By Krisca Te
You’re probably in an accounting mess if you’re reading this article.
I mean, no entrepreneur dreams about crunching numbers. No, we dream of creating the next iPhone, the marketing, the office design, the company culture, and recruiting talent.
But who would willingly spend their time thinking about invoicing and tax, right? It’s only when the sky comes crashing down do we look at the numbers.
I get that. As an entrepreneur, you want to make your first dollar before you worry about these things. But here’s the thing: accounting is a cascading function. If you don’t get this month right, there’ll be more to do next month. The problem will only grow.
So here’s my first tip:
The most common pitfall start-ups businesses make when it comes to accounting is a lack of integration. What’s integration?
Well, it’s when accounting, like product development and marketing, is part of the business processes, not separate from it. It’s not done once a month, or worse, once a year. It’s not an afterthought after a marketing campaign.
You do it every single day. And you ask your team to do it every single day. Here’s the problem though: you guys don’t have time to do all that. What do you do then?
That’s part of integration: it has to be easy to do. If you want to launch an Adwords campaign, do you need jump through hoops (like going through Google’s user manual) to do it? Of course not.
The same is true with accounting. A cloud based accounting software, like Wave Accounting, can do that for you. It’s not as complex as say, MYOB, but it keeps the correct records a spreadsheet can’t do.
2. Understand The Basics
Now that you have the data, you need to understand the basics. You need to know how to interpret those numbers and know what questions to ask.
For example, what are the basic documents you need? (Income statement, Balance sheets and Cash Flow Statements) What is the purpose of these documents? What is a liability? What’s the difference between cash and asset?
Are those documents even useful to a start-up? And if not, what do you need? These are topics for another time.
3. Credit Terms
I can’t tell you how many times an entrepreneur thought he’s going great, only to realize that he’s actually broke – a classic scenario where the bottom-line is showing a profit, but the business doesn’t actually have any cash to pay its bills.
An established business can offer their customers credit (pay nothing for 30 days), but as a start-up, you may not be able to. Making a sale is not the same as making money.
As a rule of thumb, you want to be paid as early as possible, even before the goods are delivered. For example, subscription based services (magazines, software, gym memberships) frequently give customers who pay 1 year in advance a discount to maximize their cashflow.
With the invoices you need to pay, the rule of thumb is to delay them for as long as you can (unless there’s significant discount to pay early).
You can then use the difference between the amount you collect in advance and the delayed payments to do something else in the business – like expand and advertise.