Why Accounting Info Matters
By Dave Costello, TCV Growth Partner -
Okay, I get it! You are the owner of a new business, a startup, or have been in business for a short period and your number one goal is survival! You have a million things coming at you each day that are more important than accounting. So you’re thinking - Can’t I just keep the checkbook current and that’s good enough? Well, the answer is, it depends.
If you are the only employee and don’t have inventory or equipment to buy, send out only a handful of customer invoices each month and expenses are mostly distributions to you as the owner then that may be all you need.
However, if you have employees, are billing a growing customer base regularly, are buying inventory, equipment or other supplies or paying vendors for various purposes then you probably need something more substantial than a checkbook accounting system. There are multiple on-line accounting programs for small businesses that range from about $10 a month and up, depending on the complexity of the business and your needs. Beyond that, there are outsourced bookkeeping companies that can take your transactions and process them for you in an accounting platform they use. These companies often offer the ability to scale with you as your business grows.
My advice is to think longer term than this week or this month, and here’s why.
Access to Credit
If you expect that your company will grow and you will eventually need access to bank credit products, whether a line of credit backed by accounts receivable or a real estate financing transaction, you will be well served to be able to provide historical information for at least a few years about your company. The bankers you talk with will expect a fairly organized presentation of information to include balance sheets and income statements for the last couple years, personal and business tax returns, and some discussion of your future plans and expectations as well as organization and ownership of the company. A checkbook accounting system will not provide such information.
Banks expect to be paid back. After all, for the most part they are lending you money deposited with them by their customers. There are numerous regulations banks also must satisfy in order to maintain deposit insurance for their deposit customers as well, and banks are not going to risk violating them by making unnecessarily risky loans. The underwriting process the banks use is to assess your ability to pay them back based on your business operations - they get this information from statements generated from an accounting system
Investor Pitches
As your business grows you may want to accelerate growth by bringing in investors. There are many classes and types of investors and almost all of them will want to see what kind of financial history you can show, similar to the banks information requests.
Investors have varying reasons for making investments in your business as well. At the end of the day you will have to demonstrate how you will provide a return on their investment and show how your product or service will be widely accepted and purchased in the marketplace. Additionally, you will need to demonstrate that your expected pricing and control of costs will generate sufficient profits to enable that return to investors. Therefore you will likely be asked to provide forecasts of future financial performance. It is much easier to project from a base of actual results making certain assumptions about the future than it is to show results and forecasts using a checkbook accounting system.
Knowledge of the Business
When first starting a small company it is easy to understand how the business is doing because the number of transactions are relatively small. However, as your business grows it becomes more and more difficult to comprehend the status with the increased number of transactions, customers, invoices sent, vendors and employees to pay, etc. A checkbook accounting system is not going to provide the information you will need to effectively and efficiently manage the business. As I learned in business school, accounting is the language of business.
An accounting system will enable you to KNOW the trend of revenues, costs to generate revenue, gross margins, fixed and variable expenses if appropriate, profitability and more. If you have more than one line of business you can set up accounting systems fairly easily to provide the same information for each line of business. If you are relying on customer receipts to fund the business, having information about your accounts receivable and their aging (ie, how long the invoice has been outstanding) is crucial. You certainly don’t want to continue to provide services or sell products to customers who haven’t paid you for what you have already delivered! If you have a bank line of credit collateralized with accounts receivable they will also be keenly interested in your accounts receivable aging, so the need to manage that aspect of the business becomes very important.
I understand the business owner is not typically trained in accounting. But there are a significant number of tools the owner can access to help provide this information in a relatively inexpensive way. And having the information will make you a better owner because you will have a better understanding of the business.
Final piece of advice: hire experienced professionals to assist you. This can also be accomplished in a cost effective and efficient way. The experienced professional will see things in the accounting information very quickly whereas it might take an untrained eye a bit longer and lead to mistakes in decision making. If you need help getting an handle on what accounting information you should track, contact TCV Growth Partners.