How a startup’s bookkeeping needs change from pre-seed to Series A

At pre-seed, bookkeeping might mean connecting your bank account to accounting software, categorizing a few dozen transactions, and knowing how much cash you have left. But by the time your startup reaches Series A, your company will likely have transformed. This growth comes with more accounting needs, like tracking annual customer contracts and accrued expenses, as well as setting up systems to handle accounts receivable. Plus, you’ll need to stay on top of reporting, and investors will expect consistent financial statements.

As your business becomes harder to manage from bank balances and spreadsheets alone, you and your team will need to implement more structured bookkeeping practices. In this article, we look at what that means and how founders can make sure that their company’s bookkeeping workflows keep pace with business growth.

The goal of bookkeeping for early-stage startups is relatively simple: Keep an accurate record of what money came in, what went out, and where the company stands.

But as a startup grows, only tracking cash movements won’t be enough to get a clear view of the business’s full financial picture. For example, hiring employees will add payroll complexity. As you add vendors, you’ll also have more bills to track. Once you add venture capital to the mix, you’ll have new reporting needs. Investors will likely want regular updates on burn, runway, revenue, and spending, so you’ll need to have an organized, investor-ready bookkeeping system in place.

Messy books can be costly. A miscategorized $200 software purchase may be easy to fix, for instance, but months of incorrectly recognized subscription revenue can give you a distorted view of your company’s financial position — and that can lead to misinformed financial decisions. So, staying on top of your startup’s books is essential.

There’s no single point when every startup should adopt a particular process. Most startups add bookkeeping processes gradually, often before or after a financing round exposes what the old system can no longer handle. To gauge whether you need to update your bookkeeping process, consider these questions:

• Can you and your team close the books at the end of the month without major issues?
• Can you explain the numbers and answer basic investor questions, without needing to go back and clean up the books first?

Think of the funding stages listed in the chart below as rough markers for the sort of bookkeeping process your startup might need.

As the table shows, each stage calls for a little more structure, from basic recordkeeping at pre-seed to regular reporting and more formal accounting processes by Series A.

At pre-seed, the goal for your bookkeeping should be to get the basics right. This includes separating your business and personal spending, connecting company accounts to accounting software, keeping track of receipts and invoices, and categorizing transactions consistently.

Your books should help answer a few basic financial questions:

• How much cash do we have?
• How much are we spending each month?
• What are we spending it on?
• How much revenue have we collected?
• How much runway do we have?

If your company has relatively few transactions, the founder may still manage much of this directly. Cash basis accounting may also be sufficient because this method is a way to record revenue when money arrives and expenses when money leaves.

During this business stage, aim to get these elements in place:

• Set up dedicated business banking and cards.
• Select and implement accounting software.
• Get in the habit of consistently categorizing every transaction.
• Reconcile bank and card transactions every month.
• Start doing basic P&L and balance sheet reporting.
• Set up a system for storing receipts and invoices.
• Use a simple burn and runway calculation to track your financial position.
• Implement a process for handling tax documents and filings.
• Review common bookkeeping mistakes — and avoid them.

At this stage, this should be enough to keep your books current and give you a reliable view of cash and spending.

At the seed stage, ad-hoc bookkeeping often starts to break down. You may now have employees, contractors, recurring software expenses, more customer payments, accounts receivable, and a growing number of cardholders. A founder who once recognized every transaction by sight may no longer be able to do so.

By this point, bookkeeping usually needs a monthly rhythm. So, be sure to attend to these tasks every month:

• Reconcile bank and card accounts.
• Review transaction categories
• Record outstanding bills or invoices.
• Produce financial statements on a predictable schedule.
• Track monthly burn, runway, and revenue.
• Maintain a clear picture of major expense categories.
• Track how actual spending compares with your plan.

If you find that you’re constantly correcting past periods before you can answer basic questions, a bookkeeping cleanup may be worth doing.

Founders are often outsourcing their bookkeeping at or before the seed stage, since bookkeeping often starts to take up more founder time, transactions become harder to manage consistently, and fundraising increases expectations for financial reporting. By outsourcing bookkeeping, you can delegate time-consuming reconciliations, categorization, and routine reporting to an expert, while keeping visibility into the numbers.

By Series A, a startup’s books are likely feeding into forecasts, board materials, tax work, and investor reporting. A growing SaaS company, for instance, may need to account for annual contracts, deferred revenue, prepaid expenses, accrued expenses, accounts receivable, or activity across multiple entities. Those items require more judgment than simply assigning a transaction to a category. So, having a reliable monthly close process in place is especially valuable at this stage.

During this stage of business, you’ll likely need to:

• Produce P&L, balance sheet, and cash flow statements.
• Track monthly and year-to-date actuals.
• Measure budget vs. actual performance.
• Monitor burn and runway.
• Track revenue and recurring revenue metrics.
• Maintain cash forecasts.
• Be able to clearly explain any material variances.

Eventually, growing startups will need to decide when to move from cash to accrual accounting.

Here are the basics of each method:

• Cash basis accounting: With cash basis accounting, revenue is recorded when payment is received and expenses get recorded when they’re paid.
• Accrual accounting: With accrual accounting, revenue and expenses are generally recorded in the period in which they’re earned or incurred.

Take this example: Say a SaaS company that collects $12,000 upfront from a one-year subscription. With cash accounting, the company would record $12,000 of revenue when the payment arrives. With accrual accounting, the company would spread the revenue across the service period, which can give management and investors a clearer view of performance. Here are two signs that it could be time to switch to accrual accounting:

• You need a better picture of monthly performance. Accrual accounting can be especially useful once payment timing starts obscuring how the business actually performed in a given month.
• You need more clarity on revenue, expenses, or profitability. There’s no reason to switch simply because accrual sounds more sophisticated. But if cash timing is beginning to distort how you see revenue, expenses, or profitability, the added work may be worth it.

For a fuller comparison of these accounting methods, read our guide to cash basis vs. accrual accounting.

A founder of a pre-seen company might handle basic bookkeeping with help from an accountant at tax time. Later, it might make more sense to hire an outsourced bookkeeper to take over reconciliations, categorization, accounts payable, and monthly reporting. As your company becomes more complex, you may need to hire an outsourced controller or a fractional chief financial officer, or it could be time to make your first internal finance hire.

If you’re figuring out how to evaluate outsourced bookkeeping providers for startups, look beyond price. To evaluate external bookkeeping partners and gauge whether someone is a good match, determine whether they understand SaaS revenue, accrual accounting, your accounting software, and investor reporting. Find out who will work on your account, what their monthly close process looks like, and how they typically handle unusual transactions or questions.

Automation can also help. Modern tools can reduce the need for manual categorization, receipt chasing, and reconciliation work, but they don’t eliminate the need for human review or accounting judgment. AI bookkeeping works best with clear controls and human oversight.

A useful rule is to build one step ahead of the financial complexity you can already see coming for your startup. This will help you develop enough structure to run the company well without adding processes you don’t need yet. Following this guideline will help you be ready when the next fundraising process, board meeting, or major decision arrives, since you’ll already have numbers you can trust.

Ready to set your startup up for bookkeeping success? Mercury’s integrated financial tools help you keep your books clean the busywork.

^{This article is for informational purposes only and does not constitute legal, tax, investment, or financial advice. Founders should consult their own legal and financial advisors before making important financial decisions.}