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April 20, 2021
Every business needs a bookkeeping system to keep accurate financial records. If you don’t have a finance background, building efficient bookkeeping processes and correctly tracking the right data can seem like a daunting task. Whether you’re a first-time founder laying the groundwork for a startup or a small business owner trying to reorganize your business’s finances, this bookkeeping setup checklist will guide you through the steps to create a basic bookkeeping system.
Each business’s bookkeeping system should suit its unique revenue model, the size of the team, and its plans for growth. To build a bookkeeping system that works for your startup, you’ll need to make several key decisions about the tools to use and the approach to take: This bookkeeping setup guide outlines the options at each stage of building your system.
Choosing whether to use the cash or accrual accounting method establishes how and when your business will record transactions. Cash accounting records expenses and income when cash changes hands, while accrual accounting recognizes revenue or expenses at the time of delivery of goods or services.
For small businesses that want an easy bookkeeping system and don’t plan to scale, cash accounting is a simple way to keep track of payments. However, for startups that intend to grow, it makes sense to use accrual accounting from day one. If you plan to raise venture capital, investors will expect to see reports that reflect accrual and GAAP methods, and businesses with more than $5 million annual revenue are required by the IRS to use accrual accounting. Accrual accounting also provides a more accurate picture of the business’s financial health and is the basis of proper financial modeling and projections.
Separate the business’s cash from your personal funds by setting up separate bank accounts for business expenses. It’s easier to accurately monitor the business’s outgoings when you don’t need to sort them from personal purchases, deposits, or expenses—plus, you can identify potential business tax deductions and help streamline tax preparations.
When choosing a bank account for your business, review each option with these considerations in mind:
Some founders choose to learn how to do manual bookkeeping, but with the variety of available bookkeeping software to manage your accounts, this isn’t necessary. It is possible to handle your bookkeeping in a simple spreadsheet program like Excel if you only process a handful of journal entries, but it’s easy to make errors with manual bookkeeping entries—and if the business grows larger and more complex, it will soon take hours of work to cover the essentials.
Alternatively, you can use business accounting software like Quickbooks Online to automate many bookkeeping processes—including categorizing expenses, generating invoices, and building reports—so your bookkeeping takes a fraction of the time. Because accounting software syncs all the data from bank accounts and credit cards onto one platform and offers integrations with other finance-related tools, you gain a full picture of your finances without needing to manually download the details from each account separately. For advice on how to choose the right accounting software for your business, take a look at our comparison guide of accounting software options for startups.
Whichever accounting software you choose, you will need to customize it to suit your business. This process includes first setting the software to use either cash or accrual basis accounting. Most accounting software programs includes a basic chart of accounts, but you should set up a chart of accounts that is specific to your business, including numbered expense accounts and categories for revenue. If your expenses are grouped into preset categories that don’t reflect your operations, it can take weeks to retrospectively organize the data and provide accurate reports for board members and investors.
To make your business viable, you need a way for customers to pay. You can start accepting online payments almost immediately through payment gateways like Stripe or PayPal. These systems are familiar to many customers and only charge a small fee for each payment you process. For a more comprehensive accounts receivable solution that accepts multiple payment types (like ACH transfers and wire transfers) and processes international payments, advanced billing solutions like Chargebee or Recurly handle every step of the payment process from generating invoices to collecting customer details to sending receipts. Connect your billing system with your accounting software to automatically record these financial transactions.
Before you hire your first employee, you need a system in place to pay them. As well as ensuring paychecks are correct and timely, employers are also required to complete the following payroll processes:
Most businesses use either a payroll service or professional employee organization (PEO) to help them manage these tasks. A payroll service provider manages all aspects of payroll to ensure employees are paid accurately and on time; a PEO provides more comprehensive HR solutions that include payroll. To pick the right system for your business, take a look at our article: 11 Key Features Of Payroll Services For Startups.
Reconciliation is the process of matching the transactions on your bank statement to the transactions in the general ledger of your accounts. Some discrepancies between your bookkeeping and your banking might be the result of errors you can then identify and resolve. Other discrepancies between these records might be the result of outstanding payments to or from your bank—for example, a check you issued to a vendor they have not yet cashed would be recorded in your books but not debited from your account.
Businesses should complete a bank reconciliation at least once per month, but if you have a complex banking setup or a large number of business transactions, consider reconciling your accounts every week or even every day.
See also: 12 Signs of Bad Bookkeeping
Financial reports show the business’s team, investors, and board members how you’re performing against startup metrics and goals and reveal trends in the data that help you make strategic business decisions. There are three financial statements that every business needs to generate as part of their bookkeeping process:
You can manually build these reports in a spreadsheet at the end of the month, but if you use accounting software, most platforms have built-in reporting modules that generate up-to-date financial statements in professional-looking formats, ready to present to investors or board members.
Creating a foolproof expense tracking system is crucial to managing your business finances and cash flow. Whether you decide to issue employees a corporate credit card or facilitate employee reimbursements using a tool like Expensify, take the time to set up a company credit card policy, expense guidelines, and expense tracking and reporting protocol for your business. Keep your policy as clear and straight-forward as possible, making it simple for employees to comply.
Beyond keeping business expenses under control, a thorough corporate expense policy is important to implement and follow should your business undergo an audit down the line.
Although some bookkeeping tasks are fairly straightforward, they are often time-consuming and require a focus on detail to deliver error-free data. Handling all the startup bookkeeping yourself may save paying fees to a professional, but remember to take into account the value of your time and the potential cost of any mistakes to your business. Consider working with a professional bookkeeper who will complete these tasks for you, either by hiring an in-house bookkeeper or outsourcing this work to a virtual bookkeeping service. Having a bookkeeper on your team means they are focused on your business, but keep in mind that hiring an additional employee is usually much more expensive than outsourcing your bookkeeping tasks.
The quickest, most effective way to build the right finance processes for your business is to work with a professional on your startup’s bookkeeping setup. At Zeni, our team has seen the bookkeeping challenges that startups face countless times, so we created a finance service that helps businesses avoid common bookkeeping errors and build the right financial foundation to grow.
Zeni is a modern finance firm that combines AI and ML technology with human expertise to provide accounting, tax, CFO, and bookkeeping services for startups. With Zeni’s Bookkeeping Plan, you get accurate, up-to-date books, and a service that is 10 times faster than other bookkeeping options thanks to Zeni’s AI-powered processes. The Zeni Dashboard provides 24/7 access to real-time financial data and key startup metrics, including your net burn, cash on hand, and cash zero date, so you can gain crucial insights instantly and at no extra cost. Plus, with Zeni, you’ll pay a set monthly fee based on the amount you spend to run your business, so it’s easy to budget for your bookkeeping costs, even as your business grows.