We sat down with a seasoned investor from Teamworthy Ventures to discuss the ins and outs of startup valuations. Read the full Q&A here.
March 9, 2020
If you're an entrepreneur, then you have a built-in ability to succeed. Best of all, you can do a lot of that succeeding all on your own. But, an interesting thing starts to happen as your business starts to take off. The thing that fuels the ship (money) often becomes the thing that's most difficult to manage.
Fear not! Having a lot of cogs in the proverbial wheel probably means something's going right! You might have to put on your green visor and better-acquaint yourself with your calculator; and that's okay.
However, when it starts to look like you're spending too much time deciphering your business finances and not enough time focused on business growth, then it may be time to hire a bookkeeper or outsource your bookkeeping. In this article, we'll help you understand the importance of hiring a bookkeeper for your startup. Get ready to untangle some numbers and watch your creation fly.
A bookkeeper is a professional who will maintain accurate records of every sale and expense from your company. This person (or service) helps establish and manage your bookkeeping system, and keep your company's general ledger up-to-date by recording all financial transactions into your bookkeeping or accounting software.
Much of their time is spent on data entry and tracking down receipts for business expenses to ensure accurate books and compliant financial records. A bookkeeper isn't someone who should take their job lightly, as much of a business boils down to the all-important element of finances.
The information a bookkeeper manages is also used to file taxes, do VC due diligence, secure debt financing or business loans, and outline the overall financial health of the company. When the data is accurate and clear, the business owner can then look at those figures and make informed decisions.
These smart financial decisions go beyond spending a little here and saving a little there. Bookkeepers are also responsible for generating the financial statements that are often requested for board meetings, and by current and potential investors.
The three most common reports bookkeepers generate on a monthly basis are:
What's the difference between hiring an accountant vs. a bookkeeper? The best way to look at it is that a bookkeeper will analyze, track and maintain records of your day-to-day transactions in your bookkeeping software. They get down into the nitty-gritty; we're talking the final dollars and cents. They'll also provide nifty financial reports that can help you get the lay of the land.
An accountant, however, provides large-scale overviews of a company. They'll offer evaluations and insights based on the information recorded by a bookkeeper. Accountants love to interpret complex data and identify liabilities or other problem areas that may need to be addressed. If, say, you're considering a fundraise, an accountant would be able to give you a heads up on whether or not investors might consider you to be a viable candidate.
We think an all-in-one finance solution with expert bookkeepers, accountants, CPAs, tax advisors and CFOs is the best possible solution for fast-growing startups, which is what we've created at Zeni — more on this later.
Knowing how much time you spend with your head in the books will help you know if it's time to find a bookkeeper. If you're a sole proprietor and you only conduct, say, 20 transactions a month, then you may be alright. It may be possible for you to see how much money goes in and out with ease; nothing may fall through the cracks.
But, what if you're a startup founder with three business partners and you're starting to conduct about 150 transactions a month? Then, that's over 300 instances of money coming in (as you accept payments) and money going out (as you, say, purchase new products to sell).
In this example, little details may start to fall through the cracks. It's easy for well-meaning startup founders or small business leaders to make bookkeeping mistakes. What if you gave someone a discount here or honored a bulk purchase there? Will you know exactly how much money is in your company's account in order to restock?
At this point, you may be spending several hours with your head in the books, instead of a manageable portion of your day. The moment you start to feel things slipping through the cracks and out of your hands, it may be time to hire a bookkeeper.
An efficient bookkeeper or finance team will use best practices to maintain accurate records and cut your time spent with the numbers. This can free up a host of opportunities for you to, for example, engage with new business leads to further grow your business.
What if you've launched a SaaS startup that uses invoices to generate revenue? This is quite a different affair from someone who deals in automated online transactions. Invoices require the initial contact, clear payment terms, and the occasional follow-up email. This can be hard to maintain if you're not a natural stickler for to-do lists and calendar updates.
One of the primary functions of a bookkeeper — and a service available to all Full Service customers of Zeni — is to send out invoices and collect payment. Having someone keep track of those who don't pay on time (and those who do) can be a wonderful asset. Then, once your monies are collected, they'll be accurately annotated in the books.
See also: 8 Best Accounting Tools for Startups
Do you foresee yourself advancing from your core team of five to an office of 10? That's great! It's nice to see your startup bulk up. In which case, get ready for a whole new class of paperwork.
First, there's the initial hiring paperwork. A bookkeeper can make sure all those employee W-2s or 1099s are in order. Then, there's the weekly or biweekly payroll hassle. If you spend a little time in payroll, you'll quickly see there's a lot to keep straight because you're dealing with people and their livelihoods. This is the time when a smart bookkeeper all but makes you want to kiss their feet!
After the initial hiring paperwork and the bi-weekly payroll, there may be other oddities that come into the mix. What if you need to reimburse an employee for their travel expenses? What if you need to maintain their receipts for rideshares, meals, trade shows, and hotel stays? Without question, this is the time to introduce your wonderful employees to your masterful keeper of the books.
We like to use this is a benchmark for the health of someone's books. Can you pinpoint what it costs to make or acquire the goods and services that you're selling? This may include the cost of the materials or labor performed (eg: sales, operations costs, etc.). And for SaaS and other service-based businesses, this can be tedious and difficult to compute.
The Cost of Goods Sold (COGS) is the element that often gets lost in the shuffle. Head honchos at startups can easily see what's coming in and going out. But, it's important to know your COGS because, if you can't subtract that from your revenue, then you won't have an accurate depiction of your profit.
Like your invoicing, if your COGS is falling behind, then this is a nice indicator that it's time to ask for some help (and that's okay); we all need it from time to time. Bookkeepers love to puzzle the numbers together and present you with a focused picture.
Customers of Zeni have support of the Zeni Finance team to monitoring how their COGS vs Revenues are trending, and proactively keep them informed on a monthly basis.
Consider your cash flow. What's your cash runway? Do you maintain cash flow statements? They tell you what's owed to you and what you owe to others. Hopefully, more is coming in than what's going out, but are you sure?
One thing we often hear from burgeoning startups is that the cash flow looks healthy, but the profit margin looks weak. This may mean money is being overspent in a certain area and that area needs to be found.
The beauty of a bookkeeper is that he or she will be able to draw you a map to that problem area, and help startup founders make strategic business decisions according to cold hard facts.
Certified Public Accountants (CPAs) are gifted at working the numbers. They look at your earnings and can add, subtract, multiply, and divide like nobody's business. However, they need accurate numbers to work their magic. Last year, did you find yourself scrambling for receipts to allocate expenses? Did you struggle to provide accurate numbers on your income?
If so, hiring a bookkeeper this year can remove you from all that hubbub. Your accountant and bookkeeper can go on to become BFFs because bookkeepers generally package up everything the CPA needs in a tidy, red bow. They can provide proof of expenses, income, and everything else your accountant needs to make you right with Uncle Sam.
Best of all, you won't miss out on tax write-offs. One thing Uncle Sam is very gracious about is appropriate deductions. Certain bits of mileage to and from the office are deductible. Or, if you work from home, a certain amount of square footage is deductible. And don't forget those phone bills, internet bills, and educational classes you took. These write-offs can be a great relief in offsetting the amount you owe.
What do you think? Are you ready to pass the baton? Hiring a bookkeeper doesn't have to be a full-time endeavor. You can simply outsource the pertinent data to a third party and sleep in peace at night, knowing the strategic business decisions you make based on your financials are backed by an expert.
There are pro's and con's so working with freelance or part-time bookkeepers, accounting firms or other startup bookkeeping services. We talk through some of these when reviewing the best accounting software solutions for startups in a blog post here.
We created Zeni to fulfill the bookkeeping and accounting needs for startups. With different options to choose from, including a basic bookkeeping plan, full-service and CFO plan, Zeni can help you maintain accurate books and manage all of the finance functions for your startup (plus so much more). You'll gain access to our finance team's collective 100+ years of experience -- from managing startup accounting in the tech industry to working for global public companies like Whatsapp and Apple -- and efficiencies driven by AI and machine learning.
With one team managing every aspect of your company's finances, Zeni provides best-in-class service and pricing for monthly bookkeeping, accounting services, invoicing, and even annual taxes. Learn more and try Zeni today.
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