You’ve created a minimum viable product you’re pleased with. You’re spending late nights together with your pitch deck. You’re probably not lying awake in the dark wondering, “are my books balanced?”
Accounting and bookkeeping aren't as urgent as, say, finding a technical cofounder or deciding your cash runway. But that doesn’t mean it’s not foundational to the health of your business. Plus, without accounting, how would you work out a cash runway, or allow another salary? Cheap Accountants in London have been providing a range of tailored accounting and bookkeeping services to individuals as well as small and medium-sized businesses.
If you’re the founding father of a budding startup, this text will guide you through everything you would like to understand about bookkeeping and accounting, also as some unexpectedly profitable benefits of thoroughly knowing your numbers.
Accounting vs. bookkeeping
Both are numbers-related, but bookkeeping and accounting aren't quite an equivalent thing. Bookkeeping is that the process of tracking all financial records—mainly income and expenses.
Accounting is that the process of interpreting your financial records for everything from ensuring you pay the proper amount in taxes, to creating strategic business decisions that supported by your business’s numbers.
Both bookkeeping and accounting are vital to each business’s success, but as a startup, you'll have a further got to keep good records. If you've got investors, they’ll require that you simply provide financial reports. And if you're trying to urge a commercial loan, you’ll need clear and easy-to-read financials in order that potential investors can make an informed decision about investing in your vision.
Before you'll start accounting, you’ll get to make a couple of decisions about the structure of your business.
Choose a business entity
Your business entity determines how you're taxed, how you'll pay yourself, your potential business liability, and more.
The five main sorts of business entities are:
Sole proprietorship
Partnership
C corporation
S corporation
Limited liability company
If you haven’t landed on an entity type yet, you'll read more about choosing the proper business entity for your startup here.
Choose an accounting method
Before filing your first business income tax return, you’ll get to choose one among two possible accounting methods.
1. Cash basis accounting
The simplest sort of accounting, cash basis accounting tracks income when it's actually received and expenses once they are literally paid.
2. Accrual basis accounting
Accrual basis accounting counts money when it’s “earned”, instead of received (and an equivalent with expenses). for instance, if you a customer signs an enormous contract, you’d consider the cash earned, albeit they haven’t paid you yet. This method is more complex, but it allows you to more accurately track a long-term picture of the business—something especially useful when reporting to investors or making fast-paced scaling decisions.
What financial records should a startup keep?
So you’ve picked an entity and accounting method and your business is rolling along. What sorts of financial records does one really need to stay track of?
: Keep track of documentation that shows income, expenses, deductions, and credits shown on your tax returns. These can include:
Receipts
Bank and MasterCard statements
Bills
Canceled checks
Invoices
Proof of payments
Financial statements from Bench or your bookkeeper
Previous tax returns
W2 and 1099 forms
Any other documentary evidence that supports an item of income, deduction, or credit shown on your income tax return
And don’t just keep these things until you switch your forms over to the taxman. You’ll want to hold on to most records for a minimum of three years, though there are exceptions where you'll want to stay your business’s financial records longer.
Bookkeeping checklist for startups
One thing you would like to avoid is merely cracking your business’s books when you’re forced to—such as at tax time or when courting a replacement investor. Here’s a bookkeeper-recommended checklist for keeping precise books:
Weekly Bookkeeping Tasks
Enter all transactions into your bookkeeping software or Excel spreadsheet
Even if you integrate your financial accounts with software, make certain to enter everything else, like cash transactions.
Categorize your transactions
Was that trip to Staples for office supplies or to select up a replacement banner for your tradeshow booth? These two items are categorized differently on your income tax return , so record the category while transactions are fresh in your mind.
File or digitize receipts
We recommend filing (or digitizing) your receipts and old invoices weekly. Otherwise, you’ll lose them, and won't be ready to prove certain expense deductions if you get audited.
Monthly bookkeeping tasks
This step is significant and safeguards you against any income or expenses slipping through your fingers. Bank reconciliations are often tricky until you get into the habit. to assist you out, we’ve written a user-friendly guide to bank reconciliations.
Prepare and send invoices (if applicable)
Be religious about sending invoices as soon as you'll.
Pay vendors and other bills
Just catch on over with. Otherwise, you risk giving your vendors free money in late payment interest. Late payments could also affect your business credit score.
Review outstanding invoices
See who hasn’t paid you yet, and follow-up. A smooth assets process is that the lifeblood of your income.
Review your financial standing
Any business’s prime question is “Do I even have enough money to stay operating?” Reviewing what proportion of cash you've got within the bank, and the way much cash you expect to return in, will tell you either “Yes,” or “time to form some changes.”
We recommend that you simply schedule dedicated time for handling your business’s financials. Keeping good records also means your life is going to be easier when it involves quarterly and annual income taxes for your business. And last but not least, with confident knowledge of your books, you’ll be armed to form good financial decisions on behalf of your startup.
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