Tips for fixing bad bookkeeping from an experienced startup accounting team
If you’re running a startup, you know that keeping your financial records in order is crucial for long-term success. It’s our belief, based on experience working with 1,000+ startups over the years, that metrics driven founders tend to perform better.
Bookkeeping is the basis for the financial metrics that founders use to make informed decisions. But sometimes, fast growing startups end up with messy books. This can happen for a number of reasons - maybe a founder tried to DIY the accounting, or maybe an unsophisticated bookkeeper failed to keep up with the challenges of working with an early-stage business. Either way, getting errors fixed is important!
In this guide, we combine our expertise at Kruze Consulting with a set of actionable steps to help you get your books back in shape.
Identify the Problems: Know the Signs
Before you can fix anything, you need to know what’s broken. Here are common signs that your bookkeeping needs attention:
- Unreconciled transactions: Transactions in your books don’t match your bank statements.
- Inconsistent categorization: Expenses and revenues are not accurately categorized.
- Missing documentation: Lost or incomplete receipts and invoices.
- Inability to produce metrics: The best founders, and their investors, use metrics like CAC, revenue growth, cash burn, and others to manage the business. If you are having problems reliably producing these metrics, that’s a sign that you need to fix your bookkeeping.
Top 10 Ways to Fix Bad Bookkeeping
1. Use a Real Accounting System
Why: To automate, streamline, and improve the accuracy of your bookkeeping and financial reporting.
How: Transitioning from manual bookkeeping to a dedicated accounting system can be a game-changer for startups, and here’s how to do it effectively. We have an entire article on choosing the right startup accounting software - do it!
2. Reconcile Accounts
Why: To avoid and identify erroneous or missing transactions. Your bank and credit card feeds are the source of truth, so your accounting system should match these numbers.
How: Regularly match your book transactions with your bank statements, including payroll liability accounts. QuickBooks Online has a feature that will guide you through bank and credit card reconciliation; use it regularly!
3. Check for Data Entry Errors
Why: To ensure the accuracy and reliability of your financial records.
How: Mistakes happen, especially when you’re dealing with a high volume of transactions. Here’s how you can tackle data entry errors and errors of omission:
Types of Data Entry Errors:
- Flip-Flopping Debits and Credits: Accidentally entering a debit as a credit or vice versa.
- Transposition Errors: Writing 36 instead of 63, for example.
- Entering the Wrong Numbers: A simple typo can lead to major discrepancies down the line.
4. Check for Errors of Omission
Why: Failing to record every transaction skews your books and can lead to poor financial decisions.
How: Check your receipts, bank statements, and other transaction records; make sure none are missing in your accounting system. Regularly review your statements, and use an expense management tool to keep track of all of your expenses.
5. Analyze Trends
Why: To spot irregularities or inconsistencies.
How: Examine your Profit Loss statement for trends that don’t add up. Charts are a great way to see if your expenses are lining up over time as expected. Looking at trends can help you identify and fix bad bookkeeping errors.
6. Use a Payroll System that Connects to Your Accounting Software
Why: Payroll is usually the largest expense for most startups, and small mistakes can compound over time into major bookkeeping errors.
How: Choose a payroll system that is built for startups, one that will scale with your business. And make sure to integrate it with your accounting software, so that all the pay transactions flow automatically into your bookkeeping system.
7. Eliminate Duplicate Accounts
Why: To improve clarity and accuracy.
How: Audit your accounts and remove any duplicates or nondescript ones.
8. Properly Defer Accounts That Need to Be Deferred
Why: To accurately represent your company’s financial position and performance, especially when dealing with revenue recognition and liabilities.
What: Deferred revenue is money received for goods or services that have not yet been delivered. In accounting terms, it’s a liability because it represents an obligation to deliver those goods or services in the future. It shows up as a liability on your balance sheet.
How:
- Identify Revenue to Be Deferred: Any payments received in advance for services or goods to be delivered in the future should be identified as deferred revenue.
- Record as a Liability: Initially, record the amount as a liability on your balance sheet.
- Recognize Revenue: As you deliver the goods or services, move the appropriate amount from deferred revenue to your revenue account.
9. Check Your Cash Balance: Ensure Your Balance Sheet Matches Bank Statements
Why: To verify that your financial records accurately reflect your actual cash position, aiding in both short-term decision-making and long-term planning.
What: Reconciling (comparing) your cash balance on the balance sheet with your bank statements is a fundamental yet often overlooked aspect of sound bookkeeping. Here’s how to do it right.
How:
- Obtain the Latest Bank Statement: Your bank statement provides the most up-to-date record of all transactions that have cleared your bank account.
- Compare Bank Statement with Cash Account: Go line-by-line through your cash account in your accounting system and match it with the transactions on your bank statement.
- Identify Discrepancies: Highlight any discrepancies for further investigation. This could be due to checks that haven’t cleared yet, bank fees, or direct debits that haven’t been recorded.
- Make Adjustments: Update your accounting records to reflect any discrepancies. This could mean recording transactions that were missing or correcting errors.
- Document Reconciliation: Maintain a record of your reconciliation process, including any discrepancies identified and adjustments made, for auditing purposes.
10. Hire an Outsourced Bookkeeper
Why: To ensure expert handling of your financial records, enabling you to focus on core business activities.
How: Outsourcing your bookkeeping to a specialized firm, Kruze, can reduce bookkeeping errors and save founder time. Kruze specializes in VC-backed startups, and has helped hundreds of clients with their books, taxes and VC due diligence.
The Benefits of Outsourcing Bookkeeping in Reducing Errors and Saving Founder Time
Managing your startup’s finances can be overwhelming. Bookkeeping is a specialized skill that requires attention to detail and a deep understanding of accounting principles. Outsourcing this function can offer several benefits:
- Expertise: Professional bookkeepers are trained to handle complex accounting tasks.
- Time Savings: Free up internal resources to focus on product development, marketing, and other core business functions.
- Cost-Effectiveness: Outsourcing can be more affordable than hiring a full-time in-house bookkeeper, especially when considering benefits and overhead.
Why Choose Kruze Consulting?
- Affordable Services: Kruze offers competitive pricing tailored to the needs of startups.
- VC-Backed Startup Focus: With expertise in VC-backed startups, Kruze understands the unique financial challenges and opportunities your startup faces.
- Full-Service Offering: Beyond bookkeeping, Kruze can also assist with tax planning, financial modeling, and other essential financial services.
