Startup accounting guide: bookkeeping as a building block for financially healthy small businesses

Startup accounting guide: bookkeeping as a building block for financially healthy small businesses

As a founder or small business owner, you have clear growth goals. You want to grow the business. You want to make great products. And you want to land profitable new clients. 

But you cannot achieve that without a foundation for a financially viable business. And that’s exactly what bookkeeping and accounting can enable. 

Tracking business expenses. Working out your cash runway. And making sure the right bills are paid at the right time. These are the rituals and routines of all startups and small businesses. And they become more complex as you scale up.

This guide is here to help you understand how strong accounting and bookkeeping can be a game-changer. Here's what we'll cover:

What is GAAP?

How to prepare an income statement

How to create a balance sheet

How to develop and analyze a P&L statement

When should I hire an accountant?

What is an integrated accounting system?

Accounting vs bookkeeping

We’ve used the terms accounting and bookkeeping interchangeably—but they differ. Here’s how: 

  • Accounting involves preparing tax returns, financial statements, and reports, and providing financial and tax advice.
  • Bookkeeping involves recording transactions, reconciling these transactions into the correct accounts and ledgers, and preparing draft financial statements for accountants. 

If you’re still confused, here’s another way to think of this. Bookkeeping centers only on recording financial transactions. Accounting centers on summarizing, analyzing, and reporting those transactions. In other words, bookkeeping keeps track of your finances so that an accountant can take action on them.  

Why does startup accounting matter?

Startup accounting matters because it’s a central pillar of strong financial management.

Startups need rigorous accounting to ensure they survive the threats they face as fledgling businesses. These include limited cash flow, as-yet-unproven market fit, and spiraling costs. The most common reasons startups fail include running out of cash and failing to raise new capital, according to a CB Insights analysis. 

Accounting and bookkeeping safeguards against these issues. Good accounting processes can provide visibility into your finances. This helps you identify cash constraints and capital gaps well before they become terminal. 

Truly great accounting processes can take your startup even further. They can enable stronger forecasting and budgeting. And it’s that kind of financial rigor that shows potential investors that you have the wherewithal to become an established, valuable, and profitable venture. 

5 benefits of effective startup accounting 

Well-maintained and managed finances can support your efforts to build business credit, obtain funding, and clinch partnerships with much larger businesses. Let’s take a closer look at the benefits, responsibilities, and opportunities around strong startup accounting.

Tax compliance

The Internal Revenue Service (IRS) expects every business to pay a fair share of taxes. Businesses that evade paying taxes or skirt the rules may face penalties and interest charges. For example, if you’re not paying your employees’ payroll taxes, you could be charged with tax fraud. By following the IRS’s tax filing rules and regulations, you can avoid these kinds of problems.

Getting funding

Tax compliance can help you maintain good relationships with potential funding sources, too. For example, the Small Business Administration (SBA), may ask to see your business’s tax returns when you apply for a loan. Being able to show that you’ve been compliant with the IRS will prove your startup has responsible financial management. 

Related: How to prepare a balance sheet

Due diligence

Due diligence is the process other businesses use when assessing your business as a potential partner, supplier, borrower, or investment. This is where inaccurate journal entries or patchy record-keeping can cause lucrative business deals to fall away. 

Startups are sometimes seen as risky relationships for other businesses, whether that is fair or not. Getting strong accounting processes up and running early can help your startup prepare for future due diligence with confidence.

Related: How to prepare a profit and loss statement

Customer payment confirmation

Good accounting can also ensure you’re getting paid on time, too. By keeping track of customer payments, startups can ensure that they are collecting all of the money that they are owed. When you start to get an overview of all your customer payments, you can then can make profitable changes to how and when you bill customers too.

Related: How to prepare an income statement

Financial visibility and clarity

Lastly, startup accounting matters because it gives you, as an owner, more clarity about how your business is performing.

  • You can tailor product lines and services to profitable activities
  • You can find savings when you understand wasteful spending
  • You can reinvest in the business when you can influence cashflow
  • And you can prove to investors or lenders that you run a financially sound business.

How to kick off startup accounting

More than 430,000 new businesses were registered in the United States in October 2022 alone. If you’re among this legion of entrepreneurs, here are some steps you can take to kick off accounting at your new business. 

Choose your business structure

One of the first decisions you'll need to make is about what type of business entity to form. This decision will have a big impact on your taxes, liability, and how easy it is to raise money. Here's a quick guide to help you choose the right business entity for your startup.

Sole proprietorship: The simplest business is an unincorporated business owned by one person. There are no legal filings or paperwork required, and you may not need to hire a lawyer. The downside is that you are personally liable for any debts or lawsuits against the business.

Partnership: A partnership is similar to a sole proprietorship, but it's owned by two or more people. Again, no legal filings or paperwork is required. The downside is that you are personally liable for any debts or lawsuits against the business.

Limited Liability Company (LLC):  An LLC is a popular choice for startups because it offers limited liability protection for owners. If the LLC gets sued, its owners are not personally liable for the damages. The LLC also has tax advantages over other business entities. To create an LLC, you must file articles of organization with your state’s secretary of state.

C-Corporations: Most established businesses elect to be taxed as C-Corps because they offer many tax advantages like being able to deduct employee health insurance premiums. They come with fewer ownership restrictions. C-Corps can sell stock publicly without having to go through an IPO. Many venture capitalists prefer investing in C-Corps because they can exit their investments more easily.

S-Corporations: With S-Corp status, your business profits aren’t subject to corporate tax rates. They’re only taxed once when distributed among shareholders.  Businesses must meet certain requirements to qualify as an S-Corp. For example, they must have no more than 100 shareholders and be incorporated in the United States.  

Pick a business accounting method

Most new businesses start out as a sole venture, a partnership, or an LLC. Whichever structure you choose, you’ll need to make another early and important decision. You'll need to decide whether you use cash or accrual accounting methods. Simply put: 

  • Cash accounting records revenue when cash is received and when expenses are paid when cash is paid out. 
  • Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when the cash changes hands. 

Most startups use the accrual method or switch to it as the business grows. The accrual method provides a more accurate picture of a company's financial health. Accountants, financial institutions, and potential financiers prefer the accrual method because it adheres to Generally Accepted Accounting Principles (GAAP)

Keep records from the get-go

Good accounting practices start with good record-keeping. Start keeping copies of all important financial records, As early as possible in the life of your business. That means documents like:

  • Bank statements
  • Credit card statements
  • Tax invoices from purchases
  • Payroll journals
  • Articles of incorporation
  • Commercial contracts
  • Leases and title deeds

Startup accounting best practices 

Next, it’s time to set up processes for actively managing your business’s finances. For example, make a clear decision about:

  • how often you will gather, review, and report your financial records
  • where and how you will track your sales income and sales tax

Here are some best practices to consider, to help you make these choices. 

Commit to a bookkeeping + accounting cadence

Businesses should do their bookkeeping and accounting frequently. It’s important to set regular bookkeeping and accounting cadences. Otherwise, long gaps of inactivity can create problems, such as inaccurate profit and loss totals, underestimated operating expenses, and unexpected tax bills. Activities to prioritize include:

  • Importing and updating business bank account feeds to keep track of transactions
  • Reconciling all transactions into the correct categories and accounts
  • Importing paid and unpaid invoices to keep your receivables up to date

Look at shortening your bookkeeping and accounting cadences even further, as your business grows and becomes more stable. Accounting automation software, such as Ramp, allows startups and small businesses to adopt a near real-time approach to managing their books. By keeping your financials as current as possible, you can make decisions about billing, spending, and saving based on accurate data.

Keep on top of all income and expenditure

Get into an early habit of tracking all income and expenditure too. This includes sales, tax, cash, invoices, bills, movements in and out of your bank accounts, and other transactions, such as fees and interest payments. 

This can be done manually. But most business owners find that method to be burdensome, time-consuming, and rife with costly human errors. Accounting automation software, like Ramp, can be used to automate these manual tasks in a quick, accurate, and efficient way. 

Review financial reporting

If you’re already using accounting software like NetSuite, Xero, QuickBooks, or Sage, then you have a head start in maintaining clean, accurate books. With a clear financial picture, you can start to run and review useful reports. 

For example, your balance sheet can help you understand your current assets, liabilities, and equity. Your income statement shows your business's revenue and expenses over a period of time. While your cashflow statement helps you understand the inflow and outflow of cash for your business. You should be reviewing this trio of reports regularly.

Using startup accounting as a growth driver

Ramp is America's fastest-growing corporate card and free software that scales as you grow. Our accounting automation software helps startups and small businesses solve many shared problems for new and small firms that want to set up strong accounting processes as soon as possible. For example, with Ramp, your startups and small business:

  • Close your books eight days faster with free software that saves you thousands each month by identifying wasteful spending.
  • Automate expense management with receipt matching. Submit receipts by text, email, or Ramp’s app to automatically collect, verify, and reconcile almost everything. 
  • Pay your bills with AI, which automatically detects vendors, line items, and payment details. You can also pay by ACH or check, or with a Ramp corporate card that gives 1.5% cashback on your largest expenses.
  • Confidently engage with funders or lenders, by showing them hyper-accurate reports and complete audit trails. Your books will stand up to any scrutiny, during due diligence.
  • Give accountants and bookkeepers clean financial information so they can access, explore, export, or sync data about cards, bills, and employee reimbursements. 

Ramp x Shortcut: how one SaaS startup uses accounting automation

Shortcut is a rapidly growing SaaS company that turned to Ramp out of frustration with its outdated expense management tools. Expense reports arrived late—often by months. They were missing receipts. Some didn’t even have approvals. By syncing Ramp with QuickBooks, the SaaS firm began automatically collecting and matching cardholder receipts and memos via email or SMS.

As a result, Shortcut now closes its books 5x faster every month

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FAQ

Do I need an integrated accounting system?
You need an integrated accounting system if you want to gather all your financial information and activities into a central hub, instead of working across different platforms. An integrated accounting system lets you manage payables and receivables, vendor purchases, and inventory valuations.
Do I need an accountant if I have accounting software?
Yes, it’s probably still a good idea. It may be tempting to focus only on sales or some other aspect of your business, when you’re comfortable using accounting software on your own. But is that really the best use of your time, as a founder or small business owner? Accountants java the expertise that can help you gain an in-depth understanding of areas like payroll costs, operating costs, and the larger levers you can pull to influence your bottom line.