Launching a startup can be overwhelming with all its responsibilities, but one of the most important things to take care of will be your financial situation. Although bookkeeping for startups is often not very glamorous, if you do not understand the basics of how to manage your startup’s finances right away, you could lose your startup altogether.
Bookkeeping Basics for Early-Stage Startups
When you’re an early-stage startup, Bookkeeping is how you track and organize all your startup’s financial transactions (money coming into your business and all money going out of your business). You need to establish bookkeeping best practices to help give you a better idea of your financial cash flow and prepare you for tax season.
As you start your business, you might find these following bookkeeping tips useful:
- Separate Business and Personal Finances
Make sure to set up a separate business bank account for your startup. Mixing your personal and business finances will only create more issues for you looking back on your income and expenses and for filing your taxes in the future. - Document Every Transaction
Document Every Transaction: It is important to document every transaction you enter for your startup. You can use bookkeeping software or an Excel spreadsheet to log all your financial transactions. As you record each transaction, make sure to categorize them (i.e., revenue, rent, advertising, etc.) so that your ledgers stay organized. Keep all receipts and invoices so that you have backup documentation for your accounting records. - Monthly Reconciliation
To ensure that your accounting records are accurate, it is good practice to reconcile your records to your bank statements monthly. By reconciling your records with your statements monthly, you will be able to detect any errors or lost transactions, thereby ensuring that both records are accurate and both are reconciled.
Understanding Financial Statements and Reports
What Is in Your Financial Statements & Reports
Start-ups will track the transactions the start-up made to create financial statements. The financial statements show the financial results of a start-up over a designated period. For owners of start-ups to effectively track their start-up’s financial performance, it will be helpful for them to learn about the three major financial statements listed below:
- Income Statement (Profit and Loss Statement)
Income Statements provide a detailed view of all the income and expenses associated with the operation of the start-up’s business during a specific period. The Income Statement will summarize the total profit (loss) for the time span included in the Income Statement. - Balance Sheet
The Balance Sheet provides a summary of the company’s assets, liabilities and equity as of the end of a specific period. The Balance Sheet gives a general indication of the company’s net worth at the given point in time. - Cash Flow Statement
Cash Flow Statements provide detailed information on the inflow and outflow of cash from the company as of a specific date. Cash Flow Statements allow start-ups to track their cash to identify the amount of cash available to meet their obligations and inform lenders and investors of the liquidity position of the start-up.
The routine reviews of these three financial statements will allow start-up owners to monitor their company’s financial position and to identify trends or potential problems early enough to provide them with the financial information needed to make the best possible decisions for their start-up’s financial health.
Preparing for Tax Obligations
Every business must file their federal and state income taxes along with remitting taxes. If your start-up has employees, you’ll also be responsible for submitting payroll taxes to the IRS and state government (withheld income taxes and Social Security).
Failing to file your federal and state income taxes or submitting your payroll taxes may subject you to penalties. You should also maintain a calendar of important filing deadlines, including quarterly estimated tax due dates, to ensure you have no tax compliance issues.
In addition to maintaining accurate business records for tax purposes, you should also maintain accurate tax records to support your federal income tax returns and timely tax filings. Start-ups frequently engage the services of Tax Accountants and/or Tax Consultants to ensure the start-up is claiming all available tax deductions and keeping up to date as changes to tax laws occur. By managing their tax obligations in an organized and proactive manner, start-up owners can minimize their tax compliance issues and increase their focus on growing their businesses.
Payroll Management for Startups
When you are hiring employees or on the job and are paying yourself as a salary, you need an effective payroll management system, including calculating wages, properly withholding taxes/deductions and paying everybody on or before payday. It is also important to send your withheld payroll taxes and employer tax contributions to the relevant government authorities (i.e., IRS, state, local) as scheduled and file required payroll tax forms with the appropriate government authority by the required deadlines. Failure to comply with these requirements could result in substantial penalties. Therefore, accuracy and timeliness are extremely important when managing payroll for employees.
Most startups utilize payroll software or services to automatically calculate pay checks and tax withholdings for employees so that nothing is missed at the time of paying employees. Additionally, you should have complete payroll records for every pay period, including wages paid, taxes withheld, etc. One very important item to consider is whether you classify your employee’s correctly as either employees or independent contractors, because that will have a direct effect on how taxes are withheld and reported. By establishing a sound payroll management process early on, you can ensure that your employees will be paid correctly and your business is compliant with relevant federal and state employment regulations.
Accounting Systems and Tools
Modern accounting starts with smart technology – but it doesn’t end there. While advanced accounting systems and automation tools are essential for managing invoices, expenses, reports, and bank reconciliations, software alone is never enough to build a truly reliable financial operation. At ERB, we combine the power of leading financial technologies with hands-on financial leadership. We don’t just implement systems – we actively manage them, validate the data, and turn numbers into clear business insights. Your financial records aren’t just organized and updated; they are continuously reviewed, analyzed, and transformed into decision-making tools that support growth, fundraising, and strategic planning. This is the difference between using accounting software – and having a CFO-grade financial infrastructure built and managed by ERB.
The Importance of Tracking and Managing Cash Flow
Cash flow is defined as the movement of cash into and out of your business. Cash flow is vital for every startup; cash flow shortfalls are the leading cause of nearly half of all startups failing in less than five years. Monitoring cash flow allows you to ensure that you have sufficient funds to pay your obligations, while also providing you with an opportunity to plan for future cash flow needs. Understanding how quickly you spend cash (your burn rate) and how many months your cash will last (runway), is extremely helpful for tracking cash flow.
In addition to monitoring cash inflows and outflows, business owners should also keep track of accounts receivable (money owed to the business) and accounts payable (money owed by the business) to maximize the timing of cash flow. Business owners should also prepare a monthly cash flow forecast for the next few months so that potential cash flow shortfalls can be identified and addressed as early as possible. Knowing the source of money coming into a business and where it is being spent is critical in avoiding cash flow crises. Where feasible, maintain a cash reserve to provide a buffer against unexpected expenses and/or slow sales periods.
As your business expands, financial tasks become increasingly complex; therefore, utilizing the services of an experienced accounting firm will greatly enhance your ability to operate successfully. ERB has been providing startup accounting services for many years, and its team of certified American CPAs provides a comprehensive suite of financial services from bookkeeping to payroll and compliance with tax regulations, and financial reporting, all specifically designed for young companies that are growing in the United States.