There are 3 key accounting functions that almost all small businesses have to manage
Billing (and receivables)
Payroll (if you have employees)
Bookkeeping (and consumption taxes)
The conventional wisdom is that all small businesses should invest in traditional management information systems to enable effective management control. That assumes that management can (or indeed should) effectively interpret traditional management information systems.
In most cases management needs to think about these functions begins the doors open. That means they’ll need to figure out who’s going to do the work – and when – pretty quickly.
However for many pre-revenue startups, traditional management information is of little or no value. Instead management will need to continuously develop metrics specific to an evolving minimum viable product. They will need to manage their cash – but (inaccurate) monthly financials aren’t much more useful than keeping an eye on your bank.
for managing your cash, monthly financials are expensive and not as useful as keeping an eye on the bank
For service-oriented startups the focus should be on getting the work, getting it done, getting the bills out and getting paid as quickly as possible. If you can’t do that – nothing else matters.
if you’re bootstrapping and you can’t get bills out and paid quickly enough – nothing else matters
While the payroll and bookkeeping can – and perhaps should – be outsourced, it’s my view that a new business should keep the billing and collection functions in-house. For any business – but particularly for a new business – the relationship with your customers is very intimate. Outsourcing the billing function is rather like getting someone else to date a prospective spouse and report back to you afterwards.
Thankfully the billing function is somewhat less complex than the payroll and bookkeeping functions. What’s more there are inexpensive (‘free’) and functional online billing tools available. You will be required to learn which sales taxes are applicable to your particular goods and services, and what exemptions may be available to your customers.
While you might need to seek professional advice on sales taxes, the variety of goods and services offered by most startups (other than in the retail or wholesale trades) is fairly limited and often less complex from a taxation perspective.
While payroll for most startups isn’t that complex, in my experience startups often have difficulty complying. Staff must be paid on a regular basis – they have rent or mortgages to pay – and entrepreneurs are often too distracted to issue pay cheques on time. In Canada, employee source deductions for a particular month must be paid on the 15th of the following month.
Too often entrepreneurs fail to pay source deductions on time. This then results in penalties imposed by the tax authorities. What’s more they often don’t calculate source deductions properly or keep records of how deductions were calculated. This results in extra work for the bookkeeper or the accountant at year end – and frequently can trigger a payroll audit.
If there is an experienced person on staff – or at least someone who is sufficiently detail-oriented and prepared to take on the responsibility, payroll can be done effectively in-house. Usually the CPA or the bookkeeper can help with the annual filings.
The notion that bank transactions can be imported directly into accounting software is incredibly compelling for most people. Add to that the notion of integrated payroll and invoicing, and many entrepreneurs understandably believe that an online accounting package is the right answer for their company.
It certainly sounds right!
Software publishers would have us believe that accounting can be done by anyone quickly and simply using their software – that simply isn’t true. It takes an experienced person to take on the bookkeeping function effectively.
Why is accounting software complicated?
Professional accounting software is based on concepts of double-entry bookkeeping first described by an Italian mathematician in 1494. The algebra is simple, there are only 2 underlying equations. Somehow though, it ends up confusing people unless they use it continuously.
CPAs that work with very small businesses learned long ago to teach their clients cash-basis accounting. It is very easy to tell if cash basis accounting has been done accurately and most of their clients understand it easily.
Simply put “converting accurate cash-basis accounting to an accrual basis is much easier than discovering errors in a double-entry system written up by an inexperienced (or disinterested) bookkeeper.”
Inexperienced staff can certainly learn to take on that function – however the company will need to invest in training. Often that investment takes the form of much higher year-end accounting fees until the bookkeeper finally figures it out, or gets replaced by someone that does.
Are you training the right person for the bookkeeping role?
Using simple cash-basis accounting allows in-house staff to quickly download and describe transactions in a way that the accountant can easily summarize them. We employ accounting technicians that handle this work extremely efficiently.