VenturePORT Series - Accounting and Billing
Key Issues
No matter how much or little money you have to launch your business, accounting is critical. Even if you have the luxury of some kind of accounting person to help with key issues, it helps to understand the basic principals — especially those that affect the survival of your business. In the end, it all boils down to money: Do you make it or lose it?
Probably the most important accounting concept for any start-up is cash flow. That is the concept of having at least as much cash come in as you need to run the business. That's the first goal of any company selling itself into business. Young entrepreneurs with a really big idea and good financing can afford to focus on growth and not worry so much about cash flow. Those entrepreneurs who sell themselves into business should try to break even as soon as possible.
This section focuses on what you need to know about accounting to get started in business.
[ Return to Top ]
The Essentials
Software has significantly simplified the accounting process and made it possible for any size business to have an accurate and effective accounting system. Accounting describes the process of managing your money, both from the perspective of making sure you have enough of it to generate a profit, and also from the standpoint of reporting to the government for tax purposes or to any shareholders.
Accounting consists of standardized practices for explaining and allocating different types of expenditures based on whether they are for general administration, selling, and salary expenses; entertainment expenditures (which cannot be fully deducted); and capital expenditures — purchases for equipment that you deduct or "amortize" over a period of several years rather than in the year in which the purchase was made.
Even more importantly, accounting comprises the system of billing or invoicing your customers and making sure you collect the money.
[ Return to Top ]
What You Need to Know
Here are the key concepts you should have a good grasp of under any circumstances:
Technology
Today, off-the-shelf accounting software is so inexpensive and easy to use, there's no excuse for failing to start up a sound accounting system. You can purchase software for as little as several hundred dollars. You will want to customize it to your needs, and that's where having someone with an accounting background comes in handy. The key is to set the system up so that it is as easy as possible to issue invoices, track expenses, record income, and generate the reports you need to make sure your business is on track.
Types of Accounting
From a tax reporting standpoint, there are two basic ways to keep your books.
Accrual: You apply your expenses to the months when you incurred them and your revenues to the months you invoiced or billed them. This method generally is used by companies that sell projects or services that take place over a period of time, and which generally are paid some period of time after they issue their invoices.
Cash: You apply your expenses and revenues to the months when the cash flows in or out. This method generally is used in businesses that are paid in cash for products or services that are quickly delivered, such as retail products or maintenance services.
You do not need to make this decision when you set up your accounting system, because generally it will report information both ways as long as you enter all of your transactions properly into the system.
Fiscal Year
You will need to establish a budget year that begins and ends on specified days both for planning and tax purposes. Having a distinct period of time during which to monitor your business keeps you focused and organized from almost every point of view, but it's also necessary for tax purposes. Most companies use a standard calendar year; others develop a fiscal year based on their own business cycles, usually because of unique circumstances within a specific industry.
Chart of Accounts
This is accounting terminology for the way you organize your various types of expenses. You'll want to make a distinction between general and administrative costs (G&A), Business Development or selling costs, and costs-of-goods sold — that is, whatever it costs you in out-of-pocket expenses to deliver your final product or service.
Invoicing and Accounts Receivable
The most important thing you can do is make sure you get paid. That means trying to get paid on the spot for consumer and small business services, or to get paid promptly within payment terms. Generally, your clients expect to have payment terms for general business services, but you often have to stay on top of companies to make sure they don't define terms too liberally. It can easily take 45 days or more to get paid by big companies; sometimes it's up to 90 days or more.
Thankfully, today's accounting software makes it easy to print out invoices, and even to customize them with your logo, and to keep track of the outstanding money so you can follow up until you get paid.
Depending on your business, you'll need someone for following up on past-due accounts.
Accounts Payable
Just as you require payments from your customers, so your suppliers will require payments from you. No doubt, the faster you pay, the more attention and dedication you'll get. You want to make sure that you enter all of payables into the accounting system, so that you can track, if necessary, the ratio of receivables to payables, and the amount of time you are taking to pay. You always want to be owed more money than you owe. The same software that makes it easy to manage receivables makes it easy to manage payables, including the process of printing out checks, which you can also customize with your logo and add a digitized signature.
Cash Flow
For those of you who sell yourself into business, getting to positive cash flow is job No. 1. That means having more cash coming in throughout the year than expenses going out. Some businesses only make money during the holiday seasons, but they structure their fixed costs so that those profits carry them the rest of the year. Those entrepreneurs who sell project business that bills out over a period of time can have months when on paper they have made incredible sales when in fact they have brought in relatively little in cash. When it comes to your survival, it's not only about sales, it's about how much money is left over after you have been paid.
The Balance Sheet
This document doesn't seem very relevant to day-to-day business, but it's something anyone looking over your company will want to see. It shows the assets, your accounts receivable and any other tangible property owned by the company, and your liabilities, what you owe in accounts payable and in any debt. When you have more assets than you have liabilities, you have a positive net equity or worth, which is what you want.
Making a Profit
While easier said then done, success boils down to this: Bringing in more money than you pay out in all salaries, including yourself, and in other expenses. It's not where you are at any given time of the year that counts, since you might have good periods and bad; it's where you shake out at the end of your fiscal year. You certainly want to retain income to protect you during bad times, and invest in what you need to grow and protect your business from competition.
[ Return to Top ]
Pricing
One of the key elements to making money is making sure you price your products and services properly. Obviously, you can't charge more than the market will bear, but you also have to make sure you charge enough to cover your costs. If you sell a product or service readily comparable to that of the competition, than you have to make sure you have a reason to charge a higher price, if that's your plan, or have a reason why you can charge a lower price, if you intend to compete on price.
To establish your pricing, you should start with the market. What are people currently paying to get what in return? What are they paying for comparable products and services? Then you want to look at what it costs you in "costs of goods sold" to deliver the products and services you're promising. Generally speaking, if it costs you 50 cents to deliver a product or service, you should probably charge at least $1. Why? Because, after you have covered the out-of-pocket costs of producing and delivering your product or service, you still have to pay for any salaries, office or retail space, general and administrative costs, selling costs, and have something left over for profit, retained earnings, or re-investment in improvements. You have to make sure you add an allowance for your fixed costs in your pricing, so that you cover all of the direct and indirect costs involved with delivering your product or service.
After you've determined what you need to charge, you have to make sure again that your pricing is competitive. You have to make sure that your target audience has a budget for your products and services and can justify paying your prices. Those with a unique new product and service don't necessarily have to worry about competitive pricing; instead, they have to make sure that customers are willing to create a new budget or source of funds to buy what you're offering. Those with a new twist on an already available product or service can sometimes charge more than the competition, but customers will want to understand what they get for the extra money. Those who think they have a low-cost solution to a product or service people buy every day should make sure they have a sustainable way of under-pricing the competition, because high-cost players sometimes will lower their costs to compete at least in the short run to thwart the efforts of a low-cost newcomer. It's sometimes easy for a big company to cut costs than to improve customer service or offer a unique product or service.
The safest business ideas provide a new twist or approach to something people already do, so that you have no immediate competition or your competition has to change something about the way it does business to compete. Believe it or not, it's almost as difficult for businesses to change as it is for individuals. It's not a big deal for a competitor to lower prices to put pressure on you, but you'd be surprised how difficult it is for companies to change their fundamental way of doing business.
[ Return to Top ]
What to Do When Cash Gets Tight
It may happen that your business is growing on paper at least, but that your costs are rising almost as fast as your revenues, and the cash isn't quite keeping up with the money you have to pay your vendors to keep them happy. You want to do everything you can to have a sufficient reserve of cash or a bank credit line to cover these periods, but there are some additional things you can do in a crunch period.
- Hold your own paycheck a week or two until cash looks better.
- If you have a partner, ask the same of him or her, but we would advise strongly against asking this of any other employees.
- Communicate with your vendors — don't duck anyone; be upfront and explain if you need to take more time to pay.
- Rotate the pain — if you pay one vendor particularly slowly on one occasion, favor that vendor first when cash improves, and make someone else wait when cash gets tight.
- Be proactive — call vendors before they have to call you.
- Speed up payments to the extent possible when cash flow improves.
[ Return to Top ]
Investing in Your Business
When the money starts rolling in, you will want to put some money in your pocket. That's great, but make sure you invest in the future of your business. We know of many an entrepreneur who pocketed their profits for personal use and failed to invest in hiring salespeople or other people critical to making the business self-sustaining. Many small businesses achieve success because they develop a few large clients who provide a significant amount of business and profits. It becomes tempting to put that money into the home, a car, entertainment, and fun technology, when instead you should perhaps hire another salesperson to develop a broader base of accounts, or upgrade technology or make some other improvement to make sure you retain your competitive edge. A thriving business needs the right amount of capital, just as a growing plant needs the right amount of water — not too much, not too little.
[ Return to Top ]
Who Can Help
A vibrant market of part-time accountants exists to help you get started. Many are work-at-home moms who have worked in accounting but who have left the full-time work force to raise kids. For them, it's a challenge and an opportunity to have a part-time, flexible job to help a new business get going. Generally, accounting doesn't require set hours; it requires the dedication of making sure the books are kept accurately, that invoices get promptly sent out, payables properly managed, past-due bills properly collected, etc. This can often get done from someone's home around a child's naps or school time.
Of course, you will need expert assistance with taxes, which starts with an accountant well-versed in filing taxes for your type of corporation.
[ Return to Top ]
