Wednesday, December 14, 2011

Accounting, Part 1

So you've started a business. Great!

The fun part is accounting. Well, ok, it's not really fun. But it can be painful or not painful depending on the habits you develop and some choices you make early on.

DO IT YOURSELF OR OUTSOURCE?
It depends. You'll hear me say this occasionally if we ever work together: there are high-value applications of your time and low-value applications of your time.

If building product is the best application of your time, you should focus on that. If selling product is, do that as much as you can. If rallying team members is, then that's your gig.

DO IT YOURSELF
Here's my loose rule, after 20 years of building businesses (including my band): start by doing your own accounting. Set up your own chart of accounts, do your own data entry, write your own checks (or print), send out invoices, collect receivables--do the work.

You'll know your business a lot better, you'll understand your cash flow, you'll understand your expense requirements, you'll deeply know the impact of hiring someone and the costs above salary/wages. You'll know your stuff.

That knowledge will serve you well as you scale the business, raise capital, plan the future, and develop the slush fund. (oops...).

FRAUD
Speaking of slush funds: when you hire an office manager or bookkeeper and assign accounting to them, do a background check and learn a bit about preventing and detecting fraud. For some reason, Lancaster County has had a string of crazy fraud cases, just bad, bad, bad stuff.

One method of committing fraud is through the chart of accounts. Someone with access to the Chart of Accounts can create fake (or real) vendors, and write small checks to them that add up over time.

If you have a lot of vendors, it becomes tougher to detect. I have a friend who was ripped off to the tune of $250,000. Small business. $250k. Amazing. He's 65. Trusted someone for years, didn't manage/control the chart of accounts, and didn't notice where the leaks were.

THE CHART OF ACCOUNTS
It's been a while for me, so I'll keep this brief: set up a reasonable list of categories for organizing your income and expenses. Do this with reports, charts, and graphs in mind. What do you need to know? What do you want to be able to see at a glance?

For example, let's say you spent $5k on marketing in October. Is it enough to have a single line item--Marketing? What does that tell you when you run your report? Not much.

Break it down to its component parts: Google Adwords, Email Marketing, That stupid direct mail thing that never worked, Blog Ads.

And then break those down too if it matters. Which ad? Well, that might be too granular and is better for your marketing reports, rather than bogging your accounting down with that level of granularity.

SOFTWARE
Don't get fancy. Buy Quickbooks and expect to use it for a long time, unless you grow past, oh, 100 people. Really. You don't need NetSuite or some other overloaded SaaS designed for larger companies with supply chains, and it will suck the lifeblood out of you. And your cash. Lots of it--to consultants.

I haven't tried QuickBooks Online for a while, but I'd simply get the desktop software. Your accountant knows how to use it and can import your file easily.

Today is Moving Day number 2--moving into a place downtown--so gotta wrap this up. I'll write more over the coming weeks.

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