Is Once per Year Bookkeeping a Good Idea?

Q: Another provider is telling me that I only need my bookkeeping done once, at the end of the year, so that I can do my taxes. What do you think about that?

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A:

We definitely see why this is tempting—who doesn’t like to save money? But we have to strongly recommend against it, for a few reasons:

Most pragmatically: you’re very likely going to need your books more than once a year, and the last thing you’re going to want is a fire drill when someone asks and you don’t have them.

In particular, especially these days, the vast majority of investors are going to ask for financial statements from you before they invest. You shouldn’t expect to get several quarters or years of bookkeeping done on very short notice—that work takes real time—and you absolutely don’t want this to be the thing that prevents someone from giving you money.

There are some tactical considerations as well: do you want to issue options to employees? Options require a 409(a) valuation, and a 409(a) valuation generally requires financial statements. Same for some commercial leases and partnership agreements.

More importantly, if your books aren’t regularly up-to-date, you risk not having any visibility into the health of the business. Where am I actually spending money? What’s my burn rate? How much runway do I have?

These are the sorts of things you should have a firm grasp on, monthly. We don’t recommend DIY on your accounting for a variety of reasons, but we like the idea of “flying totally blind, checking once a year” even less.

The root of the issue is really this: there’s a tension for brand new companies. Getting into place a solid financial back office that covers your bases, getting taxes filed, and positioning you well for the future isn’t cheap: it’s probably in the ballpark of $5-10k/year. And that can be more than the company initially wants to pay.

The mindset we’d encourage you to have on this is the same one you’d use in any other aspect of your business: select a quality long-term provider who will follow best practices and who will serve you well for years, rather than choosing the person who names the initial lowest number.

As an example: if you’re selecting a first software engineer,  you should pick someone who you think is going to be really great—perhaps because they have a great track record—and you should pay them the market price for their services. Hiring the engineer who names the lowest rate, or has a story for why they’re going to be so much cheaper than everyone else, is basically never the right answer.

Again, we want to acknowledge why this mindset is hard—and why it’s especially hard for first-time founders, who tend not to have much experience with the finance or back-office sides of the business. (Interestingly, we find that second-time founders tend to have a much greater appreciation of this being the right approach.)

On the topic of “once a year” accounting, specifically: in addition to the points we mentioned above, there’s one comment we’d encourage you to consider. The discipline of accounting has existed for a very long time, and there are many accounting firms in the world, serving a huge variety of companies. “Once a year” flat-rate accounting arrangements are very uncommon across the industry, and some reasons are:

• There aren’t huge (~3x) efficiency gains associated with putting off the work until the end of the year—delaying it doesn’t magically cause it to be significantly lower-cost
• There can be complications from getting so far behind on the work—information can be lost with time, delayed access can mean that things you’d like to know about go unnoticed for a long period of time
• The average company—including very tiny small businesses—tends to conclude that they want their financial records in better order than this, which is why this offering isn’t commonplace.

Said another way: if this were really a better approach, it would be an industry-standard approach. Our experience is that when something feels a bit too good to be true, it probably is.

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