Why Fast-Growing Startups Can’t Ignore Good Old Fashioned Bookkeeping
| 5 minutes read
Starting a startup is not easy; founders have many things on their minds, and they are required to multitask like hiring a team, raising money, figuring out the expenses, and many other things. Sometimes a startup failure may force you to shut the business, especially when you are in your initial phase. One of the crucial reasons for failure might be improper bookkeeping for startups because good bookkeeping allows entrepreneurs to understand the business’ financial condition and makes accounting much more manageable.
In the beginning, entrepreneurs wear many hats and they don’t find time to work towards proper bookkeeping. Therefore, it becomes important to manage and keep bookkeeping if you want to run your business for the long term.
So, now, if you are new and don’t have any bookkeeping knowledge, don’t worry, we’re going to start from the basics about bookkeeping, and we will also share the information- why startups need proper bookkeeping? Kindly read till the end, and we are sure you will be pro in managing the bookkeeping after reading this blog. Also, you will get a reason why startups can’t ignore the bookkeeping process.
What is Bookkeeping?
Bookkeeping is the process of recording, categorizing, and reporting the financial data of a business systematically. It keeps track of the business’s financial transactions, including sales, purchases, bank transactions, invoices records, etc. It involves keeping track of the startup’s assets and having complete insights on the business assets’ depreciation or appreciation.
After the basic definition, now we will discuss why bookkeeping is crucial for any startup?
- First and foremost, it helps startups make better financial and management decisions. Proper bookkeeping can help you understand the vital financial standards that determine whether your organization is operating successfully or not. Bookkeeping also helps manage cash flow and solve problems by answering questions like who owes you money, when should you send an invoice, when are your bills due, etc.
- Second, updated bookkeeping also minimizes errors when it comes to preparing your company’s annual taxes. Suppose you can provide your accountant with a well-maintained balance sheet, cash flow statement, and profit and loss statement. In that case, he/she can utilize their time towards making sound tax decisions rather than fixing out the problems with the financial statements.
- Third, investors require solid books. The frequency of which you report, you and your investors will determine financial records. In any case, the more systematic and uniform your financial reporting systems are for reporting important financial information, the happier your investors will be. It will showcase them that you understand your cash flow requirement and the business key performance indicators that will allow the startup to scale.
After an overall good understanding of bookkeeping, many can get confused between Accounting and Bookkeeping; therefore, we will now cover the difference. Let’s find out the difference in the simplest way.
Difference between Accounting and Bookkeeping
Bookkeeping and accounting are two different functions that are important for every organization. In the simple term, bookkeeping is responsible for recording financial transactions, whereas accounting is responsible for interpreting, analyzing, reporting, and summarizing the financial data. Bookkeeping provides the data through which the financial statements are created, whereas accounting is the process during which a business’s financial statements are prepared.
Startups may seek guidance from bookkeeping and accounting consultants who can offer extensive knowledge, education, and experience to help the business owners set up and manage their bookkeeping operations.
Now that you are on-board with the importance of bookkeeping for a startup, let’s look at 5 of the most common types of bookkeeping accounts for a startup or any business for that matter:
Types of Bookkeeping Accounts
- Cash: This is your first and most basic account, and it tells you how much cash you have in your bank. Various businesses monitor their cash account by separating cash receipts and cash payments.
- Sales: The sales account is closely related to cash and accounts payable but provides slightly different insight. Sales are where you track expected incoming revenues from what you sell. Tracking sales help you to understand whether your business is on track to meet predetermined metrics and benchmarks.
- Accounts Payable: Like accounts receivable, accounts payable represent money you owe to your suppliers for products and services that you do not pay for upfront. Tracking your payables will help you manage cash flow, ensure that you don’t pay the same bill twice, and may even make you eligible for discounts if you can pay early.
- Inventory: It is not equivalent to cash or accounts payable; it is undoubtedly an asset on your balance sheet that must be prudently accounted for and tracked. Properly managing your inventory ensures a great understanding of cash flow and anticipated production runs.
- Loans Payable: Your loan payable account tracks the amount of capital you’ve borrowed, how much you still owe, and how much is due in the next billing cycle.
Why do startups need to keep accurate Bookkeeping?
It can reduce the likelihood and burden of an audit
Having accurate and up-to-date financial records can reduce the possibility of being audited, but it can also keep an audit’s headache to a minimum if one is conducted. After all, there’s no reason to fear an audit when your books are already properly organized and up to date.
It improves your ability to receive financing
Properly maintained bookkeeping makes it easier for startup owners to receive external financing, as they’re often the first and most crucial records required by loan providers and investors. Even if you’re not seeking funding outside at this time, proper bookkeeping can accelerate the process in the event of a crisis. After all, when faced with a cash flow problem, you don’t want to spend a lot of time on updating books before you’re able to solve it. Instead, proper bookkeeping can allow you to rest assured that your business is ready to pursue outside funding without any delays.
It helps to reduce your payment cycles
Each day you wait before sending an invoice to a client is a day you will likely have to go without receiving payment. Even if you can afford to wait a few more days for payments, however, too many delays can put you in a real cash flow crisis. Ensuring that you are properly compensated in a timely fashion is one of the best things you can do to prevent a cash flow crunch from threatening an otherwise successful and viable business.
What are the advantages of good Bookkeeping for startups?
- Organized accounts: An adequately maintained record of financial transactions undertaken by startups plays a vital role in tracking their income and official expenses, and it can be fulfilled only by bookkeeping.
- Timely preparation of financial results: With updated bookkeeping, it becomes easy to prepare the financial statements (Balance sheet, Profit and Loss Account, Cash flow, and Fund flow statements).
- Better overview of the business: Bookkeeping provides an overview of the business from time to time and helps startups analyze their current situation.
- Future budget planning and action: Bookkeeping for Startups is about preparing organized accounts, which in turn helps the startups plan their future budget. When proper accounts are maintained for every period, financial transactions become transparent. The money that is earned or spent becomes clear.
- Analysis and better decision making: When startups opt for bookkeeping services, they analyze financial data like income, expenses, profit margin, sales, purchase, vendors’ details, taxes, etc. They interpret this data and make decisions that are valuable for them. They can quickly respond as per market demand if they know their current financial position.
- Better tracking of growth: Startups need to track their growth as they are in their initial stage of operations and invest a significant amount of time and money. So, bookkeeping provides them with details about profit and growth. A business can only grow if you analyze the growth by tracking the financial records, which can solely be provided by accurate bookkeeping.
Free tools that would save time for Startups
Do you know there are various tools that are available which would save some time for your startups, especially if you’re a newly emerged business? Gaining resources, establishing company culture, setting goals, and objectives, assessing risks are only a few of the major elements you need to consider when entering the business world. And without the use of suitable tools, juggling those components may be difficult. Quickbooks from Intuit is one such example.
We hope you are pretty much clear after reading the above information about why bookkeeping plays a vital role in startups and why businesses can’t ignore the Bookkeeping for Startups process. If you’re starting a startup, being a founder, it becomes important that you start managing your bookkeeping from day one.
There is no additional rule; all you need is to systematically note down all the financial expenses or transactions and work towards your business goals.
We are sure when you start your startup business you will keep these crucial points in mind.