial position. You can determine if the firm is making profits or losses and pinpoint areas that are incurring the most expenditure. The data also helps management in justifying the cost-cutting and investments.
5. Making the Auditing Procedure Easy
Auditors appreciate clear and periodical data as it makes auditing books of accounts easy. Precise bookkeeping assists in uncomplicating things. The management team can quickly answer questions raised by the auditor if they have access to books of accounts. This also helps firms in avoiding unfavorable remarks from third-party auditors.
6. Better Assurance for Banks and other Stakeholders
Debtors, creditors, and shareholders may wish to know the financial position of the startup at any point. Bookkeeping ensures both internal and external stakeholders get access to data in an easy-to-read format. With proper accounts in place, startups can approach financial institutions and expect quick approvals on loans.
7. Information Security
Businesses consider their internal financial records as a closely guarded secret. Entrepreneurs often hesitate to hire local finance professionals as they may not remain long-term employees and join competitors.
On the other hand, enterprises feel comfortable dealing with offshore virtual accounting firms due to data security standards and non-disclosure agreements. Data is transferred, processed, and stored via highly secure solutions.
8. Getting the Best Out of Human Resource
Startup owners often try to handle bookkeeping tasks themselves or share responsibilities for the same among key employees. Resources that can be utilized for growing the business are spent on accounting activities. Not just CFOs, but even office assistants, and other non-accounting professionals end up spending time and energy in the wrong direction. Outsourcing these tasks can help ensure the energy and time of all employees are utilized for business growth.
Put simply, opting for outsourced bookkeeping services can ensure scalability; focus on the key areas of operation, tax and audit-ready financials, and data privacy.
The Need for Accurate Records Starts from Day One!
Entrepreneurs who operate their startup with skeletal staff often ignore bookkeeping until it is tax time. However, if you wish to start at the correct footing, you should consider bookkeeping as a significant part of your daily business activities.
Even someone who is not a math-person can take a look at income and expenditure every day within minutes for tracking the startup’s performance. You can monitor losses as soon as they start eating into the firm’s capital.
Good bookkeeping practices act as one of the key ingredients in every enterprise’s success.
The founders of a startup can make prudent business decisions once they know how to use online as well as offline tools for tracking finances and generating comprehensive reports. If armed with knowledge about books, the team behind the startup can easily make the best financial decisions. Accurate records need to be maintained from day one.
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