Catch-Up Bookkeeping for Startups

Have you fallen behind with your startup’s bookkeeping? If so, then it’s important to catch up.

As the name implies, catch-up bookkeeping is the process of updating and/or organizing past-due financial records. It involves reconciling financial records and fixing backlogs from weeks, months or even years in the past to attain a more accurate financial picture for your startup. Depending on how far you’ve fallen behind and how comprehensive the catch-up is, you’ll likely have to gather documents, categorize transactions, and generate all-new financial statements to help facilitate better decision-making and ensure tax compliance.

Catch-up bookkeeping is common among startups, especially those that are rapidly evolving and lack a dedicated financial professional on staff. While it’s okay to fall behind, current books are essential to ensure compliance and during fundraising efforts. Neglecting your books for too long can have severe consequences, potentially leading to financial losses, missed growth opportunities and reputational damage.

Why Startup Books Fall Behind—and Why It Matters

Why do startups tend to fall behind with their bookkeeping? It’s largely because startup leadership prioritizes product development and growth. Couple this with the fact that many startups don’t have a dedicated financial professional on staff and lack such expertise themselves, and you can see why the books are often neglected. In many startups, bookkeeping tasks are often an afterthought rather than a priority.

However, there can be real consequences for your startup if you fall too far behind. For instance, incomplete financial records make it difficult to track cash flow, cash runway and other key metrics. It can make board reporting more of a guessing game than a presentation of accurate information. Moreover, there are several operational risks, such as potential tax problems, the inability to track true profitability and challenges with making informed decisions.

Finally, dated books can be a fundraising killer. At a minimum, messy books will slow down the fundraising process and give investors more pause. In many situations, however, it serves as a major red flag that derails fundraising deals.

Signs Your Startup Needs Catch-Up Bookkeeping

So, how do you know whether your startup needs to catch up with its bookkeeping? There are various warning signs that you should take note of, such as:

• You have reconciliation gaps that exceed three months.
• Your startup is unable to create accurate monthly financial statements.
• You’re filing taxes based on estimates and not accurate data.
• You’re starting to miss vendor payments.
• You’re planning a fundraising round and need to present accurate financial information to potential investors.
• You’re approaching annual audits or tax deadlines.

If your startup is experiencing any of these warning signs, don’t put off catch-up bookkeeping any longer. The longer you wait, the more complex, costly and time-consuming the catch-up process becomes. If you don’t think you can handle catch-up bookkeeping, consider outsourcing the service to qualified, professional bookkeeping services.

For example, a fractional CFO can offer expert-level financial services at a fraction of the cost of hiring a full-time, in-house CFO and can help with catch-up bookkeeping and ensure your books stay current at all times. What’s more, these professionals can scale and evolve as your startup grows. At Graphite Financial, service packages start at $1,250 per month.

The Catch-Up Bookkeeping Process

There’s a process for bringing your startup’s books back up to date. Here’s a look at the general steps you’ll need to take:

Gathering Financial Documentation

The first step in catch-up bookkeeping is gathering the appropriate financial documents and records. This often includes the likes of bank statements, credit card statements, invoices, receipts, payroll records, tax documents, contracts and more. It can often be cumbersome to access paper records of all these documents and records, underscoring the importance of digitizing and centralizing them in a single source for easy, more streamlined access, especially ahead of tax season. Additionally, be sure to separate personal and business expenses as you gather these records.

Transaction Entry and Categorization

After gathering the necessary financial documents and records, the next step is to enter and categorize these financial transactions. Ideally, you want to move away from basic spreadsheets and into a more robust accounting platform, which makes it easy to categorize your records based on whether they’re revenue, expenses, assets or liabilities. This step may also involve either establishing or refining your chart of accounts to support accurate reporting.

Entry and categorization may vary depending on the industry in which your startup operates. For instance, SaaS startups have different requirements than eComm startups, and eComm startups have different requirements than HealthTech startups. Ensure you are familiar with the industry standards and any specific requirements.

Reconciling Accounts and Resolving Discrepancies

Reconciling accounts involves matching your startup’s balances against external statements from partners or providers with the goal of verifying that the two numbers align. If they don’t, it’s essential to identify and resolve any significant differences, as reconciliation confirms that your books accurately reflect your startup’s actual cash position. When you’re playing catch-up on your bookkeeping, it’s common to encounter various issues while reconciling accounts. Here’s a closer look at some of the challenges for your business’s financial health that you may encounter:

• Outstanding checks: Record these as deductions, but exclude them from your balance until they clear.
• Deposits in transit: This refers to money you’ve recorded but has not yet appeared in your bank account. These should be added to the bank’s balance in your reconciliation report.
• Bank fees and interest: Be sure to record these as expenses or income during the reconciliation process.
• Duplicate entries: If you’ve recorded the same transaction twice, simply identify and remove the extra entry from your books.
• Incorrect amounts or missing transactions: Recording errors or missed items are common mistakes. Resolve these by investigating the discrepancy and making any necessary corrections.
• Unauthorized transactions: If you believe you’ve been the victim of fraud, flag the issue and take the time to investigate and, if necessary, report the incident.

How Long Does Catch-Up Bookkeeping Take?

The timeline for catch-up bookkeeping varies based on several factors, such as how far behind your startup is, how complex your transactions are and how well your records are organized. In some cases, catch-up bookkeeping may take a few weeks. However, if you’re a small business owner significantly behind, unorganized and have a high transaction volume, it could take several months of work to get all caught up again.

If your startup is lagging far behind, catching up might be too much to handle in-house. This is where it might make sense to work with a professional who can accelerate the process and ensure it’s done correctly and in compliance with generally accepted accounting standards.

Preventing Future Bookkeeping Backlogs

The best way to prevent a future bookkeeping backlog is to commit to more disciplined financial management. Bookkeeping requires time and effort, so if it’s something you can’t handle in-house, ensure you’re partnering with someone who can handle it effectively. Some best practices for maintaining clean books moving forward include:

• Establish a consistent month-end close process with defined deadlines that you commit to meeting.
• Adopt cloud-based programs or advanced tools that can link your accounting software with bank feeds to streamline bookkeeping.
• Commit to regular financial reviews, such as weekly expense training, monthly reconciliation to reconcile bank statements, and quarterly reporting that produces timely cash flow statements and monthly financial statements.

In-House vs. Outsourced Catch-Up Bookkeeping

Is it better for your startup to perform bookkeeping in-house or to outsource to a professional? It depends.

Oftentimes, it’s the startup leadership that’s responsible for bookkeeping in the early days of a startup. However, as your startup grows, it has a decision to make: continue business as usual, hire someone in-house to handle bookkeeping or outsource such services. As your startup grows, leadership is often overwhelmed by more complex bookkeeping and tax preparation, and startups typically can’t afford to take on a CFO salary with limited resources. In this case, it might make sense to outsource work to a fractional CFO.

Here’s a look at some of the key differences between in-house and outsourced bookkeeping:

• It can cost more than $100,000 to hire an in-house professional to perform bookkeeping for your startup. Conversely, Graphite’s fractional CFO packages start at $1,250 per month and can scale as your startup grows and evolves.
• With outsourced fractional CFO services, you’re still gaining access to expert-level financial data services just not at the full-time price.
• Financial firms often pair professionals with specific industry experience with relevant startups to offer even more value-added service.
• Even as an outsourced partner, fractional CFOs bring specialized startup expertise and can build scalable processes within your organization.

Restore Financial Clarity and Confidence with Graphite

Don’t downplay the importance of catch-up bookkeeping and the value of clean books. Well-maintained books result in smoother audits, more confident investor reporting, stronger overall fundraising and more accurate runway projections. If you’re in need of catch-up bookkeeping and more disciplined financial management, contact Graphite today to learn about our fractional CFO services. As an experienced financial support firm, we specialize in working with venture-backed startups. Contact us today or schedule a consultation to learn more about our services.

FAQs

How much does catch-up bookkeeping cost for a startup?

The cost of catch-up bookkeeping for a startup varies by several factors, such as how far behind your startup is, transaction volume, number of accounts that need to be addressed and more. For basic cleanup projects, the cost is typically in the hundreds of dollars, while more complex projects can cost thousands or even tens of thousands of dollars. As a general rule of thumb, the further behind you are, the greater the volume of transactions, the higher the number of accounts, and the greater the complexity of your industry, the more a catch-up bookkeeping service will cost.

Can I do my own catch-up bookkeeping, or do I need professional help?

Whether you need professional help largely depends on the complexity of your startup’s financial situation and your comfort level with accounting principles. While it is possible to do your own catch-up bookkeeping, many startups elect to outsource the service to a professional to ensure it’s done correctly. This is especially true if the project is complex.

How far behind can my books be before catch-up bookkeeping becomes too complex?

Again, this isn’t so much about how far behind you’ve fallen as it is about various other factors, such as the total volume of transactions, consistency of your records and why your bookkeeping has been delayed. However, noting this, most professionals suggest catching up on your books if you have reconciliation gaps that exceed three months, especially if you’re dealing with complex, high-volume transactions.

Will catch-up bookkeeping help me prepare for a fundraising round?

Yes, catch-up bookkeeping is crucial when preparing for a fundraising round because investors want to ensure your books are accurate, organized and transparent. Accurate, up-to-date financial records help investors understand your startup’s overall health and determine whether to invest. Failure to have updated books has the potential to significantly delay deals and may result in enhanced scrutiny. In some situations, deals may fail to close. Conversely, updated bookkeeping demonstrates compliance and can help build trust and transparency with investors.

What happens if I skip catch-up bookkeeping and continue operating with outdated records?

If you opt not to perform catch-up bookkeeping and instead operate with outdated records, you’re opening up your startup to significant legal, financial and operational risks. From a legal standpoint, you may be breaking the law and violating regulations, which could subject you to tax non-compliance, regulatory fines and other legal liabilities. From an operational perspective, inaccurate financial reporting can lead to poor decision-making and make it difficult to secure financing from investors. You could also put your startup’s reputation at risk. Bottom line: Don’t skip catch-up bookkeeping.

How do I prevent my startup’s books from falling behind again after catch-up is complete?

To prevent your startup’s books from falling behind, commit to more disciplined financial management. Establish a consistent routine and leverage specialty tools and programs to streamline processes. If this is too much for you or another member of your startup’s leadership team to handle, consider working with a professional bookkeeper who can help you stay current and avoid any future backlogs.