Understanding your startup’s finances does not need to be hard – that’s been the tenor of our past few blog posts. This one continues in the same ilk. We’re shedding some light on two basic tech startup finance functions, bookkeeping, and accounting.
Aren’t Bookkeeping and Accounting the Same?
The short answer is no. They are separate functions but often confused because they are usually combined within the same team and may even share an office. Smaller companies might employ an accountant who also does the bookkeeping. Despite this close relationship, there are a significant differences between the two.
Bookkeepers organize and record your company’s financial information. They may take care of invoicing customers, recording incoming payments, and paying what your company owes to others. Put simply, bookkeeping administers and monitors all the business’s financial transactions.
Accountants, on the other hand, often take a wider view of the company’s finances. They prepare the three main financial statements for your startup, work on budgets, and analyse business performance. Plus, external accountants pull together your year-end accounts, oversee your tax returns to ensure you are neither paying too much or too little, and file both in time to meet statutory deadlines.
As a founder, you may think of your accountant as the person entering the room only to tell you that there are not enough funds for the next big step in your development. But here is the thing – accountants are not nay-sayers. A good accountant will show you ways to optimize your income and spending patterns. Rather than nay-sayers, accountants are more of an early warning system to help you steer clear of financial roadblocks. They will also be able to help you assess whether your idea is as good for the business as you believe, and if so help you find a route to make it happen.
Organising Accounting and Bookkeeping for a Startup
As a startup or early-stage company, you’re unlikely to have a large finance team at your disposal. Even hiring two people to take care of bookkeeping and accounting separately is usually too much at the beginning.
Staying on top of your financial situation is important but not to the detriment of product development and initial sales. After all, if your company can’t generate income there are very few records to keep. So, what are your options?
- One person for both functions
- Automation and external expertise
1. One Person for Both Functions
Can you hire one person to be your bookkeeper and accountant? In theory, that is possible. Quite a few accountants start their careers as bookkeepers to gain basic experience before expanding their qualifications.
However, choosing this approach may come with a few pitfalls. Depending on the nature of your business, hiring one full-time person may still be too much and too expensive in the early stages of the business. That means you may end up paying over the odds for someone whose expertise you only need occasionally.
Second, by hiring one combined person you don’t necessarily get access to highly specialized expertise. Tech startups can be in a class of their own when it comes to the financial side of the business. Without a specialized accountant, you may miss a trick or two.
2. Automation and External Expertise
How do you feel about taking care of the bookkeeping yourself? Don’t click away – please hear me out. Bookkeeping (and accounting) software like Xero has made light work of keeping track of transactions on a daily basis.
It can be as easy as scanning receipts whenever you make a purchase and activating feeds of transactions from your bank account. Software allows you to issue invoices and matches those with incoming payments. For a reasonable monthly subscription fee, your bookkeeping almost takes care of itself. If it doesn’t there are book-keepers who you can outsource the work to but you will still need to communicate with them lots to ensure they understand the business and the transactions you are making. Remember – garbage in, garbage out!
Once a month or so you want an accountant to run reports and interpret them for you, your management team, and your investors. That is when you need to back up the automated bookkeeping with the expertise of an accountant or a chief finance officer (CFO).
Most startups only need the expertise of a CFO every few weeks, but when they need it, their questions are often highly specialised. That is why many startups and early-stage businesses benefit more from having access to a CFO “on demand” rather than keeping a full-time person on staff.
Final Thoughts
So, where does all of that leave you? Think of it this way: bookkeeping records the numbers, and accounting makes sense of them.
Putting in a little effort to support automated bookkeeping is an excellent solution for smaller companies that don’t need an entire finance department yet. Building a relationship with a virtual or on-demand CFO means you have easy access to specialized advice when you need it most.
Having said that, of course, there are plenty of other options in between these two scenarios. Talk to us if you’d like to discuss your situation or receive a tailored recommendation.