09/10/2018
Start-ups(new companies) are an integral part of a vibrant economy. They contribute significantly (disproportionate to their size) towards new idea creation, new technology and exciting products and services. Since Start-ups work in an environment of low resources and limited funding (generally), all their focus is geared towards the core activities of a business. This could be either sales or marketing or research and development.
Support functions like accounting, IT, and HR are usually make-shift arrangements or ignored completely. However accounting is one function that can be ignored at one’s own peril. Good Accounting is the means to a greater end- informed decision making and better controls. A good set of accounts can give valuable insights into- how assets can be utilized, how sales can be analyzed, how expenses can be managed, how working capital can be improved and inventory be streamlined better.
For example, an accounting system of an equipment manufacturing company that generates sales trends for different income streams(different sales types) can lead to useful insights like service revenues are growing faster than product sales(though on a smaller base). Similarly, it can probably also show that service revenues are far more profitable than product sales. Hence the company can work towards selling more service contracts (and subsidize the equipment sales). Accounting system can give you more information that just how much money your firm makes!
Given the importance of accounting systems in decision making, its’ important that an entrepreneur always works towards establishing better accounting systems in his/her company , right from the early days.
I have listed below the five guidelines for start-up accounting:
1. Buy for the near-future rather than the present
Choose an accounting package that can not only meet your immediate needs but also handle the expected growth in near future. I have seen many companies use a basic version of accounting software, only to spend much more money doing a tedious migration to a larger software after some-time.
Thumb-rule- buy a accounting software which is one version higher than the version that just meets your current needs.
2. See your accounting costs as an investment, not as an expense
Most start-ups use a semi-qualified internal member or an over-worked part-time accountant to maintain their accounts. The perceived simplicity of popular accounting software also makes company owners wrongly believe at a non-qualified data entry person or semi-qualified accountant can manage accounts. These strategies can back-fire frequently and substantially! I have handled many such assignments where the expenses are all messed up and entered in hundreds of different accounts, assets are booked as expenses and owner’s personal expenses are mixed with business expenses. The effort and costs of this post-mortem correction is substantially greater then the time taken to create a new set of accounts.
A good set of accounts from the initial days goes a long way towards managing things when the big growth happens. They also help a start-up keep tab of its most precious asset- its cash-flows!!
3. Spend time with your accountant to chart out a good accounting system
Areas include creating a structured chart of accounts (accounts lay-out), establishing important internal sales, purchase, payments and expense reimbursement procedures. Setting up a chart of accounts is a very important accounting activity for a start-up. Poorly created chart of accounts with insufficient/duplicate/multiple expense accounts create a big head-ache (and a costly accounting prescription to fix it).
Plan out the revenue items and accounts, expense items and accounts (and sub accounts), and handling of company/personal transactions clearly. It helps to create a check-list and ask a lot of questions. For e.g. do you need to track freight(transportation) along with cost of goods sold/purchases (a direct input cost) or as a general expense(indirect cost), do you want to book rep commissions under sales or as expenses, do you want to track sub-contractor expense separately or under direct costs. You may have to go through a few iterations before you arrive at a good fit.
4. Don’t do yesterday’s accounting the day after!
Many start-ups handle accounting on a rewind/flash-back mode. They realize a few weeks/month before the tax-deadline that their books are only a set of papers and bank statements that have not been touched for quite some-time. This results in a last minute dash to book everything and somehow create a set of financials for the tax-preparer to work on. This hurried processing can result in costly omissions and errors. For e.g. expenses are hurriedly dumped in some general accounts with little memo/additional information keyed in. Many of these expenses could be tax-deductible but your tax-preparer wouldn’t know till he sees them!!. He is very likely to miss them in the maze of the general/dumping grounds(accounts).
5. Establish reporting signage in your business highway
Reports are like a dashboard in a car. They can serve multiple purposes. A Cash-flow report like a fuel gauge indicates when cash is running out, income statement like the speedometer tells us whether there is momentum in the business and balance sheet is like an odometer tells us the complete story so far!.
