Bookkeeping for Startups: Everything You Need to Know for Funding Success

Good bookkeeping ensures that your startup’s financial records are accurate and up-to-date. It also ensures that your finances can be presented transparently, which is important for investors deciding whether to invest in your startup. Transparency builds trust and can lead to more informed decision-making, paving the way for funding success.

Why Effective Bookkeeping Is a Competitive Advantage for Startups

Effective bookkeeping is more than just a necessity for startups. When it’s done properly, it can also serve as a competitive advantage. Aside from ensuring that any compliance requirements and obligations are met, effective bookkeeping and accounting can help your startup:

• Streamline decision-making and strategic financial planning based on financial data.
• Build trust with investors and further fundraising efforts.
• Identify cash flow issues early so corrective action can be taken sooner.

When Is the Right Time to Invest in Professional Bookkeeping?

When should your startup invest in professional bookkeeping? Generally, such services should be sought at the point when your finances are becoming too much or too complicated for founders to manage.

For example, startups should consider professional bookkeeping and accounting services after they secure funding or are in the midst of a significant growth period. Additionally, if this task is taking up too much of your startup leadership’s time to the point where they’re unable to focus on other aspects of running their operations, then bookkeeping services should be sought.

Essential Bookkeeping Systems Every Venture-Backed Startup Needs

From selecting the right bookkeeping software to creating a chart of accounts that best suits your startup, here’s what you need to consider to support your startup’s bookkeeping needs:

Selecting the Right Bookkeeping Software

Don’t underestimate the importance of the right bookkeeping software for your startup. The best bookkeeping software integrates with other programs your startup relies on, can automate certain practices, and is easy to use and understand. Some of the best options for startups include QuickBooks, Xero, NetSuite and FreshBooks. Whichever you choose, it should support your broader accounting system and scale with your startup as it grows.

Setting Up Your Chart of Accounts

A chart of accounts (COA) is a financial tool that lists all the accounts used by a startup to record its financial transactions. It records the likes of assets, liabilities, equity, revenue and expenses. A good COA helps ensure accurate financial reporting, can better track transactions and facilitate better financial analysis. It can also help streamline the auditing process.

The right setup can also be beneficial for fundraising purposes by making financial data more easily digestible for investors.

Key Bookkeeping Tasks That Support Fundraising Success

From tracking expenses that provide robust audit trails to proper record keeping, the right bookkeeping tasks support fundraising success. Here’s a look at what to know:

Tracking and Categorizing Business Expenses

Proper tracking leads to better audit trails — and it’s important to track expenses into startup-specific categories that align with investor relations. Some tips include:

• Separate business and personal finances
• Provide the right documentation (i.e., invoices, receipts)
• Categorize expenses properly
• Reconcile accounts regularly

Revenue Recognition and Metrics Tracking

Revenue recognition is a generally accepted accounting principle (GAAP) that dictates how and when revenue is recognized. Different startups track revenue in different ways. For instance, a SaaS startup is going to track revenue differently than a CPG startup.

Creating Investor-Ready Financial Reports

Investors want to see various types of reports before deciding on funding your startup. These include P&Ls, balance sheets, cash flows and more. Such reports should be structured in a way that can tell your startup’s financial story, while giving investors a clear picture of your financial performance. Maintaining accurate financial records is essential to building these reports and instilling confidence in potential investors.

In-House vs. Outsourced Bookkeeping: Making the Right Choice for Your Startup

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

There’s a significant cost advantage to outsourcing bookkeeping services, as working with an external partner comes at a fraction of the price of hiring a full-time professional to work in-house. However, if you go the outsourced route, it’s important to work with a credible partner. The cost savings is only an advantage if you work with a partner you can trust and rely on. Partnering with a firm that offers accounting and bookkeeping services can help ensure your financial management stays aligned as your startup grows.

How Strong Bookkeeping Practices Make Capital Raising Diligence Easier

Financial statements, revenue models, burn rate, cash flow and financial projections are all bookkeeping metrics your startup should be keeping track of during due diligence periods for investors. However, it’s also important that these metrics are favorable, or else they could risk investors losing interest.

Some red flags that can kill deals include declining revenue, uneven cash flow, high debt levels, inaccurate financial statements and misrepresented expenses. Proactive cash flow management can help prevent these issues and keep your financial profile investor-ready.

Startup-Specific Bookkeeping Challenges and Solutions

One of the best reasons to work with a bookkeeping professional is to ensure your startup avoids some of the common pain points associated with the practice. Here’s a look at some of the common challenges that startups face with their bookkeeping:

• Properly accounting for different funding instruments: This requires a thorough understanding of each of the various funding instruments’ unique characteristics and how they should be recorded.
• Tax compliance: Penalties for non-compliance can result in significant fines and potentially even jail time. Managing tax documents while staying on top of changing legislation is a must — and strong tax preparation practices play a key role.
• Poor organization and record keeping: You don’t want your finances to be chaotic. Invest in the right software and pay attention to the little details to keep things neat and organized.

Common Bookkeeping Mistakes That Kill Startup Fundraising

There are bookkeeping challenges — and then there are mistakes that can drive a stake through any potential fundraising deal. Some of the mistakes you’ll want to avoid include:

• Miscalculations, especially key metrics like burn rate and runway
• Not separating personal and business expenses
• Failing to properly reconcile accounts
• Failure to properly document expenses

Setting Up Your Startup’s Bookkeeping: A Step-by-Step Implementation Plan

Ready to set up effective bookkeeping practices for your startup? Here’s an overview of the steps to take:

1. Select the right accounting method based on your startup’s status. For instance, early-stage startups will likely practice cash basis accounting, while growing startups practice accrual basis accounting.
2. Set up your system with the right accounting software
3. Establish a chart of accounts
4. Track income and expenses properly within your chart of accounts
5. Start budgeting and managing accounts receivable and payable
6. Reconcile bank statements regularly
7. Adapt and adjust over time

Bookkeeping Best Practices Timeline: From Pre-Seed to Series B

The further you get into your funding rounds, the more investors expect of your startup. In early-stage funding, investors are gauging your startup on its potential. Later fundraising rounds, however, and they’re more looking for signs of progress and sustainable growth. That said, as your startup evolves, investors will be looking for signs of more sophisticated financial management and startup accounting practices.

Transform Your Startup’s Financial Future with Expert Bookkeeping

Streamline your bookkeeping and avoid many of the challenges and mistakes involved in the practice by working with a qualified professional today. Graphite Financial specializes in startup bookkeeping and financial management, and can evolve bookkeeping practices along with your startup to ensure sustainable growth and compliance. Contact us today for more information and to schedule a consultation.

FAQs

How much do bookkeeping services for startups typically cost?

Bookkeeping agreements with Graphite start at $1,250 per month and can grow from there based on your startup’s needs. It represents a significant cost savings compared to hiring a full-time professional in-house.

When should a startup transition from DIY bookkeeping to professional services?

Professional service should be sought at the point when your finances are becoming too much or too complicated for founders to adequately manage.

What bookkeeping software is best for venture-backed startups?

Some of the best options for venture-backed startups include QuickBooks, Xero, NetSuite and FreshBooks.

How does proper bookkeeping help startups raise venture capital?

Proper bookkeeping provides investors with accurate, reliable information and presents it transparently.

What financial records do investors expect to see during due diligence?

Financial statements, revenue models, burn rate, cash flow statements and financial projections are all bookkeeping metrics your startup should be keeping track of during due diligence periods for investors.

How does bookkeeping for startups differ from traditional small business accounting?

Bookkeeping for startups tends to focus more on growth and preserving financial health, with an emphasis on cash flow. Small business accounting tends to focus more on complying with standard accounting practices.

What are the most common bookkeeping mistakes startups make?

Some of the most common bookkeeping mistakes startups make include miscalculations, not separating personal and business expenses, failing to properly reconcile accounts and failure to properly document expenses.

How often should startup financial statements be prepared and reviewed?

For startups, financial statements should be prepared and reviewed every month.

How do I account for SAFE notes and convertible debt in my startup’s books?

SAFE notes tend to be treated as equity, while convertible debt is a liability, but could convert to equity.

What tax benefits can proper bookkeeping help my startup capture?

Proper bookkeeping can help ensure your startup qualifies for all available deductions and credits. These may include the R&D tax credit, home office deduction and other expenses related to your business.