Starting a new business is an exciting venture, but with it comes the responsibility of maintaining a solid financial foundation. One of the most critical components of any successful start-up is effective bookkeeping. Whether you’re a solo entrepreneur or building a small team, setting up your financial system properly from the start will save you time, money, and headaches down the road.
Here’s a guide for new businesses on how to set up an effective bookkeeping system from day one.
1. Choose the Right Bookkeeping Method
The first step in setting up your financial system is to decide whether you’ll use cash accounting or accrual accounting. Both methods have their pros and cons, and your decision may depend on the size and type of your business.
- Cash Accounting: This method records income and expenses when cash is received or paid. It’s simple and ideal for smaller businesses with straightforward transactions.
- Accrual Accounting: This method records income when it’s earned and expenses when they’re incurred, regardless of when money changes hands. While more complex, accrual accounting gives a clearer picture of your business’s financial health, especially if you’re managing inventory or dealing with contracts.
For most start-ups, cash accounting may suffice initially, but as your business grows, switching to accrual accounting can provide a more accurate overview of your financial position.
2. Select Your Bookkeeping Software
In today’s digital world, using bookkeeping software is essential for efficiency and accuracy. The right software can automate many manual tasks, helping you stay organized and compliant. Start-ups often benefit from cloud-based solutions, which allow you to manage your books from anywhere with an internet connection.
Some popular options include:
- QuickBooks Online: A user-friendly and scalable solution that offers a range of features, including invoicing, expense tracking, and tax preparation.
- Xero: Another great option, known for its ease of use and integration with third-party apps like Shopify and Stripe.
- Wave: A free option with basic bookkeeping tools, suitable for very small start-ups.
When choosing software, consider your future needs as well. Look for scalability, ease of use, and compatibility with other tools your business may rely on (like payroll or CRM systems).
3. Set Up Your Chart of Accounts
The chart of accounts is the foundation of your bookkeeping system. It’s essentially a list of all the categories your business uses to organize financial transactions. These categories typically include assets, liabilities, income, and expenses.
For start-ups, it’s important to keep your chart of accounts simple and straightforward. Common accounts include:
- Revenue: Sales, services, or other income streams.
- Expenses: Categorize your costs (rent, utilities, marketing, software subscriptions, etc.).
- Assets: Anything the business owns (bank accounts, equipment, inventory).
- Liabilities: Money you owe (loans, credit card balances, unpaid bills).
Your chart of accounts will evolve as your business grows, so it’s important to review and update it periodically to reflect new revenue streams or expenses.
4. Track Income and Expenses Accurately
One of the most common mistakes new businesses make is failing to track income and expenses properly. Every dollar coming in and going out should be recorded and categorized correctly.
Tips for Tracking Income:
- Keep Personal and Business Finances Separate: Open a dedicated business bank account. Mixing personal and business transactions can create confusion and complicate tax filings.
- Invoice Promptly: Set up a clear invoicing system that includes payment terms. Automate reminders for unpaid invoices to keep cash flow steady.
Tips for Tracking Expenses:
- Digitize Receipts: Use apps like Expensify or your bookkeeping software’s receipt capture feature to store and organize receipts.
- Monitor Subscriptions: Many start-ups rely on various software subscriptions. Keep track of these to avoid paying for unused services.
5. Stay on Top of Taxes
Tax compliance is critical for start-ups, and failing to stay on top of taxes can result in penalties. There are several types of taxes that businesses in Canada need to be aware of, including income tax, GST/HST, and payroll taxes if you have employees.
What to Keep in Mind:
- GST/HST: Once your start-up exceeds $30,000 in revenue over four consecutive calendar quarters, you’ll need to register for a GST/HST number and begin charging sales tax.
- Income Tax: Depending on your business structure (sole proprietorship, partnership, or corporation), your tax filing requirements will differ. Start-ups should consult with a tax professional or bookkeeper to ensure proper tax planning from the beginning.
- Payroll Taxes: If you hire employees, you must deduct and remit payroll taxes, including EI (Employment Insurance) and CPP (Canada Pension Plan).
6. Create a Consistent Bookkeeping Schedule
Bookkeeping isn’t something you should do sporadically or only when tax season is approaching. Keeping your financial records up to date requires consistency. Establish a regular schedule for reviewing and updating your books, whether it’s weekly or monthly.
Benefits of a Regular Bookkeeping Routine:
- Catch Errors Early: Regular reviews help you spot discrepancies or errors quickly.
- Stay Prepared for Taxes: By staying on top of your finances, tax season becomes much less stressful, as your records are already organized.
- Understand Your Cash Flow: Consistent tracking of your finances helps you better understand your cash flow, allowing you to make informed business decisions.
7. Consider Outsourcing to a Professional
While setting up your bookkeeping system may seem manageable, maintaining it as your business grows can become overwhelming. At this point, outsourcing your bookkeeping to a professional can free up your time to focus on scaling your start-up.
When to Outsource:
- Complex Finances: If you’re dealing with multiple revenue streams, complex expenses, or tax regulations, a professional bookkeeper can provide invaluable assistance.
- Time Constraints: As a start-up founder, your time is valuable. Outsourcing your bookkeeping allows you to focus on core business activities.
- Expertise: Bookkeepers can provide insights and financial reports that help you make data-driven decisions. They also ensure that your start-up remains compliant with tax laws and financial regulations.
Final Thoughts
Setting up a solid bookkeeping system is one of the most important steps a start-up can take to ensure long-term success. By choosing the right accounting method, using reliable software, staying organized, and keeping up with taxes, you’ll create a strong financial foundation for your business. If you need help with setting up or maintaining your bookkeeping system, the team at Bookkeeping Barn is here to support your start-up every step of the way.
