For early-stage startups, keeping your accounting system simple is the smartest approach. That lets founders focus on hiring, product-market fit, and fundraising. But as your team grows, financial management should evolve to keep pace. One of the most impactful ways to upgrade your reporting is by setting up departments in QuickBooks Online (QBO). When is the right time to make this move, and what are the benefits and best practices?
Why Set Up Departments in QuickBooks Online?
Clarity for the CEO:
Once a company hits around 20 employees, it’s nearly impossible for a founder or CEO to manage every line item and all spending centrally. Setting up departments lets you track income and expenses by team (like Engineering, Sales, or Marketing), giving leadership crucial, real-time visibility into what’s driving growth and where money is going.
Transparency for Investors:
Breaking out costs by department offers investors a much clearer view of your company’s scalability. It enables peer comparisons and helps answer the classic VC question: Are your costs in line with industry benchmarks?
Accountability for the Team:
Departmental reporting empowers each leader to own and understand their budget. With clear spend tracking, team members are accountable for hitting milestones without overshooting costs, and everyone sees how their work contributes to overall company growth.
How to Set Up Departments in QBO: Two Approaches
Using the “Class” Functionality:
QBO offers a built-in “class” field to tag each expense or transaction. For instance, all R&D expenses are labeled with an “R&D” class for easy reporting.
- Advantages: Quick to implement, intuitive for non-finance staff, works well with third-party tools (like Bill.com, Expensify, or Brex).
- Disadvantages: Exporting historical data is harder since QBO only lets you download one period at a time.
Adjusting the Chart of Accounts:
This means creating separate master accounts for each department with subaccounts for major spend categories (like Salary, Airfare, Meals, or Consulting).
- Advantages: Streamlined periodic reporting, ideal for companies with stable org charts and in-house finance teams.
- Disadvantages: More manual work, trickier for non-finance staff, and creates a longer, more complex P&L; harder to keep current if your org structure changes frequently.
Kruze’s Recommendation
Most early-stage startups should use the “class” option in QBO; it’s easier to set up, train on, and maintain, especially if you don’t have a large finance team. As the organization grows and your structure stabilizes, you might later transition to a chart-of-accounts-based approach to allow for faster reporting across time periods, but only when your reporting needs truly warrant it.
Department-level reporting gives every growing startup the visibility and control needed for scale. If you’re unsure how or when to make the transition, Kruze Consulting can help you evaluate the best timing and method, and support your startup as it grows to new milestones.
