This is a valid question all startup executives should begin to ask themselves as their company scales. Thorough and up-to-date bookkeeping is essential for growing any venture sustainably, especially if there is a plan to complete a round fundraising in the near future. Effective bookkeeping and accounting provides startup leadership with the most digestible understanding of their historic performance. Transparent reporting speeds up future business decisions as well, reducing the analysis paralysis that results from a lack of information.
Why is great bookkeeping so critical for success in business?
Great bookkeeping gives growing companies an accurate view of their ongoing business operations by way of financial reports that are timely, accurate, and easy to understand. Key reports such as financial statements, Accounts Receivable aging schedules, and sales detail by customers play an essential role in helping management understand their business.
At its most basic level, bookkeeping is used to generally categorize expenses so that business leaders can see very quickly where money is going on a monthly basis. Doing so allows a company to measure key spending trends, including how much money is going towards the direct product, and how much is going towards operational expenses and overhead.
Detailed bookkeeping allows entrepreneurs to organize sales data by product, customer, sales-rep, and more. This type of flexibility allows a company to more accurately understand the true drivers of their business such as what products provide the highest returns and what customers provide the company with the lowest margins.
What does good bookkeeping look like?
Entrepreneurs often don’t know what to look for to ensure their bookkeeping process is really at the quality that is needed. We have put together this checklist of key items to ensure your accounting process meets the minimum requirements necessary for any financial team or investor.
The best bookkeepers are able to take basic financial reporting principles and customize them to fit the operational needs of any business. However, there are many consistent truths and industry best practices that can be used to ensure your accounting process is up to the minimum usable standard.
Are your bank accounts being reconciled?
With money constantly flowing in and out of a business, there are many places where cash can be stored. While this is natural even at an early stage, an entrepreneur must be able to keep an eye on balances across all accounts. If bank accounts are not reconciled, it is difficult to catch irregular transactions as well as have a true picture of your cash position on a monthly basis.
Have you organized a formal Chart of Accounts?
A Chart of Accounts serves as the standard ledger for business operations. The best chart of accounts is one that clearly marks and categorizes the assets, liabilities, revenues, and expenses. These accounts must be clearly organized so that they can be easily manipulated to break expenses into critical categories and can be grouped into buckets such as which are product-related and which are operational.
A strong Chart of Accounts also organizes assets that need to be capitalized and to depreciated. This is especially important for SaaS companies, where a large portion of initial expenses are dedicated to development, and is essential for smoothing out costs over the useful period of the software rather than incurring high up-front costs in a given reporting period.
Is your sales pipeline quantifiable by product and customer?
It is important early on in the life of a business to understand the direct impact each customer and product has on your bottom line. It is critical to be able to tie specific products and customers to sales numbers in order to understand business performance on a customer, unit, or product basis. Collecting and grouping top line sales in an organized way allows a business to better plan for future sales opportunities and analyze its existing sales and contracts.
Are your expense categories clear and easy to understand?
While it is important to be detailed in a financial report, breaking down expenses into too many categories can create unnecessary confusion. The best way to optimize financial reports is to create subcategories. For example, if a category is called “employee benefits,” subcategories such as “healthcare” and “gym reimbursements” can fall underneath. You may even want to fit all of these under an even broader category like “payroll expenses” and include it with employee salaries as well to allow for easier analysis of all payroll-related expenses.
Beyond internal use, investors or outside stakeholders will also want to be able to quickly and clearly comprehend your company’s finances. A practical way to test this is to review key financial reports with a new, qualified bookkeeper, advisor, and potential investor to see what immediate questions they have about your business. If they cannot immediately understand key aspects of the business based on the way you’ve broken down your financials, it is probably a good idea to reassess your categorization.
Do you have a clear picture of cash flow from accounts receivable?
An organized and up-to-date accounts receivable can help management understand clearly what the business’ working capital looks like over the next 3-6 months. These are critical metrics for business decision making, especially when it comes to making larger purchases, hiring, or raising money.
In order to accurately break down accounts receivable, it is important to be reasonable and gauge when customers are delinquent so that you can write off their accounts as uncollectible in order to not overstate net income. Even if the sales are booked, cash flow from sales is the metric that matters most and if too many accounts are defaulting, a new process of vetting customers might be necessary.
Better Bookkeeping leads to a better financial future:
With reliable and concise books and accounting processes a business can project future performance, and as a result, can provide a clear financial vision to its executive team and key investors. Solid financials also allow a company to project confidence in their business model and operating capacity. Equipped with a firm grip on operations and cash flows, business leadership can properly allocate money for teams to further develop products, take on new and exciting projects, or save for future investments.
What to do if you’re unhappy with your current bookkeepers:
A good accountant and bookkeeper should be able to understand a company’s vision in order to deliver timely and accurate financial information to key stakeholders. We have developed the above principles for good bookkeeping after seeing how many of our growth-stage clients didn’t have the minimum level of financial organization and reporting needed to understand business performance.
Our team is equipped with the skills and resources needed to understand any business model to order to ensure the best chances of a profitable future. Exbo Group’s Better Bookkeeping service creates high-quality financial reports so that your company can focus what you do best – building and selling your products.