How to Clean Up Messy Startup Books Before Fundraising (And What Investors Will Find If You Don’t)

You’ve received a term sheet. The investor says they want to see financial statements covering 18 months, and your stomach sinks. Chances are your accounting records aren’t as organized as they should be.

This happens more often than most founders realize. The good news is that it can be fixed. The catch is that you need to do it before due diligence begins.

Here is what inaccurate financial records actually look like.

Most founders don’t realize their books are a problem until someone asks to see them. “Inaccurate financial record” is not simply a feeling; it’s easily identified problems on a spreadsheet:

• Uncategorized transactions: expenses recorded without being assigned to the correct account or category.
• Mixed personal and business costs, like your Netflix account right beside a SaaS vendor payment.
• Unreconciled bank account: gaps in bank reconciliation that are unexplained.
• Revenue recognition: Revenue is recognized before it has been earned.

One of these is a yellow flag. All four together? That’s a funding risk factor.

Why Messy Books Kill Fundraising Deals

Your numbers are not the only thing investors take into consideration; they’re taking into account how you operate your business.

Poorly maintained financial records often signal weak financial controls. Risk is evident when financial management is poor. They begin asking themselves, ‘If the books look like this, what else isn’t being managed properly?

Doubt exists in the presence of inconsistent accounting records, even when the product is good and the traction is authentic. Doubt slows deals, and in fundraising, delays can kill opportunities.

The 5-Step Bookkeeping Cleanup Process for Startups.

Here are the steps to take before you fundraise so that this bookkeeping cleanup process isn’t a panic.

Step 1: All transactions are categorized:

Review all transactions for the last 12-18 months and determine where each transaction belongs, such as payroll, software, marketing, cost of goods sold, etc. This is extremely meticulous but is the groundwork. An accurate profit and loss statement will not be possible without the categorization of data.

Step 2: Bank Reconciliation:

For each transaction in your accounting software, find the matching bank statement on a month-by-month basis. This will detect duplicate records, missing records, and totals that are not matching. Bank reconciliation confirms that your accounting records match your bank statements.

Step 3: Separate Personal and Business Expenses:

All personal expenses that have come through your business account must be identified and accounted for either as a reimbursement or reclassified. Mixed finances are a warning sign for investors and a headache for auditors.

Step 4: The next step is to resolve the issue of revenue recognition.

Revenue should be recognized when it is earned, not simply when cash is received, in accordance with applicable accounting standards. For SaaS businesses, deferred revenue should be recognized over the period the service is delivered rather than recorded as revenue upfront. This is very critical for investors’ analysis.

Step 5: Create an accurate profit & loss and balance sheet (statement of financial position) 

After categorizing, reconciling, and correcting your transactions, print out a profit & loss statement and a balance sheet. These are the two documents that will be the first in line for every investor. They should be clean, regular, and easy to read. There should be no need for footnotes to explain the anomalies.

How Long Does a Bookkeeping Cleanup Actually Take?

With professional assistance, a 12-month cleanup takes 2–4 weeks if properly done. Based on our experience helping startups prepare for fundraising time and again as startups get ready to raise.

Attempting to work out the issues alone, while operating your business, is likely to be much longer and may be incomplete. Cleaning up is typically cheaper than a delayed or a dead deal.

What Happens If You Don’t Clean Up Before Fundraising

Investors can easily see the dirty books. They’ve seen hundreds of startup financial records during due diligence. They understand what clean means and what is hidden when it’s not clean.

The outcomes vary, but none of them are good:

• They feel they need more time, and it goes on for months and months.
• They may reduce their valuation because of the additional perceived risk.
• They pass entirely and tell others.

Most founders have found themselves in this circumstance due to the empathetic truth: they were more interested in the business than the books. That’s understandable. However, it needs to be addressed before the money talk begins.

The bottom line:  Not only do accurate records improve fundraising outcomes, but they also give you the confidence to sit across the table from an investor and not flinch when they ask to see the numbers. That confidence is often more valuable than a polished pitch deck.

Need a little help with your books? 8cast offers bookkeeping cleanup for startups preparing to raise funds. Call for a free consultation; we’ll inform you what you need to do and how soon we can do it