Bookkeeping: A Secret Weapon for Thriving Startups

by Mehr Sokhanda

In the early stages of a company, founders typically focus on product development, achieving market fit, and scaling their business.These are important priorities, but there’s a critical aspect that’s frequently overlooked: bookkeeping.  This function is typically overlooked; however, proper bookkeeping can be the difference between success and failure for a young company.

In a recent discussion on Tech Uncensored with Tanvi Gupta, senior manager within the assurance services team of MNP , we explored the critical aspects of bookkeeping for startups and small businesses. As Gupta puts it, “In the simplest words, bookkeeping is just a process of recording financial transactions, think about documenting the flow of money into or out of a business.”

Despite this straightforward definition, Gupta emphasizes that bookkeeping plays an important maintaining the financial health of your business, ensuring compliance, and enabling informed decision-making.

Why Bookkeeping Matters

Bookkeeping provides the foundation for financial management. As Gupta notes, “You need accurate bookkeeping so that you can keep track of your cash flow, manage your expenses, and plan for the future.” For founders, this means having a clear, real-time picture of their company’s financial health, which is essential for making informed decisions, securing investment, and ensuring long-term sustainability. Without solid bookkeeping practices, a startup risks flying blind, potentially leading to cash flow problems, missed opportunities, or even business failure.

For startups seeking investment, bookkeeping is especially key”Investors and stakeholders would require your financial information to assess the performance, sustainability, the durability of your startup.” In addition, she adds that all businesses must follow regulatory compliance. This is typically done through annual tax filing requirements through the Canada Revenue Agency. As well, as part of the business planning process, having a historical record of business transactions is useful for risk management.

Despite its importance, many startups overlook bookkeeping, especially in their early stages. The reasons are varied, from lack of knowledge to resource constraints. About 20% of businesses fail due to cash flow problems – issues that could often be avoided with proper bookkeeping practices.

Overcoming Bookkeeping Hurdles

While the perceived costs and complexities of bookkeeping can be daunting for startups, there are ways to overcome these challenges. Gupta highlights the benefits of automation tools, which can record transactions automatically, allowing founders to simply review them. She also suggests outsourcing as a practical solution for time-constrained startups. “Outsourcing allows experts to handle bookkeeping, freeing up time for founders to focus on other aspects of their business” Gupta explains. Additionally, she emphasizes the importance of investing in basic financial literacy and training to help founders better understand and manage their company’s bookkeeping needs. By leveraging these strategies, startups can streamline their financial management processes and concentrate on scaling their business.

Bookkeeping vs. Accounting: Understanding the Difference

Gupta acknowledges that bookkeeping and accounting, while closely related, are distinct fields as well.

She elaborates, “Bookkeeping, involves the transactional side—recording day-to-day financial data, like cash inflows and outflows. But accounting is taking a step further. Accounting is when you take all the data from the bookkeeping processes, and you start interpreting and analysing the data to provide insights and support decision making.” Essentially, bookkeeping is the first step, providing the raw data, while accounting classifies, summarizes, and reports it, which helps with tasks like cash flow management and financial forecasting.”

Understanding Cash vs. Accrual Basis

One of the initial steps in bookkeeping is deciding between the cash basis and accrual basis of accounting, which are two methods used to recognize financial transactions.

The cash basis, as Gupta explains, recognizes revenue and expenses only when cash is received or paid. It’s straightforward and often preferred by small businesses and sole proprietors due to its simplicity. For instance, utility bills are recorded as expenses when paid, not when the service is provided. On the other hand, accrual basis recognizes revenue when it is earned and expenses when they are incurred, regardless of cash transactions. “It’s more complex accounting. It requires adjustments for accruals deferrals. It results in a timing difference between recognition versus cash,” Gupta noted, adding that it aligns with Generally Accepted Accounting Principles (GAAP) and is often necessary for larger businesses.

However, Gupta emphasizes , “The CRA generally recommends the accrual basis for businesses, but small businesses below a certain annual gross revenue threshold may still use the cash basis for tax reporting, provided they follow specific rules…what you’re talking about has tax implications on when you recognize revenue. This distinction is important for tax implications, particularly in determining when revenue is recognized—whether in the year it’s invoiced or the year it’s collected.”

Importance of Accurate Classification

Accurate classification of financial transactions is essential for maintaining the integrity of your books. Gupta emphasized, “You don’t want your revenue being recognized as a liability. It’s essential that everything is tracked properly.” Using standardized categories helps ensure that similar transactions are consistently recorded, aiding in accurate financial reporting and analysis. Gupta explains, “A sale should always be recorded under a sales account, not as an expense or receivable. It’s important to use standardized categories and follow consistent accounting principles, whether you choose cash or accrual methods.”

Best Practices for Effective Bookkeeping

Gupta outlined several best practices for maintaining accurate and efficient bookkeeping that every founder should consider. Consistency is key; transactions should be recorded regularly, whether daily, weekly, or monthly, as waiting until the end of the year can lead to inaccuracies and missed details. She also emphasized the importance of using a double-entry system, where each transaction impacts at least two accounts to maintain balance—for instance, receiving cash from a customer should affect both the cash and sales accounts.

Additionally, thorough documentation is essential for easy audits and reconciliations. Gupta advises, “You could also consider digital filing now as most of the software available currently are cloud based. So, think about digital filing all your documents, all the relevant support, and ensure they are securely saved. And by doing some of these easy tasks that most tend to refrain from doing upfront, you can ensure that your financial data is as accurate as possible.”

Outsourcing Bookkeeping: A Cost-Benefit Analysis

For many startups, outsourcing bookkeeping can be a cost-effective solution with several key advantages. Gupta highlights, “It leads to reduced payroll. Rather than hiring a full-time employee or even part time employee to do the bookkeeping you can just outsource the job to specialized firms that handle bookkeeping more efficiently and at a lower cost. There’s an elimination of training and recruitment costs as once you hire the outsourcing firm, you don’t need to train them.”

She adds, “Also think about cost savings on software and technology. While smaller businesses might be able to keep track of transactions in Excel, growth often requires investing in software. By outsourcing bookkeeping, the firm handles the necessary tools and software, saving you from purchasing and maintaining a software license.” Gupta also emphasizes how outsourcing provides access to specialized expertise, which minimizes the risk of errors and compliance issues.

Annual Filing Requirements

Finally, Gupta highlights essential annual filing requirements for businesses, stressing the importance of staying compliant with the CRA. Payroll remittances, including taxes deducted from employees’ pay checks, must be regularly submitted to the CRA. Additionally, businesses are required to file the Harmonized Sales Tax (HST) on a monthly or quarterly basis, depending on their sales volume.

Corporate taxes are another critical obligation, with the T2 corporate tax return due annually. “Most startups have a December 31st year-end, but other year-ends are possible depending on what period makes sense for you,” Gupta explained, noting the flexibility businesses have in choosing a fiscal year that aligns with their operations.

Effective bookkeeping is a fundamental pillar of startup success. “Think about it as a foundation, and then you build on the future predictions, assumptions in the modelling, so that you have better results for decision making,” states Gupta. By maintaining consistent and accurate bookkeeping practices, leveraging the right accounting methods, and considering the benefits of outsourcing, startups can better manage their cash flow, avoid costly errors, and position themselves for growth.

As Gupta highlighted, “Startups should prioritize their financial management from the outset. This will empower founders to focus on scaling their business with confidence, knowing that their financial foundation is solid.”

MNP is a valued partner of Altitude Accelerator. If you are interested in learning more about this topic or wish to find out more about MNP, please contact us at info@altitudeaccelerator.ca

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