Starting a Business? Why You Need to Know Accounting
Accounting is one the most commonly outsourced competencies in small business. Busy entrepreneurs either don’t want to spend the time or aren’t confident in handling the books and decide it is easier to have an in-house bookkeeper or professional accountant in charge. It is also very common for these same entrepreneurs to pay dearly for that decision.
Accounting is the function that records the financial history of the business. Managed correctly, it provides an accurate record of money in and money out, such that it is easy to identify many internal problems through the financial reports produced by these records. Managed incorrectly, it is a waste of time, a misleading mess of false information, and potentially the difference between the ultimate success or failure of the organization.
Like any other profession, there are certainly tricks of the accounting trade that are best managed by, well, the professionals. But the fundamentals of accounting should be familiar to every entrepreneur. The way your books are set up and the accounts that are used to track income and expenses should be well known to the business owner, such that you could take over the tasks if necessary (or at least train a new bookkeeper).
The position of bookkeeper in a small business is the number one opportunity for embezzlement…and don’t assume that just because your bookkeeper is “like family” that they won’t rip you off. It happens all the time. There are a million reasons that people skim cash from their workplace, and not all of those folks are hardened criminals. The best way to avoid any potential of employees or contractors stealing from you is to understand what is going on with your accounting system. Embezzlement is far easier for an employee or outsource professional who holds all the cards…don’t let someone else set up and manage your books on their own. At an absolute minimum, sit side-by-side with your bookkeeper or accountant while the accounts are established and make sure you absolutely understand every line.
In addition, accounting must be completely accurate to be useful. In many cases, business owners rely on periodic financial reports from the bookkeeper to assess the health of the venture. However, if the books are not kept correctly (all entries correctly assigned to appropriate categories, entries checked for accuracy), the reports are completely useless. And, should you need to secure second round financing, you could spend up to thousands of dollars to hire an accountant to clean up the books before a bank will even talk to you.
There are all kinds of horror stories that start with the business owner relinquishing all responsibility for their own accounting system. Embezzlement is a common one, as are tax problems and employee issues. One business owner in Chicago learned the hard way not to trust others with every detail of his accounting system. After 13 years in business, his home theater installation venture was growing at a steady pace. When the recession hit, the owner reviewed his financial statements and was confident the company would weather the economy.
Unfortunately, the professional, national, accounting firm he hired had classified his future contract sales as current sales…so when people started to cancel their orders, the company was in a serious cash crunch. Had the owner understood that the income category reflected money that was not actually in the bank, he likely could have taken steps to handle the reduction in work. Instead, he relied on the accountant’s reports until it was too late. He was forced to let his staff of 20+ go…some without their final paychecks. He lost his business, he lost his house, and he learned a painful lesson. Had he taken the time to at least assist in setting up the company’s accounting system at the start, there would have been no confusion as to what the numbers on the report actually meant.
Though many entrepreneurs are eager to dump those pesky accounting tasks off to a bookkeeper as early as possible in the startup process, it is a mistake that can turn in to a venture-closing devastation. Protect your future and keep control over your business by learning the basics of your accounting system from the start.
About the Author
K. MacKillop, a serial entrepreneur with a J.D. from Duke University, is co-founder of LaunchX and authors a blog focused on starting a business. Visit LaunchX.com to learn more about the LaunchX System, a complete business startup kit that helps you learn the business basics while starting a business.
For additional information about our Kehr Law, our practice areas, or our services please visit us at www.kehrlaw.com or contact us by telephone at (619) 400-4942 or via email at dan@kehrlaw.com.
