It’s important to understand the difference between accounting, bookkeeping, and financial analysis. These will all play a very important yet different role in your company.
- Accounting is the process of interpreting your financial records for everything, from making sure you pay the right amount in taxes to making strategic business decisions based on your business’s numbers
- Bookkeeping is the process of tracking all financial records—mainly income and expenses
Financial Planning and Analysis 101
- FP&A revolves around budgeting, financial planning, management and performance reporting, forecasting and modeling
How do I use my financials to make informed decisions?
At first, many founders start off by managing their books themselves. But not all founders have the time or desire to manage their books correctly There are many options on the market that make this less than ideal task…fun!
Founder best practices:
- Develop a base understanding of accounting - Puzzle Accounting Glossary
- Create a habit of collecting certain receipts for expenses from the beginning - this will give you a leg up in an audit or during due diligence
- Any expenses that could be construed as personal (e.g. Amazon, meals, lodging) or expenses over $75 should have an associated receipt
- Smart accounting software like Puzzle supports receipt uploads which tie directly to the transaction
- Credit cards like Ramp and Brex can also upload receipts into the Puzzle accounting software
- Keep a working document of your company’s accounting practices
- Documentation on your internal policies such as revenue recognition, expense management, and accounting treatments will be useful to refer to during due-diligence or in the case of an audit
- Perform monthly reviews of your financial statements
- Identify changes in your cash and opex month over months
- Review your budgeted versus actual financials and understand the reason for variances
Use accounting as a source of truth and a means for growth, rather than merely for compliance. Find an accounting software that does more than act as a general ledger, but also as a way to understand your company’s financial health.
Cash vs. Accrual Method
The difference? Timing. Each method has different rules about when businesses have to record their revenue and expenses.
- Cash Method - Record revenue when you receive payment, and you record expenses when you pay for them. This is how most people track their personal finances.
- Accrual Method - Record revenue when the sale occurs, and you record expenses when you receive the goods or services — regardless of when payment is received or sent. In other words, you don’t wait to see money change hands before you record the transaction.
Generally, due to its simplicity, cash-basis accounting is a go-to method for startups with 10 or fewer employees. However, the majority of startups (67%) use accrual-basis accounting to track and report their transactions.
- Gross Receipts Test - Companies with average annual gross receipts of $26 million or less are eligible for either accounting method.
- While you can choose your accounting method if you pass the gross receipts test, it is important to note that investors prefer businesses that perform accounting on an accrual basis since it helps them better judge your business.
- Since you’re already accounting for accrued revenue and expenses, you and your investors can see how profitable your business will be over the long term. Accrual accounting allows you to provide a glimpse of the future state of the business after the accrued expenses are paid and accrued income is received.
What accounting software should I use?
- AI embedded accounting software designed for startups. Founders can setup themselves.
- Real-time accounting software with API integrations that make accounting, fundraising, and tax filings simple.
- Includes insights and startup metrics like runway, MRR, ARR, and burn
- Design-focused SMB software developed in 2006 in New Zealand. Requires an accountant to setup.
- The largest SMB accounting solution developed in 1983. Requires an accountant to setup.
- Has additional features such as payroll, time tracking, and expense tracking.
- Has a team of outsourced bookkeepers to manage your books at an additional cost.
- Wave by HR Block
- Suite of SMB money and accounting software developed in 2009 in Canada. Founders can set it up themselves.
Do I need a bookkeeper?
Most founders don’t consider bookkeepers or tax accountants until they’re absolutely needed - e.g. when they are scaling or when they need to file taxes. And most very-early stage startups do not need a third party, nor a full-time bookkeeper.
- It’s generally suggested that once your company has raised around $250,000 or has 6+ months in runway, you hire a bookkeeper
- You know your company the best - If you choose to hire a bookkeeper, it is suggested that you work alongside them
- This will help you to educate yourself on your company’s financial standing
- This will ensure your chart of accounts and expense categorization is handled appropriately
Finding a bookkeeper or tax professional who knows the startup space can be difficult. We’re here to help! Here is a list of trusted professionals:
- Bookkeeping, CFO Advisory, R&D Tax Credits, Tax
- Bookkeeping, Tax, State Registrations
- Burkland Associates
- Bookkeeping, CFO Advisory, Tax, HR
- Trivium Accounting and Tax
- Bookkeeping, Tax, CFO Advisory, Accounting Policy
- Perlson LLP
- Bookkeeping, Tax, CFO Advisory, Accounting Policy, Sales Tax
- Integrated CPA
- Bookkeeping, Tax, CFO Advisory, Crypto, R&D Tax Credits
How do I track and project my financial health?
- Runway - Short term decisions have long term consequences; so track and plan your future revenue and expenses to minimize your risk of running out of cash.
- Create a budget/forecast
- Generate projections for each financial statement
- P&L - Should include predicted values for the following:
- COS of COGS
- Operating profit
- Non-operating expenses
- Non-operating profit
- Net income
- Balance Sheet - Should include predicted values for the following:
- Assets - current, non-current, and fixed
- Liabilities - current and long-term
- Equity - retained and current earnings, and common and preferred stock
- Statement of Cash Flows - Should include predicted values for the following:
- Cash from operating activities, including accounts receivable and accounts payable, inventory, and depreciation
- Cash from investing activities, including sales of assets and purchases of fixed assets
- Cash from financing activities, including incoming cash from investors or banks and outgoing cash paid to shareholders
- Change in cash and cash equivalents
- If you have little to no finance background, you can leverage online startup financial modeling templates
- Our favorite financial planning software:
What financial reporting do I need to share with my investors?
Regular communication with investors and important stakeholders is key to a startup’s success!
- Common items shared in investor updates:
- Key Highlights - Hires, product, growth
- Lowlights - Including steps on how you plan to overcome the pain points
- Ask for Help
- KPIs - Churn rate, number of active users, MRR, burn rate, etc.
- Revenue - Show metric as a trend over time
- Burn Rate
- Number of Active Users
- Churn Rate
- Customer Acquisition Costs (CAC)
- Template - Visible VC Update Templates