Signs You Need to Step Up Your Startup’s Bookkeeping

It’s important to keep track of all your startup’s financial transactions for at least three years, and sometimes even longer. Every transaction on the general ledger must be substantiated, or supported, in order to be accepted by the ATO and financial auditors. You risk losing out on tax deductions if you can’t.

Before funding you, serious investors might not go over your books line-by-line, but they will likely request your financial accounts for the previous three years or longer. Excel spreadsheets with basic cash-basis bookkeeping do not provide prospective investors with the information they require. Founders frequently become aware of poor finance management just before an investment pitch. Not the ideal time to be rushing to organise your books.

Common issues with record keeping

There are several ways that maintaining financial records might go wrong. Let’s imagine, for example, that you and your cofounders keep receipts. That’s wonderful, but there’s a challenge. While the bookkeeping is done digitally, the receipts are on paper. You’ll need to look through a year’s worth of paper receipts during tax season to make sure that every item was recorded in the financial statements.

Your startup will waste more time on paper-based accounting tasks as it grows and as you add more team members. Putting money into a financial management infrastructure is a smart move. You won’t need to engage an accountant to organise the books if you do it that way. Additionally, by making your accounting system better, you’ll spend less time preparing for a financial audit or filing your company’s tax return.

How to handle incomplete financial records

Keep all supporting documentation for income, payroll and deductions on yearly tax returns. Basic financial records should contain the following information, according to ATO guidelines:

• Receipts
• Banking records
• Payroll statements
• Invoices

If you’re using a manual spreadsheet or paper bookkeeping system, record the information about the spending as quickly as you can on the reverse of the receipt. Additionally, make a note of the date, the reason for the meeting, and the name of the investor or client you met.

To maintain your receipts electronically, we advise utilizing a program like Weel or Paytron. When using Weel, you can take a picture of the receipt, upload it, and input all the necessary details. Everything is maintained in one location and may be readily noted in your books this way.

Since your bank statement provides independent third-party confirmation of your bank activities, every business must promptly reconcile the bank statement to the accounting records following month-end. As soon as the bank statement is accessible online, we advise performing a reconciliation.

You compare each cash account transaction in your accounting records (often known as “the books”) to the bank statement when you execute a bank reconciliation. If the transactions don’t line up, you must determine why. There are other common reconciling problems, such as a cheque that hasn’t been posted to the bank account at the end of the month.

Although it may not seem like the best use of any founder’s time, this is extremely crucial. Your financial statements can be off if you don’t promptly reconcile your books and bank account.

Every company choice you make going forward will be based on inaccurate data, and whatever numbers you give to investors, both present and future, will be off. Your tax return will be inaccurate if your financial statements are erroneous. In general, you just want to do it right the first time.

Poor bookkeeping can affect daily operations.

The day-to-day operations of your startup may suffer from not balancing the books. Consider the scenario where you use Excel spreadsheets to manage your books. On December 15th, you make an order with a supplier, promising to pay $500 in 30 days. You add the sum to material expenses and raise accounts payable. Good news so far.

The vendor emails you on January 15 to inform you that the $500 invoice has not been paid. You send $500 right away in order to keep your supplier happy.

You miss the fact that the invoice was previously paid and that you failed to publish the payment in your accounting records because you haven’t completed the December Month End bank reconciliation. Your bank account is out of balance, as are the accounts.

There are several reconciling items—differences between your bank statement and accounting records—that you must handle when you execute a bank reconciliation. The more time it takes to make modifications after the event, the longer you put off executing a reconciliation. Furthermore, the bank reconciliation is the most effective technique to find fraudulent activity, like an unlawful debit from your account.

How to handle item reconciliation

Using bookkeeping software that is integrated with your company’s bank account greatly simplifies the process of reconciling the books. However, if you choose to perform the monthly bank reconciliation by hand, proceed as follows:

• Check to see if every bank transaction has been recorded in the general ledger.
• Gather all of the month’s source papers (paper invoices, purchase orders, payment confirmations, etc.).
• Each sum in the source documents should be connected to the transactions you posted in step one.
• Next, check for discrepancies between the bank statement for the month and your accounting records. Checks that haven’t cleared and transactions that are difficult to identify are common reconciling items.
• Post the revised information to the general ledger once you have reconciled those entries.
• Finally, create a bank reconciliation statement that details the adjustments you made and lists any unreconciled items that remain.

There is a cash flow issue if your financial statements indicate you are profitable yet your bank account is depleted of funds. There are several reasons why there is negative cash flow, including shoddy bookkeeping.

Every entrepreneur needs to keep an eye on cash flow, no matter what the reason for their problems may be. Poor cash flow management can result in:

• errors in burn rate and runway estimations
• inability to pay employees or fulfill obligations
• Investor interest will be lost if you don’t pass the acid test ratio

How to handle issues with financial flow

Beginning with the books, pay particular attention to accounts payable and receivable. You can be paying twice without recognizing it if the accounts payable department is disorganized. Create a process for comparing the accounts payable detail to actual cash payments. Every time you pay a past-due invoice with cash, this will assist you in lowering accounts payable.

Similar to how careless accounts receivable work can cause unpaid invoices to accumulate for months, Your company ought to have a written cash collecting policy. For instance, you may call them if an unpaid bill is 45 days old and email them if an invoice is 30 days old. This could hasten the collection of money.

After the books are balanced, you might want to automate your billing process. This shortens the invoicing process, speeds up the delivery of invoices, and gives information on those who are making late payments. Furthermore, it makes it simpler to collect past-due invoices.

It’s important to keep in mind that cash flow issues aren’t usually the result of poor bookkeeping. Even if your books are in order and you still lack cash, your business model may be the bigger problem.

The chart of accounts contains a list of all the accounts you utilize for your company along with their respective account numbers. Because they are used to post every accounting activity and ultimately produce the financial statements, properly setting up the accounts is crucial.

For business owners, this could seem like a futile activity. However, classifying transactions allows you to combine revenues and expenses based on a chart of accounts’ logical numbering scheme. This not only makes it easier for you to budget, but it’s also helpful for investors who want to know how strong and profitable your revenue streams are.

It’s simple to record transactions incorrectly or more than once if you don’t categorize them. You might have to pay a high tax accountant’s charge to resolve the issue, or the ATO may fine you.

How to handle an awkward chart of accounts

In a good chart of accounts, revenue and spending accounts are arranged after the accounts connected to the income statement (asset, liability, and equity accounts).

Here’s an illustration:

• Account codes 100–199 refer to assets
• Expenses: 200 to 299
• Accounts for equity: 300–399
• Income: 400-499
• Costs of Sale (COS/COGS): 500 to 599

The accounts are numbered according to the sequence in which they appear in each financial statement within each category. For instance, under the asset area, the cash account number can be 100, followed by inventory, accounts receivables number 101, and so forth. Accounts 100 through 399 present the accounts in the balance sheet in the order that they appear there.

You can gather financial data more quickly and create financial statements more quickly even with a basic classification system like this one.

You’ll probably need to develop a more comprehensive coding scheme based on departments as your startup expands in size and complexity. You can either utilize bookkeeping software that automatically classifies transactions by category or engage a one-time bookkeeping service to set up a system for you.

Proactive business management includes accurate bookkeeping.

Understanding financial management is key to evaluating the performance of your startup. While you might initially get away with using a straightforward cash-in, cash-out spreadsheet, any firm hoping to secure Series A funding needs to get their accounting in order.

A budget, long-term objectives, and judgments based on facts rather than guesswork are all possible with sound financial management. A proactive business management strategy that positions you for future success includes knowing when to begin investing in professional bookkeeping services.