Whether you’re a bootstrapped company or preparing for your Seed or Series A / Series B funding, having a robust bookkeeping function is critical to building a financially successful business. Although it may seem daunting for founders to learn financial discipline on top of managing their businesses, properly tracking financial transactions from the outset will help the startup grow rapidly, without worrying about back-office problems.
First Republic is committed to supporting entrepreneurs at all stages; we interviewed the team at Pilot, to provide guidance on bookkeeping best practices to help you manage your business’s finances.
What’s the difference between bookkeeping and accounting?
Bookkeeping, in short, is what generates the three financial statements (Profit & Loss, Cash Flow, and Balance Sheet) that are standard “books” for businesses, according to Pilot. Bookkeeping is defined as the day-to-day task of recording financial transactions, including purchases, receipts, sales and payments, in a consistent way. The complexity of one’s bookkeeping varies depending on the needs of the business, the number of transactions, categorizations, reconciliations, and any customizations needed such as a custom Chart of Accounts or specific revenue recognition requirements.
Many people confuse bookkeeping with accounting. In fact, bookkeeping is a subset of accounting. Accounting includes tasks such as forecasting, audits, strategic planning, tax returns, etc. in addition to bookkeeping. You might have heard of audit accountants or auditors; these are professionals whose expertise lies in conducting financial audits. If you were to ask them to prepare your income tax return, they will likely not have that expertise. Similarly, there are tax accountants whose expertise lies in preparing and filing income tax returns.
How to get started with bookkeeping
Every small-to-medium business needs bookkeeping as the fundamental base for financial management. Without bookkeeping, says the Pilot team, you could create a whole host of problems for yourself, such as:
- Compliance problems from filing an incorrect income tax return
- Continuous cash flow problems
- Inability to manage a budget
- Missing revenue or incorrectly allocated equity
- Double rent payments or poor financial management
These are all common problems that startups without good financial processes face. The good news is that these issues can be easily fixed by setting up a solid bookkeeping system. Pilot shared the basics you need to set up your finances for your startup:
- Open a bank account and credit card for your business, to keep business and personal expenses separate
- Establish a bookkeeping system for your business and decide on an accounting software application
- For business owners with limited bookkeeping experience, it is helpful to outsource this work completely to a bookkeeper who will help make this as seamless as possible. In addition to product features and pricing, consider the level of personalized service, industry-specific custom reporting and expertise in scaling businesses, when you’re ready to grow.
- Use the right invoicing solution, a payroll system, and well-developed reimbursement and expense management system
- Choose a good tax preparer
If you choose to do bookkeeping in-house, what are the financial basics to track?
- Bank statements
- Credit card statements
- Payroll, including W-2s, 1099s and 941s
- Cost of Goods Sold
- Operational business expenses, including sales and marketing, legal, professional fees
- Invoices that are clearly tracked and recorded
- Payments received from customers
- Bills from vendors
- Proof of payment to vendors
- Tax returns
- Financial statements on a monthly or quarterly basis
What are fundamental bookkeeping principles to know?
No matter what stage your company is in, effective startup bookkeeping ensures that you have the full financial picture of your business. When you’re running on a tight budget, the Pilot team advises, it is critical to keep accurate bookkeeping month over month, so you know how you are trending towards your budget and when you’re overspending. Most importantly, as you gain traction and want to fundraise, investors will want to see your financials (i.e. your "books"). If you have not kept good records for a long time, this will be a huge pain point.
Whether you’re handling bookkeeping on your own or exploring options for outsourcing, below are practical guides from Pilot, on bookkeeping and accounting principles that every founder should know.
The views of the interviewee of this article do not necessarily represent the views of First Republic Bank. This information is governed by our Terms and Conditions of Use
First Republic does not provide tax or legal advice. Clients’ tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.