Although it’s true that a pre-revenue startup might not immediately need a full-time bookkeeper, any business that is generating even zero revenue needs to keep a clean set of books. Here’s why.
Why is bookkeeping so important during the pre-revenue stage?
1. It saves you a lot of work later
Bookkeeping involves recording your financial transactions in one place—usually using some kind of accounting software, or a spreadsheet—and keeping them organized using some kind of bookkeeping system.
You’re probably already recording your revenues or expenses somewhere—in a notebook, on a spreadsheet, on the back of a napkin—which means you are already kind of doing bookkeeping.
Instead of kind of doing it now and redoing all of that work later in a mad scramble—when it’s time to file your taxes or apply for a loan, for example—it makes far more sense to start recording all of those transactions properly using a real bookkeeping system right away.
2. It tracks your expenses
Even if your business is bringing in zero revenue, it’s probably already spending money to get off the ground—on office supplies, rent, equipment, licenses, and other startup costs. Because of this, it’s important to track expenses to stay on top of your burn rate—a number that indicates when you need to be profitable by.
You’ll need to track those expenses, not just for your own purposes, but also if you plan on deducting any of them on your taxes or approaching an investor or creditor for money.
3. It helps you think like a bank/investor
When you go to a bank for a small business loan or ask an investor for money, one of the first things they’ll look at is your books.
Leaving them unorganized until the last minute might mean that you yourself won’t get a good look at them, while getting a head start could help you catch any red flags early.
Worried that some of your startup expenses might be getting out of hand or look bad to a loan officer? Bookkeeping is the only way to really know.
4. It helps build good financial habits early
Bookkeeping forces you to start doing things like budgeting, bank reconciliations and separating business and personal expenses, which are good financial habits to develop no matter what stage your business is at.
How do I do pre-revenue bookkeeping?
Keeping an updated set of books works the same way whether you’re already earning revenue or not.
1. Get some accounting software, or an Excel spreadsheet
You’ve got a few options when it comes to setting up your bookkeeping operation.
You could get some accounting software like Quickbooks and start recording your transactions there. You can also get an expense tracker like Mint, which automatically syncs up with the transactions in your credit card and bank account history.
If you’d prefer something more manual, you could also start doing your bookkeeping using our handy Excel Income Statement template.
2. Start categorizing your transactions
Every time you record a transaction in your bookkeeping system, you’ll have to categorize it.
Is that Staples receipt for office supplies, or for that new banner you printed for your tradeshow booth? You’ll categorize these two expenses differently on your tax return, so make sure you get all the details down somewhere while they’re still fresh in your mind.
(Note: If your business makes lots of small expenses, you might benefit from setting up a petty cash fund and logging your small expenses that way.)
3. File or digitize your receipts and invoices
Did you know that the IRS requires you to keep records and receipts for any expenses you claim on your taxes at least three years after filing the return?
4. Reconcile your bank accounts
This involves looking at the transactions in your books and bank account and making sure that they match up. They’re your first line of defence against any bookkeeping mistakes, and you should be doing them at least once a month.
Check out our user-friendly guide to bank reconciliations for a step-by-step guide.
5. Make time in your schedule for bookkeeping
As your business starts to generate revenue and its expenses increase, staying on top of all your invoices and bills and making sure they’re recorded in your books properly will get harder.
We recommend setting aside some time in your schedule every week to catch up on your bookkeeping and make sure your finances are in order.
6. Try out a bookkeeping service like Bench
If setting up a bookkeeping system seems too daunting to do by yourself, you could also try handing that work over to a dedicated bookkeeper.
Cloud bookkeeping services like Bench (that’s us) will import your bank statements, categorize your transactions and keep a clean set of books for you, letting you focus on the important stuff.
Once your business gets off the ground and starts generating revenue, Bench will also generate financial statements for you and keep your books in order for when tax time rolls around.
If you’re curious about what a dedicated bookkeeper could do for your pre-revenue startup company, start your free trial of Bench today.
Bookkeeping and accounting 101
- Revenue Recognition: A Simple Guide (7 minute read time)
- What is Profit Margin? A Simple Introduction (4 minute read time)
- Liquidity: A Simple Guide for Businesses (7 minute read time)
- How to Read (and Analyze) Financial Statements (13 minute read time)
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