5 factors to consider for your startup bookkeeping

Bookkeeping is often thought of as an administrative, cost centre activity. We set the record straight here.

What is bookkeeping and why is it important for a startup?

Bookkeeping is, simply put, the recording of all the daily, weekly, monthly financial transactions that occur in your business. Did you sell a product or service to a consumer? That's a bookkeeping (or accounting) transaction! Did you purchase an asset for the business? That's another transaction that needs to be recorded. In that case, cash is getting used up and the business is receiving an asset in exchange. If you look at the receipt or invoice, you might also notice that there are additional charges. Sales taxes. Shipping or customs duties. How do these get accounted for? Great questions! Before we dig into those questions, suffice it to say that keeping track of all these purchases and sales, and asset purchase is very important. To some, these might seem like mundane transactions hat you can afford to worry about later, but we would strongly recommend against doing that. The life of a startup businessperson is hectic, and if anything, future 'you' might be even more busy. This is why having a strategy for your startup bookkeeping is absolutely critical.

Here, we discuss 5 factors to consider with your startup bookkeeping.

  1. Identify who is going to be responsible for bookkeeping both now and in the future
  2. Establish a monthly schedule where your bookkeeping is never more than 30 days out of date
  3. Make sure you are investing in your own financial literacy and "know your numbers" 
  4. Consider how your accounting system will scale with your business needs
  5. Have a cash flow forecast and integrate this with your bookkeeping plan
Numbers are more fun when you have an abacus

1. Identify who is going to be responsible for bookkeeping

Even in a small company, it pays to have defined roles for who will be doing what. If you've hired a bookkeeper, make sure you know what they're doing and what you're responsible for as a business owner. In large organizations, a CFO or controller has well defined roles, and they have a support staff of accountants who take care of departmental functions. Small businesses would do well to consider these functions as well. If you have a staff of three or four people, keep in mind that you still want to have someone 'controlling,' someone 'looking ahead like a CFO' and someone responsible for bookkeeping. If one owner-manager person is doing all of that work, that's also still ok - it just has to be done, preferably on a schedule and the 'to do' list has to be updated regularly. Even with firms that hire a bookkeeper, it is important to maintain some oversight over that person or company. Reputable bookkeeping and accounting firms collaborate with and augment your skills and capabilities - boosting your knowledge and helping owner accumulate financial knowledge over time.

The best results involve business owners who respect their accounting function and are engaged with all the ways that KPis are changing month-over-month.

2. Establish a monthly schedule for your bookkeeping

A lot can change in a short amount of time in the world of small business. Completing credit card and account reconciliations and remembering what transactions are for what purpose can become onerous tasks if they are tackled many months later. Transactions that have been forgotten about, or non-invoiced amounts can result in lost revenue or an inability to collect input sales tax credits on eligible amounts. Monthly bookkeeping keeps a business no more than 30 days away from their actual month-over-month accrual performance. Many business owners look at cash in the bank or mere sales growth and conclude that their business is doing well. These can be highly misleading and simplistic measures of performance. Sales can be high but sales quality can be poor. Some sales may be low or negative margin sales - eroding profitability rather than benefitting the bottom line. Good cash performance also does not necessarily mean profitability. Unearned revenues can inflate perceptions for companies that collect funds in advance of delivering services. Service firms in particular often fail to adequately track revenues and expenses, leading to high variability in profitability across their customer base.

3. Invest in your own financial literacy as a business owner

Invest in your own knowledge of bookkeeping to the extent that you can keep people honest. If you have no idea what types of expenses belong in Cost of Goods Sold vs. Sales, General and Administrative expenses, how can you be sure your bookkeeper is categorizing things correctly? Consider your chart of accounts. Is it appropriate for your business? Is it a default chart of accounts that reflects a casual approach to your bookkeeping? How well certified and trained is your bookkeeper or accountant? If you quiz them on some more complex accounting questions, are they able to provide guidance and useful input? Ultimately, you as a business owner are legally responsible for your financial statements. Absentee financial management or placing undue trust in your advisors can be a mistake. A best practice is to take a basic online course on accounting so that you are familiar with the basics of accrual accounting and can talk knowledgeably about your cost of goods sold, cash flow conversion cycle and key performance metrics.

4. Consider how your accounting systems will scale

When was the last time you updated your chart of accounts? Has it been appropriately customized for the size of business you currently run? What accounting software are you using? If you have an eCommerce business, do you have adequate cost of goods sold and inventory data in your accounting system? If your accounting system would benefit from accurate and automated data inflows from a CRM, Inventory, Warehousing, Logistics/3PL, or eCommerce portal (WooCommerce, Amazon, Shopify), are these connections in place and can you triple your revenues with your existing setup? If not, it may be time to seek some technology guidance so that your systems are properly implemented and good foundations are in place to help you grow without losing efficiency.

5. Have a cash flow forecast and integrate this with your bookkeeping

Financial statements are backwards looking things. They only tell you what happened, not what will happen. What will happen is, of course, uncertain. However, it is far better to have a reasonable estimate of the future than not to have any idea of what it looks like. One of the many awesome benefits of a strong monthly bookkeeping system is that you can start to forecast your future cash balance accurately. At Tuulyp Consulting, we recommend using the Float App to help forecast future bank balances - taking into account future cash-affecting events such as accounts payable dates and invoice payment dates (and any financing or investing cash flows). The interactions of all these future events can really bring clarity to your future cash position - helping you to identify the need to apply for financing early if there is a forecasted deficit, or to plan for that new hire if you know you will have the cash available to comfortably do so.

Cash really is king and moving from backwards looking financial data to forward looking budgets and forecasts is a powerful indication of next-level financial management.

With expertise in wealth and cash flow forecasting, Peter helps ensure a short and long term plan is in place.