You Don't Know What a Ledger is For
You think you do, but you don't
You don’t know what a ledger is for.
You think you do, but you don’t. You’re aware that ledgers “keep accountants happy” and that “keep track of money across the business.” But your company has been doing just fine without one, so it’s not entirely clear why all of a sudden it would need one.
If you don’t know what a ledger is for, then having one is pointless.
Not knowing what a ledger is for has disastrous consequences, whether you’re a manager or an executive. Managers who don’t know what ledgers are for can’t get their projects approved; executives who don’t know don’t what ledgers are for build ineffective ones.
Vague awareness of what a ledger is for isn’t enough. Only when you know precisely how a ledger fits within the context of your business, the project gets approved, the engineers understand the goal, and the resulting system is very effective, unlocking new avenues of growth and better financial planning and analysis.
But you don’t know what a ledger is for.
Let’s change that.
This is The Payments Engineer Playbook, the only newsletter on Earth tailor-made for engineers of money software. Every week, more than 2,000 subscribers from companies like Stripe, Coinbase and Modern Treasury get a dive deep on how to build software that moves money around. Not to pass interviews, but to do their job exceptionally well.
When money is on the line, stakes are sky high and the margin for error is razor thin.
In The Payments Engineer Playbook, we investigate the technology that transfers money. All to help you become a smarter, more skillful and more successful payments engineer. And we do that by cutting off one sliver of it and extracting insights from it.
Here’s what you can expect in today’s article:
Why ledgers suddenly go from pointless to top priority at many startups
The Accounting-Engineering tension at the core of every ledger
Why all ledgers have to fulfill at least one of 4 use cases
How to know if your company needs one
Enough intro, let’s dive in.
Money is a Skill
Mone requires judgement, accuracy, and ownership.
Knowing how much you have in the bank is good, but not enough. The skill of money means acquiring the capacity to understand how money was used in the past, what insights to gather from that usage now, and how to make the most of what you have in the future.
In other words: the skill of money is about cash flow, budgeting and ROI. And these subskills are built incrementally.
In the beginning, startups don’t require ledgers at all, because the only metric that matters is “the runway”. Just as airplanes need a runway of a minimum length to take off, startups must have enough cash to reach Product-Market Fit. The only money skill that matters at this stage is “how much time can I buy with the expenses I have right now?”.
The 70 percent of startups that don’t get to achieve PMF don’t get to build a ledger either.
The startups that live to tell the tale face a more sophisticated money problem: how to make the most with what they have. Past survival, every post-PMF startup’s CEO has to allocate their money in such a way that the company achieves explosive growth. Sales are no longer founder led, employees cannot simply “do things that don’t scale”, and engineers have to titrate up the software used to satisfy customers’ needs.
Given the opportunities opened by product-market fit, the money skill that matters is “how much money do I allocate on each opportunity to achieve the most growth?”.
This is the part where, all of a sudden, knowing where the money goes, and what for, becomes necessary. And, depending on the complexity of the money flows, whether having everything on a spreadsheet will cut it, or whether a fully-fledge system is required.
What ends up happening is often a mix of the two: money inflows are tracked in a PSP dashboard, and the codebase preserves some data regarding transactions on their database, with some basic reporting built on top. This is good: the last thing you want is to waste everybody’s time getting strict with your finances at the expense of the startup’s actual goals.
However, there’s a point when startups can no longer ignore their finances anymore, because profit starts to become as important as revenue. Past a threshold, and every startup has it, ROI suddenly creeps into every conversation with investors.
Growth isn’t just the only thing that matters. And, by then, if you don’t have a ledger in place, you’ll be falling behind.
The Accounting - Engineer Tension
At scale, there’s a tension between correctness and edge cases.
When a company starts handling a large volume of transactions, across multiple accounts, currencies, or business units, tracking balances manually with a spreadsheet becomes inefficient, error prone and opaque. At that point, a ledger system provides a structured, auditable way to record everything money-wise, ensuring accuracy, clarity and compliance.
Some companies never reach this stage though. That’s why most of us don’t need a ledger to manage our finances: there’s X amount in the bank, we know the outstanding credit card debt, and your precise portfolio balance doesn’t really matter in your daily life. In simpler businesses with few accounts and minimal volume, building a ledger is unwarranted.
If a spreadsheet is enough, use a spreadsheet. Ledger adoption is a matter of timing and scale.
Spreadsheets work because they’re simple, and simplicity is a great tool for correctness. Having your finances right in front of you is the best way to spot errors and missteps. It is not the lack of features what makes a spreadsheet inferior to a ledger system. Rather, it is the complexity and the scale of the business that makes a simple, but human dependent tool, unwieldy.
This is the tension between the Accounting and Engineering systems within the ledger: accounting is focused on correctness and precision; engineering is focused on scale and throughput. A ledger system provides (and demands) both. If manual work at low scale is sufficient, choose the spreadsheet.
This tension is also the biggest reason why ledgers don’t get adopted until late: its necessity is felt by accountants, not engineers.
When to ditch the spreadsheet and build a ledger
Here’s a good framework for deciding whether to build a ledger for your company:
1. Transaction Volume: Your company is approaching 1,000 transactions per month
2. Audit Readiness: Your company takes around around 40 hours of man-work to close the book for the quarter.
3. Error rates: Your company consistently has at least 1 percent discrepancy rate (as in “1 in 100 transactions aren’t correct down to the cent).
4. Reconciliation Effort: Your company’s finance team spends 20 percent of their day in reconciliation.
5. Forecasted Growth: Your company’s transaction volume is projected to grow more than 50 percent in the next year.
These indicators are different manifestations of the same need, and often reinforce each other. They’re symptoms of scale, and signal that your company will soon need a more rigorous approach to its finances.
A ledger isn’t an accounting tool
Ledgers aren’t compliance checkboxes.
A ledger is a system that builds the skill of money in your company. In the beginning, it may look like a ledger answers the question “where did money go?”.
But the trick is that, when built correctly, a ledger ends up answering “where should money go next?”.
Startups that treat money as a skill build ledgers slightly before they need them. Their executives are aware of the usefulness of spreadsheets, but can look into the future and see the necessity for budgeting and ROI conversations.
In other words: they see beyond revenue growth, and the inevitable refocus to profit.
This is it for this week in The Payments Engineer Playbook. I’ll see you next week.