I'm making up the curriculum for MBA Mondays on the fly. The end game is to lay out how to look a businesses, value it, and invest in it. We started with the time value of money and interest rates, we then talked about the corporate entity. Now I want to talk about how to keep track of the money in a company. That is called accounting. This will be a multi-post effort and will include posts on cash flow, profit and loss, balance sheets, GAAP accounting, audits, and financial statement analysis. But before we can get to those issues, we need to start with the basics of accounting.
Accounting is keeping track of the money in a company. It's critical to keep good books and records for a business, no matter how small it is. I'm not going to lay out exactly how to do that, but I am going to discuss a few important principals.
The first important principal is every financial transaction of a company needs to be recorded. This process has been made much easier with the advent of accounting software. For most startups, Quickbooks will do in the beginning. As the company grows, the choice of accounting software will become more complicated, but by then you will have hired a financial team that can make those choices.
The recording of financial transactions is not an art. It is a science and a well understood science. It revolves around the twin concepts of a "chart of accounts" and "double entry accounting." Let's start with the chart of accounts.
The accounting books of a company start with a chart of accounts. There are two kinds of accounts; income/expense accounts and asset/liability accounts. The chart of accounts includes all of them. Income and expense accounts represent money coming into and out of a business. Asset and liability accounts represent money that is contained in the business or owed by the business.
Advertising revenue that you receive from Google Adsense would be an income account. The salary expense of a developer you hire would be an expense account. Your cash in your bank account would be an asset account. The money you owe on your company credit card would be called "accounts payable" and would be a liability.
When you initially set up your chart of accounts, the balance in each and every account is zero. As you start entering financial transactions in your accounting software, the balances of the accounts goes up or possibly down.
The concept of double entry accounting is important to understand. Each financial transaction has two sides to it and you need both of them to record the transaction. Let's go back to that Adsense revenue example. You receive a check in the mail from Google. You deposit the check at the bank. The accounting double entry is you record an increase in the cash asset account on the balance sheet and a corresponding equal increase in the advertising revenue account. When you pay the credit card bill, you would record a decrease in the cash asset account on the balance sheet and a decrease in the "accounts payable" account on the balance sheet.
These accounting entries can get very complicated with many accounts involved in a single recorded transaction, but no matter how complicated the entries get the two sides of the financial transaction always have to add up to the same amount. The entry must balance out. That is the science of accounting.
Since the objective of MBA Mondays is not to turn you all into accountants, I'll stop there, but I hope everyone understands what a chart of accounts and an accounting entry is now.
Once you have a chart of accounts and have recorded financial transactions in it, you can produce reports. These reports are simply the balances in various accounts or alternatively the changes in the balances over a period of time.
The next three posts are going to be about the three most common reports;
- the profit and loss statement which is a report of the changes in the income and expense accounts over a certain period of time (month and year being the most common)
- the balance sheet which is a report of the balances all all asset and liability accounts at a certain point in time
- the cash flow statement which is report of the changes in all of the accounts (income/expense and asset/liability) in order to determine how much cash the business is producing or consuming over a certain period of time (month and year being the most common)
If you have a company, you must have financial records for it. And they must be accurate and up to date. I do not recommend doing this yourself. I recommend hiring a part-time bookkeeper to maintain your financial records at the start. A good one will save you all sorts of headaches. As your company grows, eventually you will need a full time accounting person, then several, and at some point your finance organization could be quite large.
There is always a temptation to skimp on this part of the business. It's not a core part of most businesses and is often not valued by tech entrepreneurs. But please don't skimp on this. Do it right and well. And hire good people to do the accounting work for your company. It will pay huge dividends in the long run.
Great post. Just a quick add: keep your accountants in accounting, where they add value, and don’t let them run the business side. Trust me on that one.
I have a different view for start-ups. Accountants can’t play a more important role in the early stage of a business’ life when cash is tight. I would totally use accountants extensively to help on the business side for a start-up just to pinch pennies and make sure the lights are kept on.For businesses on a firmer footing, then definitely balance the often micro-level focus that bean counters have with people that can see the wider picture.
Have to say I couldn’t disagree more.A great CFO is a crucial asset to any board. A good CFO will have business acumen as well as the financial understanding of what’s going on in the company (which can be lacking in a CEO, particularly if they come from an IT or science background, trust me on that one)Apart from the their financial knowledge, most CFO’s will have a broad understanding and experience of aspects of business law, human resources and IT as well as good exposure to the sales cycle.Quite often for a start up that has just raised it’s first major venture round the CFO is probably one of the most important senior external hires that will follow because a good one should be able to support the existing founders in making the transition to a VC backed company.Managing the growth that usually occurs after a round is something many founders struggle with, particularly the financial impact of that growth.Founders should not underestimate the value of a good CFO particularly if they don’t want to be replaced by a “professional” management team.
Points taken; I did not mean to disparage accountants and CFOs, as they do provide valuable business support. The point I was getting at (and which should have been better clarified) is that some CFOs just don’t “get” the primacy of idea/technology/product over generic business support functions.It’s like when you are having a surgery, you don’t want accountants to be there bossing the nurses around, telling the anesthesiologists what to do, etc. I don’t believe this is tolerated in any hospital, yet in startups sometimes you get a CFO with an inflated ego, who would try to act like a boss, would mess up with patents, give statements to media on things he knows nothing about, etc… That’s very bad for business, and you ought to do everything in your power to put them in their place.Cheers.
A huge luxury is to have a CFO who does not have a Marshal’s Baton in his knapsack. Somebody who is going to provide the requisite detail and not try to run the damn company.I have had both and the ambitious CFO can be a real problem when it comes to running the company as they are trying to wrest the steering wheel from your hands.I always tell the CFO — you are management and the “financial conscience of the company” but I am the leader. I always try to over pay my CFO at least 10%. Always.Make your CFO produce a set of graphical operating parameters — charts, spreadsheets and graphs, graphs, graphs — on a continuing basis — one week delivered in hard copy, the next week delivered verbally in a face to face meeting — showing all cash positions, investments, ratios (I am very big on ratios), debt balances and specific accounts (legal, etc.).Make the CFO report to you — not in an obnoxious manner but in a confident, calm and precise manner. Force him to tell you whatever bad news he sees in the numbers. Press him hard to identify and report on problems while they are mice and not elephants.Make this review a rote process and watch the graphs show the trends over time.The future is simply the projection of the trends over time. Make the trend your friend.
The recording of financial transactions is a science, but many charts of accounts require another branch of science to understand what is going on.Never ever use anything that “tanslates” the accounts to normal business info.If anything like that is required- Excel, reports etc- , than the chart of accounts is wrong, and nobody really knows what is going on. The chart of accounts should be transperent and reflect the real business entites and activities
but i daresay that in some cases accounting gets very very creative, not that far from art (closer to modern art) 😀
And that is a bad thing. Very bad. Good accounting is not art in the least
As a commercial lender I completely agree that good accounting should be as scientific as possible. However there are quite a few areas where the financial people are making judgment decisions that more approach art. For instance allocation of expenses to COGS or Overhead, when to recognized sales, accruing for multi-month projects, FIFO or LIFO inventory decisions, depreciation & amortization, etc. Also, optimizing the company for tax purposes related to the corporate structures you discussed last week can materially affect the way a company is presented in its financial statements. My goal in reviewing and understanding financial work is to look for questions to ask that will let me better understand the biases and motives that were used in their construction. No to companies are the same. Start with a basic understanding of accounting but always ask lots and lots of questions.
Your point about the accounting choice of “when to recognize sales, ” . . .There’s an old story in the tech business about a company on a fast growth path that decided to change to the plan of recording sales when the product shipped. Sales went through the roof. Then it came out that the shipping department was sending out nicely packaged boxes that contained bricks. Uh, the accounting was correct?Needless to say, there were other problems in the company.
That would definitely be a game ending problem. Recognizing sales/revenues can also be trickier. There were several discussions last fall related to Apple’s accounting on their iPhone revenue. They recognized that revenue over the course of a 2 year subscription basis which means they booked 1/24 of the revenue generated from each month for 2 years, thereby lowering overall sales but increasing cash flow. That is neither good nor bad but just a conscious decision by management as to how they would recognize the revenue.Contrast that with a company like Enron that went and booked the entire value of their contracts (sometimes decades in length) in the quarter they were closed. Revenue looked phenomenal but the company famously ran out of cash and imploded. (That were many other factors to Enron but the lack of cash is what closes a business.)
The ultimate objective of any accounting system is to accurately and fairly represent the financial condition of any enterprise. Nothing more, nothing less.Commercial lending is a wonderful profession from which to observe the many different ways that folks view the financial model of their business. In many instances, folks do not look at things the same.As an example, as an acquirer of companies, I hate “goodwill” (difference between acquisition cost and hard assets) and will do anything to remove it from the balance sheet. Weird view of things, but it has stood me in good stead in private and public companies.
There is a science to contemporary art….
What level of disclosure to employees is appropriate? One startup I was in was damaged severely by the CEO keeping the books secret to himself. Since the books were secret we didn’t know when the company was running out of money, so we kept spending on a growth path. His plan was to raise more money before it ran out. He didn’t make it in time and we ran off a cliff. If we had known how tight the money was we could have adjusted spending. For example we bought a PBX right before we had to lay off a bunch of people.
I think you bring up a really good point. Channels of communication should be open in general. I’ve seen businesses run into the ground or not become as operationally efficient as they could because people did not communicate openly and honestly.
Many of our portfolio companies share their board decks (or most of them) with their team. I like that practice. Keeping the team in the dark is bad
I like to take the boys/girls out for lunch. Feed them well and answer questions about anything. A bit of “managing by wandering around”.I subscribe to the English theory of never talking biz until we have all eaten.I did this today and as always I learned something and was able to reinforce some things that I was getting pissed off about. You have to work the communication deal to ensure that everybody is truly “on” the team.Teamwork is not easy but it is easy to make easier. Just takes time and commitment.
“feed them well and answer questions about anything” – priceless advice
Food is the universal salve.
JonAny company, regardless of the size, has to have a closed loop process for managing expenses. Someone senior in the company, the CEO, CFO or an accounting manager, has to understand the cash position of the company, and the forecasts for the future, and expenditures have to be made in line with those expectations. If the CEO keeps this information to himself, and the rest of the organization doesn’t have an approved plan as to what they should be doing in terms of investment and expenses, the company will go off that cliff.And this gets very tactical, in that expenses over $xx should get sign off from the person accountable for ensuring spending is in line with the plan…this goes for hires as well.In a 3 person startup, this means everyone in the group should understand the finances, and they should be reviewing actual results and cash position each month.In a larger organization, I don’t think you need to push financials all the way down the organization. But that closed loop process is critical to ensuring that spending stays in line with the plan.This works in the other direction as well, up to the board. The board should be getting summary monthly reporting so that they understand the financial position of the company, and how it’s tracking to plan.Of course, in the end, if the CEO wants to hide this information, no accounting system in the world can overcome a concerted effort by key people to hide bad news. We’ve seen this story play out over and over…
I’d share anything but raw payroll numbers. Generally, each quarter, I went over the key accounting metrics with the members in my company just like I did my Board.
I have been running companies (private and public) for a long, long time. I have heard just about every compensation issue ever raised. I am not better for the experience, mind you, but it has made me adopt a policy which works very well for me.I am not a Communist — though if I had been one I am convinced I would have been a very ruthless and good one.I let everybody know everybody else’s compensation down to the salary, bonus, incentive comp, commissions, extra benefits (cars, vacation) level. Anybody can go to accounting and get the info at their own volition. They often do.It saves a whole lot of problems in the long run and it keeps you on your toes. It makes you defend your own decisions and it makes you intellectually rise to the level of being perfectly rational.It also sparks a dialogue from time to time that needs to be sparked. It also smokes out any bubbling personal discontent. You don’t want bubbling discontent. Lance the damn boil and deal with it in real time.I once told a fellow who worked for me — who was very good but lazy as a dog — that he “could not hold another person’s jock”. He was mightily offended. I told him — “show me otherwise”. He did and I increased his compensation.I only do and recommend stuff — even when it seems a bit weird and against my sometimes elitist instincts — because I know it works.
Just to be clear — your transparency into comp is upward, too?That is very bold. That is very JLM.
Well, his current company is publicly traded (on the OTCBB), so any of his employees can look up what he’s paying himself out of that one online.
Completely correct. Any public company has to file the Employment Agreement of its CEO as well as reporting the comp of its Board and highly compensated individuals.
Sure but what about the people in between?
It looks the second and third highest comped folks at JLM’s company have their comps listed publicly too. Whether he discloses to his staff the comps of everyone else from there down, I don’t know. Perhaps JLM will elaborate here.
It’s not necessary. i’m not connected enough to dig and it doesn’t really matter.I just wanted to understand, conceptually, if it was a 360-degree transparency or just top-down.I hadn’t thought about it before, so thanks for illuminating the possibility!
It is an interesting question.Incidentally, investing in OTCBB companies is an alternative worth considering for individual investors who hate hearing about big company CEOs getting 9 figure golden parachutes after their middling or worse management tenures. It takes a little digging, but you can find some solid companies there, including ones where the founder/CEO pays himself modestly and owns the lion’s share of the shares.
Everybody gets revealed and everyone can get all the info from the receptionist to the CEO. As CEO, I often don’t remember what folks get paid nor do I particularly care.I always tell folks I am resposible for managing the company and they are responsible for managing their own careers. The first time I tell them that, they get a funny look on their faces. Then they get it. I am in the opportunity business not the fulfillment business.I never really think about it until we make a bunch of money, then I give healthy bonuses — stock or cash. To everybody.I am also very keen to make “tailor” made solutions. You have kids getting ready to go to college, I will dream up a college scholarship program. You are going to grad school at night, I will dream up a tuition reimbursement program — only if you make “A’s”. I make it up as I go and I don’t particularly worry about anything except SEC considerations.I try to end up w/ a system wherein if the folks do well, I do very, very, very well. Has never failed me yet.I have people who follow me from deal to deal because they know I will share the wealth. The greatest honor ever bestowed upon me in business is the high quality of folks who have invested their lives and confidence in me. It is really awe inspiring and I truly do not deserve it. It is the only real impediment to my working remotely from the mountains and Mexico 12 months of the year.And along the way, I have a whole lot of damn fun. But I digress, sorry.
Another damn good comment.Leadership. How refreshing!
refreshing indeed. i like the “making stuff up”
You are the CEO of what?
agree 100%. i only have a very small team of people i pay (who, like myself, earn a very small amount as well 🙂 ) but everyone knows what the others earn. i’m confident that my system is extremely fair and if someone wants to convince me otherwise i’m certainly open to it (but they better have a well thought out case if they want me to take it seriously). so i have nothing to hide and am proud of my compensation system. it has at times created some ill feelings, but that will ALWAYS happen anytime you talk about splitting a pie of money, which is what any business ends up doing, regardless of how they go about it or how fair or unfair allocation is. overall though i think it creates a team environment where overachievers can be rewarded both in terms of money and recognition, while underachievers can be quickly identified and given the “shape up or ship out” message implicitly if not explicitly. nobody wants to see an underachiever get paid well, so it allows peer pressure to serve as a positive management force, in my opinion.
In the early days, hold comp discussion meetings @ 6:30 AM. Fire everybody who is late. It works like a charm.
6:30 AM?!?! damn JLM i think you’re trying to get me to fire myself! 😀
At my last company we had (have) a real-time dashboard available to all employees showing many high-level financial metrics (paid subs, cash for the day, cash for the week, cash for the month/quarter/year, etc.) Hitting milestones became an all-company event that people would all rally around. Great stuff. There was also a firm connection between what top management was telling you about the health of the company and what you were seeing on the dashboard — no BS or funny money. You have to trust your employees though, and consistently reinforce the message that the information is a privelege, not a right, and that it isn’t to be shared with the world at large.In my new role at a Fortune 100 public company I get no such information and I find it somewhat annoying.
Excellent transparency and motivator
i share almost everything and am happy to err on the side of sharing too much (which i have) rather than err on the side of sharing too little. transparency builds trust.
You explained it well. How about adjusting entries next time?
Oy. I’m not sure how deep we want to get in the “accounting weeds” here. What do others think?
I agree–maybe don’t need to get that deep, but I think it might be nice to touch on the basic principles of cash vs. accrual basis (even though most will be accrual), and maybe also some basics like the matching principle.
That’s a good topic too.
A number of colleges stopped teaching this stuff now. If you are an accounting student they give you an extra course on T-charts and adjusting entries, etc., but if you are a general business student they keep you at the high level. I, personally, wouldn’t touch it for this blog.
I’ve actually only seen the general t-chart in an economics course…oddly enough…
I think an entrepreneur with limited accounting knowledge should just start with learning how to maintain a simple cashbook to record / balance out all of his or her company transactions, then seek qualified help to come in on a monthly basis to consolidate and report the entries.It is inexpensive to hire a part-time book keeper and probably worth every dollar spent to keep your financials in order.Hence to answer the question not much point to get into too much detail on accounting, but perhaps focus on how the reporting aspects of accounting tie in with the more strategic corporate finance issues that start-ups may face when trying to raise financing.
“Accounting weeds” are better handled via a problem set that people work through on their own and raise questions. Not a blog topic. Too narrow.Not that I expect MBA Mondays to generate problem sets any time soon…
at what stage do startups or companies become creative in their accounting practices. Does taking advantage of the loopholes offered in taxation and accounting rules make for a good accountant and or does it reflect the abilities of the start up or company to make themselves look good.What is your take on the pushing of the envelope in terms of accounting.I am not sure at what stage of a companies life do they change and loose their conscience to be able to milk the system to their advantage and not focus on improving their product/service.But I hope Mr. Wilson leads the way to enlighten many who think of creatively massaging the “charts”
I’d stay as far away from creative practices as possible. Tax is one area where I might hedge that advice. I believe companies should pay their fair share of taxes. But fair is a complicated notion when it comes to taxation
As a business grows into a larger and more complex organization, accounting decisions and options increase. Minimizing taxes often become a primary factor in driving those decisions, in the case of publicly traded firms the objective may become impressing/deceiving investors or with regulated businesses finding every bit of fractal space at the edge of what is permissible. All of these efforts tend to reduce the value of accounting as a management tool for understanding business performance and may even encourage some executives knowingly or unknowingly to pursue value destroying activities. Many accountants are conflicted by the demands of their clients and those of their profession and too many are constrained by their limited ability to clearly explain what is going on in a complex set of books. Ultimately it is up to executives, boards, and investors to demand from accounting the clearest and most objective information about how the business is doing and to treat the performance enhancing manipulations as no more than an ancillary profit center.
Good points Robert. At the appropriate time Fred, I think this speaks to the need to focus on the most critical part of the financials, the cash flow statement. I know it’s coming in a future post…but there is a lot of grey in accounting that ultimately should get flushed back out of the cash flow. The concept of “profitability” is subject to interpretations of GAAP, but ultimately a cash flow that ties back to the balance sheet gives insight into whether a company is producing or burning cash, and how long that burn rate might be sustainable.
Yup. I plan to hammer that home. Cash doesn’t lie over the medium to long term
Great entry, Fred. Accounting is not a sexy thing, but far too many entrepreneurs think it’s a meaningless thing. Well-organized books will help you have a realistic snapshot of where the company is at any given point, open communication will help executives and their employees stay on the same page.I’m sure the exit part is the most important for you as a VC – well-kept books, I’m sure, reduce headaches for the auditors and create a smoother path to either acquisition or IPO, should you be fortunate enough to get there.
“When order is made from chaos, value appears.”We all have only so much time to make order from chaos. If the accounting is clean and disciplined and simple, then you have more time and energy to focus on the product and its marketing.An organized and simple platform will provide a stable platform from which to be creative.
Who is that ‘order from choas’ quote from JLM? It is sooooo right
JLM original from when I was buying “troubled” assets. I have lived it. I have ridden it to the pay window.
Great way to ease everybody into this topic. Quickbooks is indeed a great way to start, and in fact they have an online version (http://quickbooksonline.int… which is very easy and all SaaS based, so you’re up in running in no time and cheaply. For a startup, this should be all you need for a while.I really look forward to your discussion of GAAP Accounting – while it’s still science, this is also where the art comes into play – and for a startup, it can be confusing in terms of the health of the business if you don’t know what you’re looking at.
Thanks for the link to hosted quickbooks. That’s a great solution for most startups
Quickbooks is great but I would have thought that a set of accounting spreadsheet templates would be an even simpler, painless (and possibly free) solution for a startup that is presumably tight on cash.
Spreadsheets actually sounds more complicated to me. And I love Excel.Trying to replicate even the most basic chart of accounts and reporting in Excel is probably a mistake for even the smallest of businesses. Something simple like Quickbooks does not cost that much, and enables entrepreneurs to have accurate books that will scale (to a point) rather than getting dragged into an accounting quagmire in Excel.
Maybe i’m a little outdated in this respect but hang on – garbage in garbage out – the accuracy of your financials in either of Excel or Quickbooks is only as accurate as what you key in. A well constructed accounting spreadsheet template maintained with some diligence works just as well as Quickbooks IMHO.
i agree excel is for youngsters when it comes to managing books….more complicated to setup, more error prone, missing basic features that you’d want in accounting (understandable, because excel was not designed to be accounting software). web-based quickbooks is where it’s at, cheap and simple.
I like the discipline that quickbooks imposes on the entries
Indeed, accurate double entry bookkeeping quickly gets out of hand in Excel. Quickbooks ensures debits=credits, and in fact does most of that in the background so that the user does not have to enter the debit and credit for every entry. True, garbage in garbage out, but QB’s has a user interface that really works to limit that. And a suite of ready made reports are available on the fly, no creation or updating of reports as in Excel.
These in the cloud accounting tools can almost make startup accounting “fun” (oxymoron?).MBA-style accounting originates from paper-based ledger entries. Impossible to understand, takes forever to see what’s going on in your business, focusing more on P&Ls and BSs, rather than the “Cash is King” cash flow statement. This 1950s stuff.With new tools you need less of the theory and get an almost up-to-the-minute view on where your business is going. Directly linked to your bank accounts (online), suppliers and customers linking in. Great.
i second the vote for quickbooks online. one great feature i love about it is that it makes it easy to share financial statements, you can just give the appropriate people read-only access to whatever areas you’d like.
Good accounting may be a science, but great accounting is an art.
Financial accounting = a science.Tax accounting = an art.Two distinctly different types.
Bookkeeping = ScienceTax Accounting = Science and the skill to navigate through complex (sometimes contradictory) regulations – borderline law practices Accountancy (translating those numbers into meaningful business information) = Artmy $.02
I wanted to add something that wasn’t mentioned (in this blog post) but it is critical that you keep your personal and company records separate. Even if running a sole proprietorship, it is very important to maintain separate bank accounts, Quicken/Quickbook files, etc.
Yup. We talked a bit about that in the last two week’s posts
An hour a month from a financial friend sounds good at the start.expenses start simple: hosting, accounting, legalincome: whatever early sales/revenue is generateddoes it make sense to keep track of founder effort since its all “sweat equity”. That would look like a large sink (negative sheets) but would balance against net worth of a business.What’s the norm?
Tracking your sweat equity can be useful bit of info for you to be aware of as you negotiate founders equity with founder partners you bring in — e.g. how much time/effort have you already sunk in.Also may effect your “negotiation” around what your salary should be. Although in a startup I believe investors want to see that number be low enough that it is not a drain on the business and keep you motivated to work more.But it doesn’t play in the financial accounting. There was no transaction.
Thanks Tereza, I suspected as much but it’s good to get outside confirmation. My “spreadsheet” business tracker has alerted me to an immediate need for greater revenue 🙂
Mark I’d like to know more about what your business is, who is your sweet spot target. Who knows, I may have thoughts on where some rev may be for you.Pls pop me a note at tnemessanyi at highridgegroup dot com.
Nope. That’s the value of your stock
Groovy, I like simple solutions. Less tracking where it makes sense.
so far youve covered 3 topics on the CFA exam. if you keep going maybe i wont have to study.
Not my goal but it would make me very happy
Could agree more Fred, especially the last paragraph. I wrote on the subject of startups and productivity when it comes to accounting several weeks ago here:http://thecfo.wordpress.com…It is generally not productive for a small business owner to spend time performing overhead functions rather than planning, marketing and selling their product or service. Saving overhead for this type of business is simply not as profitable as scaling and focusing on revenue buildout.
Great introductory post Fred. In future posts on this series it would be great if you could touch on the typical revenue models and the differences between those from an accounting perspective, the trade-off’s, etc. For example, what are the revenue recognition rules that tech entrepreneurs should be aware of, especially for subscription-based businesses where revenue from a new deal might be spread over several years.
Good suggestion. I hope I can do it justice.
I’m sure you’ll do it justice! Looking forward to it.
The accounting principles which are the basis for accounting decisions in any accounting system are just as important as the chart of accounts.Assumptions pertaining to revenue recognition, capitalization/expensing of start up expenses, etc. are vital to understanding what the financial statements say.Cable TV and cell phone systems used to peddle an assumption that “value” was at least 3-5 times installed plant until there were a number of bankruptcies and purchase price as a multiple of installed plant dipped to about 30%.
I have a slightly different perspective–from a “been there done that” perspective, I strongly recommend that every entrepreneur have enough of a background in accounting to actually be able to do the books, at least while the company is still small and this isn’t a burden.It only takes a few hours to attain a working knowledge of double-entry accounting, and modern small business software packages make the nuts and bolts easy.This knowledge and experience is crucial, since the accounts are the instrument panel of a company. It’s not good enough to have the bookkeeper show you the reports every month (or week or whatever). You need to be intimately familiar with where the money is going, where it is, and why.I don’t think it’s possible to make good strategic decisions without a deep understanding of things like a company’s operating leverage, sustainable cash flow, expansion capital needs, and so forth. A good entrepreneur needs to intuitively understand the answers to questions like, “if my company is profitable, why does the bank account keep getting smaller? And should I be worried?”As a bonus, it’s much harder to steal money from a company where the management team has a basic working knowledge of accounting and knows how to read an income statement and a balance sheet.
Totally agree – management / owners, above all, should have an intimate feel of where the cash in a business is. I get somewhat perturbed reading about how some entrepreneurs are focused on building traction in a start-up and have absolutely no idea whether they are making any profit (or at least be on the right track to do so) from the traction.
I’d say its a great suggestion but not a must have based on the most successful investments we have made
For anyone whose interested, there are some accounting spreadsheet templates halfway down these discussion threads that you can use for your start-up:http://www.finance30.com/fo…http://www.finance30.com/fo…Some will take you through the full accounting cycle so you can keep own records till your accountant / book keeper starts work, others will help you generate a P&L statement and cashflow statement for your presentation purposes. May be worthwhile trying to reconstruct them so you learn by doing.I would have attached the files to this comment if I could (feature suggestion for Disqus).
Great post. A key follow-up to make is that when a company shows financial results in a powerpoint or other format that they must tie back into what is in the QB financials. Or note why they don’t tie. While this might be obvious to most people, I have seen examples where an entrepreneur, in good faith, uses one set of numbers which may explain a valid strategic or operational point or metric. But is contradictory to what is in the financials. This can cause serious issues in fundraising and strategic conversations.
That’s one of those things you have to mess up before you realize how important it is. Great advice john
Yes, battle scars can prove to be quite valuable.
Print these out for your kids. The principles are same for a home, no matter the stage in life you are in. You probably could do very simple accounting for yourself, and doing so would probably give a person a much better idea of their future options in regards to their monetary position for all sorts of personal life decisions (ie, marriage, kids, retirement) And i realize that a lot of my friends don’t quite get that.
Marry for money and you will earn every penny.Marry for love and you will be rich beyond your wildest dreams.
I will marry for love.But I would like to think I won’t fight about money (or fight less aboutmoney) (a big reason people get divorced) because I married someone who likeme believed in keeping good books. So we knew where our money was going andcould make good decisions about it. Marriage is work, from what I hear…Imight as well set up good habits to make it easier on me!
Much good info and discussion here about the aspects of accounting that center on “bookkeeping”… reporting on the past. “Not a sexy thing” as another comment stated. I know this is a “basics” forum today, but I would like to highlight another important accounting function- how a good accounting department/CFO can leverage financial information and resources to enable CEOs and managers in all departments to do their jobs better and make better decisions. How? Forward-looking accounting. By utilizing your accounting department to track, report, and project key company and departmental financial and non-financial FORWARD looking metrics. To create accurate/useful projections. To identify trends…thereby enabling managers to act on them in advance. A huge topic, ahead of the game in today’s “basics” discussion, but as an accounting “super-freak” I feel compelled to point out this more sexy (and dividend paying) aspects of accounting. Accounting not just as a “how is the business doing” report of the past. Accounting that actively contributes to the growth of a business. You don’t drive using only your rear-view mirror! 🙂 Perhaps fodder for future accounting posts.
we’ll get there eventually in this series. it’s critical.
You are pushing my buttons this week. Cable and accounting. New career/old career.I’m a reformed accountant who always focused more on the business side of accounting decisions. This is why I’m in business development and strategy…My only piece of advice is to spend the money on the front end for a business-focused accountant’s assistance in setting up the company structure, chart of accounts and basic processes. Once simple bill-paying, invoice generating/collecting and reporting processes are in place, the weekly and monthly headaches are minimized. Quickbooks online makes this very easy–much easier than a spreadsheet–mainly due to the ability to pay bills, generate invoices and balance your business bank account (emphasis on BUSINESS). I’ve had the “pleasure” of recreating years worth of accounting records for a couple of small startups that grew in to $10 to $20 milllion revenue businesses. If the original entrepreneurs had taken the time and spent the money on the front end, better decisions would have been made, opportunities would have been uncovered and ultimately less money would have been spent on tactical, transaction-level work (not to mention delays in important things like S-1 filings and venture round closings).I’d be happy to share what I’ve learned in the transition from an accountant who shed the Big 4 taint to work for public and venture backed software and healthcare companies if anyone has more specific questions that wouldn’t necessarily benefit this community. Note, I’m not looking for a consulting gig…been there/done that/too busy…but I love helping businesses lay the proper foundation.
this is your week gregg. what else would you like to discuss?
Great topic.Remember the entire VC world trades on EBITDA — which is NOT a defined term under GAAP. It has to be “derived” from the specific defined terms which are included.This fact should serve as an alarm as to how important accounting is to everything in a start up.
I am a firm believer that all businesspersons have to become 360 degree professionals. We have to be proficient on a great number of things. Accounting is one of those things. This is why you are the boss.When starting out, get a CPA (small shop preferably) to set up your books on QuikBooks. He will already have the software and will undoubtedly have an existing client. This will take him about 15 minutes. Check, doublecheck and re-check the chart of accounts and the work product to be delivered.You need at minimum — general ledger, financial statements (income statement, balance sheet, statement of cash flows), transaction journals (accounts receivable, cash receipts journal, accounts payable, cash disbursements journal, check register), payroll, bank reconciliations, debt reconciliation and a cash account reconciliation (only because cash is so dear).Don’t panic, these documents are all produced by the software. All you have to do is bring him the invoices and he will cut the checks and you will sign the checks. At the startup phase, never, ever, ever, ever delegate check signing to anybody.Feel the cash flowing through your fingers. This is like feeling a big fat Rainbow Trout “mouthing” your fly. It is the difference between landing the big one and well, not landing the big one.For the first few months, have the CPA go over each and every document and explain them to you so you can see the linkages. You are in school now but it will only take an hour a month. In three months you will be an expert.Then, get a bookkeeper or retain a bookkeeping service (small shop w/ lady w/ blue hair who does not smoke and has grandchildren and reminds you of your own grandmother — she will not embezzle from your accounts) and have them enter the transactions and have them reviewed and verified by the CPA on a monthly, quarterly and annual basis.Maintain detailed files while requiring the CPA and bookkeeper to maintain the identical files.As you grow, you will bring the bookkeeping in house and then the “controller” (CPA) function. In this way, you have developed a systematic approach which will be easy to assimilate and which will really change nothing as you grow. You will be growing “smooth”.Last tip — have electronic access to your accounts at all times so you can check which things have been paid, which have not been paid (that’s sometimes how you manage cash flow — not paying on time) and how much cash you have.Distribute the information to your key employees and partners/founders and make damn sure they read it. Overcommunicate.You don’t want anyone to find out they are in a risky business when the first bomb goes off. Make them own the reality of the enterprise.
JLM that comment is a perfect 10.That reflects perfect scores on both Technical Proficiency as well as Artistic Interpretation.Perfection on the Artistic scale requires pragmatic, real-world examples which we can relate to and activate.I knew you had it in you, JLM.You are a thoroughbred.
damn, JLM did my post better than i did.
Nice.So, for accounting, as founding technical CEO, (1) get a Subchapter S, (2) get started with the on-line version of Quickbooks as outlined in this thread below, (3) early on type in the entries of the financial transactions, e.g., checks written, checks deposited, records kept, myself and, thus, get familiar with the details, (4) learn to get out the usual reports, (5) soon convert to a purchased copy of Quickbooks, (6) get a bookkeeper and a CPA as you outlined with all three of us having the same data (neither the bookkeeper nor the CPA ‘owns’ the data or can charge me for it if I want to convert to another source of bookkeeping or accounting), (7) get that arrangement going with the usual reports and tax filings, (8) and go from there.So, in this way:CON: Take time away planning of the business, writing software, system management of the Web site, collecting data on Web site usage and the ad clicks and analyzing that data, recruiting, fund raising, selecting and leasing office space, business insurance, etc.PRO: DO have solid financial records, do better in the fund raising, do keep the tax people off my back or at least have a good way to defend myself, and have a basis for a bank loan, say, for depreciable assets.Nice. That’s about what I had in mind but adds clarity.Question: Being conservative, and believing that “cash is king”, very much would like to build up a nice cash cushion in the business. Then if need the cash for business expenses, e.g., buying computer parts, paying salaries, paying lawyers, etc., that cash would be available.But, at the end of a tax year, such cash, e.g,, ‘cash flow’ or ‘current assets less current liabilities’ given that we will have little in depreciable assets, from that year would be ‘earnings’ to be paid in taxes. I intend to spend the cash on business expenses but just not necessarily so soon.Hmm ….Maybe pick a few volatile assets that can buy on thin margin, e.g., pork bellies, FOREX. For each volatile asset, in the same account, take a big long position and in the same account a big offsetting short position. Use some of the cash to supply any needed margin. Just before the end of the tax period, close out enough of the losing position to equal the positive cash flow want to ‘save’. So, report $0.00 earnings or nearly so.Then first thing the next day, close out the equivalent amount of the winning position and be back where was.So, get to move the cash to the next tax period where 100% of it will be available for business expenses if needed and otherwise can remain as a cushion.Where does this go wrong?Is there a better way?
Tax liability is only calculated on “profits” not “cash flow” — which is the result of borrowings or capital investment.If revenue minus expenses (including depreciation and other non-cash costs) is a positive number you have made a profit and you owe INCOME taxes on your profits.If revenue minus expenses is a negative number you have netted a loss and you owe no income taxes.If you pay expenses from borrowed funds or invested capital, you likely have no revenue. You owe no income taxes because you have no profit/income.Porkbellies — stow that nonsense.Paying taxes is a good thing, it means you are making a profit. How much you pay is up to politics but paying taxing means you are making a profit and making a profit is the fundamental objective of business.
Thanks!I’m most concerned just with getting to revenue. Then I’d like to accumulate a cash cushion, e.g., for any unexpected expenses, before leasing office space, hiring people, etc.The way venture capital is working, I likely should be profitable before getting any outside funding.It’s been a long time since I read some ‘accounting 101’; so my understanding and terminology are not solid. For my simple financial situation, pre-tax profit at the end of the tax year should be essentially the same as current assets less current liabilities (a common definition of ‘cash flow’) and in my case essentially the same as the bank balance in the company checking account.If as a Sub-chapter S I show pre-tax profit of $500,000 some early year, then living here in NY and having to pay Federal, state, and town taxes, I’d be lucky to end up with $250,000. When I go to hire, I’d rather have the $500,000 available for expenses instead of the $250,000.Uh, a technical entrepreneur, with an applied math Ph.D., specializing in stochastic optimal control, i.e., making something (taxes?) small under conditions of uncertainty (business?), will be reluctant to accept “Porkbellies — stow that nonsense.”! Besides I owe some friends in Sandusky some yacht trips!Turns out, in principle my idea with pork bellies, or some other volatile security where can take ‘offsetting positions’, is fine and not “nonsense”! But, there are two problems! First, while I thought of this idea on my own, it turns out I’m not nearly the first to think of it! People used to use the idea, and it was legal! Second, so many other people have thought of the idea that rules against it are now in Section 1092 of the IRS code!Uh, a few years ago the idea worked fine!So, I will have to keep thinking …!As a friend once told me, the main trick is getting the profits to begin with! I think he’s right!Toward getting the profits, I looked up the Section 1092 details while some software I just wrote was running. The software is to make use of the Windows XP program NTBACKUP.EXE, in a script, not the GUI, to backup up my booted XP operating system while it’s running! Before going live and betting my business on XP and my software, such a backup could be IMPORTANT! I wouldn’t invest in an IT company that didn’t have such backup in good shape! The correct command line options for NTBACKUP.EXE are NOT easy to find (the documentation has errors!); neither are the report files and log files or how to read them. Finally, after too many hours, I have it all fairly well understood, well documented, and working! Well, 99%: I changed the way I call NTBACKUP.EXE and now am not getting the return code from the program! Bummer! It wrote 15 GB nicely! So, change to get the return code, and maybe it’ll be done!Such are the steps on the way to the profits! Actually, the difficult, unique software is long since in solid shape. What remains is just silly, routine, but wasteful mud wrestling as with NTBACKUP.EXE!
The thing I heard over and over again from entrepreneurs when I was in business school was, “the thing they don’t teach you about in business school is cash flow”. And they were right on. For me, I found business school was great for giving me a framework in many areas – but managing cash flow was one where it is severely lacking. It is one thing to know how much money you will make, loose on paper – but in reality the numbers can be different. If there are any rules of thumb on how much cash you should have on hand vs. projected expenses or P/L or some other type of framework to give some structure I would be interested in hearing about that aspect of cash flow.
“cash is more important than your mother” – alan shugart, founder of seagate and several other disk drive companieshttp://en.wikipedia.org/wik…
2nd and 3rd paragraphs. “principals” => “principles”
ugh. when are we going to get reader copy editing?
I couldn’t resist. Hope I didn’t offend.
you did not, thanks for the correction. i value good grammar but don’t always deliver it.
Interesting historical fact — double entry bookeeping was pioneered by the Venetianshttp://www.patentlyo.com/pa…Given that everything is done online now, you’d think that the tools for analyzing cash-flow would have improved more. I would love to meet anybody working on accounting analysis tools that provide a frequency-average analysis of transactions beyond what you get from sequential balance sheets. I want a spectrum-analyzer for cash-flow. Why don’t we have this already?
you learn something new every day, especially if you blog and have great commentersthank you
You’re welcome. I admire your ethos. I can see that you’ve made your mind up about patents, but if you’re ever interested in exploring some out of the box ideas for streamlining tech transfer, please email me. On the other hand, if the phone’s not ringing, I’ll know it’s you.
Fred,I would like to register a lonely dissent: this post is irritating!Steve Blank just posted an absolutely great article called “No Accounting for Startups” which does a better job than I can do at expressing what irritates me about this recent post. In it, Steve says, “These financial documents [Income Statement, Balance Sheet and Cash Flow Statement] were worse than useless for helping us understand how well we were (or weren’t) doing.” This is the opposite of what you say–that they are “critical.” He goes on to explain when and why accounting is important; it’s just not when you are in the business model discovery phase of a startup.Aaron Patzer at Mint.com went even farther in his comments, saying (paraphrased) “you can always clean up the books as soon as you find traction.”Personally, I think Patzer got a bit lucky on the clean up, so my startup is keeping receipts and bookkeeper. But still, your focus here on accounting is obvious at best and a distraction at worst. In contrast, Steve’s insightful post puts the focus where it ought to be!Put otherwise, was it FourSquare’s viral coefficient or its income statement that mattered to you when you invested?I’d like to call for the swift, merciful end of MBA Monday’s if it can bring us even one more issue-oriented post ..Looking forward to the next 6 days of regular programming!
if you don’t like it don’t read it. MBA Mondays is a series and it happens every monday on this blog. It is about sharing the business side of entrepreneurship with the people who read this blog.you are correct that there are other skill sets that are more important to success and i stated that in this reply to another commenthttp://www.avc.com/a_vc/201…but if you ignore the importance of accounting you do so at your own peril
“if you don’t like it, don’t read it.” Ouch! Just trying to point out an alternative point of view. Steve called this stuff “worse than useless”, not me, and I am on the record here saying I am not banking on being as lucky as Patzer. Keep your receipts–got it!Sorry about the comment about the MBA Mondays–it was really meant to be a compliment about your regular posts.Thanks for your seemingly endless supply of insights, day in and day out.
steve is wrongcalling accounting useless is not helpfulit may not be the single most important success factorbut to completely disregard its worth is recipe for disaster
damn boss you totally put him in his place
Your statement strikes me as a bit naive — like a pilot who focuses only on takeoffs ignoring the necessity of practicing landings while observing — “well, nothing bad has happened thus far”.In fact, accounting and financial analysis are not in conflict. One does not have the luxury of focusing on one and ignoring the other. It is a false choice and it erects a strawman which is simply not accurate.They are two different aspects of financial information management which when coupled with “budgeting/forecasting” provide the minimum — the MINIMUM — amount of information to effectively run a business. To create a stable platform within which to develop a product.Whether you think you are building a business or just developing a killer product, you have to have a stable business platform within which to operate.Accounting is pretty damn easy and defining the financial parameters which will drive the business is equally easy. There is no necessity to make this a mutually exclusive decision.Poor financial management is like blood poisoning, it kills you even if the musculature and skeleton are still intact. Money is as important as blood, no more.A good read is “Competing on Analytics” by Jeanne Harris. Not the Bible but a damn good read. It makes the case for your view without the absurd notion of abandoning accounting as a necessary discipline and control.
I totally believe in metrics. But to steal your analogy, running a business primarily by accounting is like flying a plane by watching the altimeter. Sure, you should have an altimeter on your plane, but god help you through the mountains! I think that Steve Blank’s original point is very much in the spirit of this colorful analogy.And see my reply to Charles below. As Fred’s recent Tumbler post demonstrates, few if any important startup business metrics come from quickbooks. Accounting is a necessary evil until you have discovered a scalable, repeatable business.
Perhaps our common ground is the word “primarily” as I am not advocating for the idea that accounting is the primary management tool for any company. It is one tool and a very important tool.To further the aviation analogy, an instrument pilot constantly scans the attitude indicator, the directional compass, the altimeter, the vertical speed indicator, the airspeed indicator and the turn & bank indicator.The essence of attitude instrument flying is the ability to quickly scan each instrument, correlate the information and to develop confidence that the plane — without reference to the visual horizon or sight in general — is in level flight/climbing/descending/turning as desired. The instruments indicate that to be so. Or they alert the pilot that it cannot be so, given the instrument feedback.Accounting is only one of the disciplines necessary to ensure smooth flight for a business or to indicate that there is a bit of turbulence ahead.BTW, the altimeter is a great tool for mountain flying — as long as the altimeter reading is greater than the highest element of cumulo-granitis, then the mountains are a snap. But I get what you are saying.Accounting, forecasting, budgeting, operating metrics/analytics are the 4-pack of business instrument flying.We must all become 360 degree professionals and become competent in a myriad of disciplines while not disregarding the fundamentals of building a competent business. Accounting and metrics are as important as water and air — can you do without either?
shut-up, I like it,,,,
Fred Wilson does Accounting. The comments are worth the price of the ticket. @fredwilson @profalbrecht
After reading through some comments to this post, I’d like to extend my support for MBA Mondays. Fred describes these building blocks of business in a simple and down-to-earth language and he does so by leveraging on his very significant experience of dealing with startups. While MBAs themselves will find these articles too simple, there is still a lot of value in reading between the lines and would-be entrepreneurs should study them thoroughly and then refer to more technical readings as required. In my opinion, if you don’t understand accounting, you shouldn’t even get near a management position with financial responsibilities.
Finally, a VC who says it’s important to invest a little – just a little – in getting this stuff right from the start! Yea! As you say, it’s often not valued by tech entrepreneurs – and all too frequently not by their investors and Board members either, as if it’s an unnecessary burden.It’s particularly important to make sure your accounting is working correctly when you start ramping up your revenues. If you’re a software company there are some highly complex technical accounting requirements you need to comply with on revenue recognition – and much of it ripples from just how you structured your sales contracts, whether you have properly separated the key elements of each product or service, how you priced your deals etc. You have no idea how many people mess this up – not just the accounting, but the things that drive the accounting …So, make sure you have the right advisors lined up at every stage. Sometimes an experienced CFO or businessperson on your Advisory Board, or a similar more-experienced part-time resource can make all the difference in getting things right upfront and helping set up processes. It’s not as simple as saying “OK, I start by doing it myself, then I hire a bookkeeper, then a Controller, and then a CFO” as the years go by. One company I started helping recently has been going for 4 or 5 years and it took me less than an hour into it to figure out their entire reported revenue history has been completely wrong. So now everything has to be restated and investors and the Board feel rather misled about the prior numbers – in some cases numbers they relied on for investment decisions. At least they’re now happy that someone has fixed it.So, yes, keep this stuff straight from the get-go. And supplement it with the financial and business advisors that help you win and optimize as you go.
Oh man, all those accounting classes in undergrad and grad school for what? I could have just asked Fred!
Does software like quickbooks works for startups who are not in USA? I mean do people/law handle accounts same way across world?
Fred, glad to see this effort to demistify accounting – something every company needs to deal with. My company runs the back office for several startups. Everything from accounting to reporting, payroll, paying vendors, government compliance, etc. I believe entrepreneurs should know where their cash is and know their burn, but should not directly spend time doing the books. It is not core and does not add value in and of itself. Back office needs are pretty common across companies and the best way to fulfill them is through an outsourced service.Having led finance for VC backed startups for past 11 years, I really believe startup books have to be lean. Spend the minimum amount of effort for things to be completely accurate. Keep reporting clean and simple. Make everything available electronically. Not just the accounting, but all back office files. I am working to make that a scalable solution for startups now. More info to follow.In the meantime, I recently reviewed accounting software alternatives out there including the new SaaS ones. http://www.startupcfo.ca/?p…Main takeaway – stick with Quickbooks. Best solution and cleanest upgrade path to mid market ERP systems once your company takes off.
Who knew Accounting would generate so much chatter? I think Fred’s bucking for an honourary CPA as opposed to MBA.Having been there and done that several times and usually the lone accountant in the company, I know how frustrating it can be to generate interest in the sometimes arcane-seeming rules and regs around accounting standards and the accompanying tax treatments.I agree with Fred that knowing the basics is key. With that in mind, I thought I should include the foundational equation behind double-entry accounting:Assets – Liabilities = EquityEquity is both your companies share value PLUS/MINUS your companies Net Earnings. At some point, every transaction you make will flow through Earnings although, not always all at once. If you buy a server, the cash you pay does not immediately translate into a business expense. There are different rules about how Asset Purchases are treated. The Cashflow doesn’t always match the accounting treatment.The double entry system is composed on two things; Debits and Credits. Fred’s right that every entry needs an equal amount of both; however, the MEANING of a DR and CR should be clarified.A Debit is good for your Asset base. You get in money and the DR increases your bank.A Credit is a decrease for your assets, but it’s actually the GOOD part of the Income Statement. An increase in Revenue is signified by a CREDIT entry.I guess this might have something to do with people’s intolerance in learning accounting.You want to start learning? Get your Accountant/bookkeeper to show you the FLOW of the transactions through the use of T-Accounts. It’s a tool of the beginner accountant that maps the entry and ensures completeness. Maybe Fred will talk about it later.Some of the commenters didn’t like this post because it didn’t talk about the importance of Cashflow/cashburn and Operational measures (i.e. # of transactions, CPA, CPC, churn rates, etc). These are all crucial, but they are crucial IN ADDITION to the standard suite of statements. If you want to get funded, or get a loan, or be tax compliant, you NEED quality financials. End of story.
Two things that jump off the page for me. 1) Quickbooks Online version is OK for starters, however when you grow big enough and financially sophisticated enough where you need non-online QB, such as QuickBooks Pro or QuickBooks Premier, you will have problems converting. These are two disparate groups at Intuit, and from my experience, they don’t talk to each other. I have had client nightmares making that transition, as the databases are incompatible and days of tech support were required, not to mention the lost time from the CEO and the bookkeeper.2) A high percentage of CPAs look at the business through their myopic “tax colored glasses”, which is very different than “management colored glasses”. Management accounting is a better approach for small businesses that because it’s focused on the “use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.” – Wikipedia. That’s what a small or startup business needs. Small CPA firms are often rooted in Tax or in Audit as many of the principals of those firms were once managers of Tax or managers of Audit practices at big firms.The point is just because someone is a CPA, does not mean they are right for your business. The virtual CFO, part-time CFO, or on-demand CFO (whatever you want to call it) is perhaps a better choice to overseeing the bookkeeping and the tax-related/CPA work. A rockstar CFO with 25+ years experience in operations, finance, accounting, sales, marketing, and general management will outperform most CPAs any day of the week, not necessarily in taxes though. That’s not to say that a rockstar CFO can’t be a CPA, just that a typical CPA’s breadth and depth of experience is often limited…many have never been a CFO anywhere. Also, keep in mind that CPAs have an ethical obligation to stay at arms-length and not be materially involved in the day to day operations of a business (think Enron and Arthur Anderson).I know this is controversial for CPAs and they argue with me on this subject. In fact, see this blog post.http://www.martykoenig.com/…Marty KoenigCxO To Go
Read your post and would like to clarify that you probably meant Tax CPAs. I am sure you are well aware of this but wanted to clarify it with the rest of the people who are not in the industry that not all CPA do taxes or audit. Back in the old days generalist are very popular and probably every CPA did do a little bit of taxes. But with today’s complexity in the industry, generalist are a dying breed – most accountants I know are specialists in 1 or 2 subjects with adequate knowledge in all the other areas.CPAs are merely accountants who have satisfied a minimum requirement and passed a standardized accounting test (in tax, financial accounting, business/IT and audit) designed to protect consumers. Nothing more, nothing less.Examples:Me – CPA, audit based, specialize in management accounting for small bus and internal controls for SEC companiesMy wife – not a CPA, large corporation tax specialist, now focusing on small business and personal returnsMy controller – not a CPA, tons of management accounting experience and will run circles around me with month end closing topicsMy advisor – CPA, merger/acquisition specialist, have little to no clue about everyday accounting beyond theory he reads in a bookKnowledge is everything. License is of little relevance.
The MBA Mondays are a welcome addition to this blog.
i read MBAm’s. Every one of them. And I’m in the business of doing business. I help buy and help sell companies for ESPN. I help evaluate and help license products and services for sports fans, ideally all over the world. Each time I read one of your entries I learn something. Which got me thinking. If I’m learning something, I bet a lot of other business persons are as well. Have you ever considered inviting business people to guest blog for your MBAm’s series? We could email you on the side a topic or you could at the end of each MBAm post, list a few topics under consideration for the following week. Folks email you back pieces. You could edit as you see fit, including not use, use as is, use with edits, or excerpt from and write your own entry. You’d leverage the power of the network, with you as a conductor. I’d write on licensing, which is many mondays from now. But I bet there is a cashflow genius out there ready to wax poetic now. And you’d make the post that much better.
I can’t wait to read it kid
Great MNK, my paranometer is up by 22%
Great suggestion charles
Read “Competing on Analytics” by Jeanne Harris, the best discussion that is out there on how to drive business with the numbers.The key to any business is knowing the analytical drivers — the data driven drivers — which are the propellant for any business.Number of customers, unique customer visits, average spend….these are the type of analytical data points that we all have to know to drive business to a profitable level.It is not easy but it is essential.
anytime i post a comment with a link disqus deletes it. i’ve reposted this comment on my blog, which you can access by clicking on my username.(sorry mark for the off-topic reply to your comment, but i wanted others to know where they could find my comment that got deleted).
That’s bad news for Disqusmaybe they’re having problems scaling. I’ve had longer than usual delays loading disqus enabled blogs, and sometimes it just doesn’t load.I’m sure they’re desperately working to fix it.
Doesn’t happen to me kid. Maybe I’m blacklisting you? 😉
He’s not right about that because I get his links via disqus all the time
I see them by email, but not on the siteMy soapboxHttp://www.victusspiritus.com/
Charles,Thanks for taking the time to read Steve Blank’s post. I think Steve’s post is very important.What part have I misrepresented from Steve’s post? First, the title of Steve’s post is “No accounting for startups.” Second, re-read the sentence I quoted in my first post here (“These financial documents [Income Statement, Balance Sheet and Cash Flow Statement] were worse than useless for helping us understand how well we were (or weren’t) doing.” emphasis added.) I think that I have accurately conveyed the thrust of Steve’s post.But you spot on about other metrics: burn rate, runway, time to cash flow breakeven. In a stable business, those figures can be gleaned from financial statements. But startups differ in important ways from stable businesses. Consider: is it more important to know whether I am about to hire a 4th employee next month or to know my revenue and costs down to the last penny? I know my burn rate without opening up my quickbooks, and I know that I have until December both to discover a scalable, repeatable business and then to raise a round to expand the business. Staying on top of the metrics that Steve outlines can be done without any accounting at all (although it’s reckless to do so!) and in fact, Patzer at Mint.com did just that.So, if Patzer can get away with it, where’s the evidence for Fred’s claims “to completely disregard its [accounting] worth is a recipe for disaster” and “ignore it at your peril”? That’s strong stuff!Here’s my unsolicited (and apparently unwanted) advice to Fred for MBA Mondays: focus on these cautionary tales! When have you passed on an exciting investment because the accounting was inadequate? What avoidable headaches have you had to deal with? That’d be so much more valuable than a cursory treatment of double-entry accounting. (And the discussion of the perils was indeed the tiny gem inside Fred’s legal post.)Bottom line, I believe accounting is a necessary evil that serves limited if any strategic value for a startup.
You’re welcome, and thank you too. Isn’t funny how these intense debates seem merely to reinforce pre-existing prejudices?For example, you are an investor, right? I imagine that part of difference comes from being on opposite sides of the table. Fred and you both seem like extremely entrepreneur-friendly investors, but there are still two sides to this table. Accounting is part of the productive tussle over information rights. Also, I think that Steve and I are thinking about extremely early stage startups — perhaps a phase or two before you’d even consider investing.And a topic for a future discussion: how to capture strategic metrics. Fred just posted some great thoughts about the traction that Tumbler has, and you’ll notice that none of the metrics show up in quickbooks. Just as I’d like to see more discussion of accounting perils, I’d be tickled pink to hear more about how to benefit from accounting. Color me a skeptic though…So far, I have one (possibly weak) example on my side (Patzer), but I hear nothing but theoretical arguments on the other side. Until then, I still believe that accounting is merely a necessary evil.
Have the other discussions really reassessed anything? Steve Blank makes a provocative claim backed by insightful analysis and personal experiences; Fred’s claim is, at best, obvious. And I can’t find anyone else who has introduced any constructive criticism to challenge this pablem and I have not been welcomed warmly in this discussion to say the least.I’ve entered a gun fight with a small knife! Thanks for engaging with me, and dulling the pain of this bloody experience.
Michael,I’ve read both post and I believe there is a big difference between what Steve and Fred is talking about. In the accounting world – everything starts with proper record keeping (bookkeeping;) without it, you cannot generate any meaningful data or reports for analysis (be it via traditional reports like the BS, IS and Cash Flow mentioned here, or specific metrics like the customer acquisition cost calculation mentioned on Steve’s post.) From my understanding, I believe Steve’s point in his post is that information that traditional reports provide the entrepreneur may be confusing or less effective than a set of proper metrics tailored to answer their specific business questions. What Fred is illustrating here is the importance of proper tracking of the a company’s finances, the basics of double entry accounting and the 3 most commonly used reports. Both are talking about a piece of the accounting process but neither of which are all inclusive. It’d be relatively hard for anyone to analyze any metrics without proper record keeping (part of the accounting process) in the first place.As a CPA I can appreciate the information that proper accounting bring to the table, yet as an entrepreneur I dislike the mundane aspects of record keeping. Which is why I have managers who manage the books of my company while I focus solely on the business information it provides (both financial statements AND metrics) me so I can grow my company. The purpose of accounting is for business owners to be aware of the financial aspect of their business – depending on what you are looking for, you may need to utilize different reports/metrics.As far as Aaron Patzer goes (big fan of what he has done for personal finances,) it is easy for him to say you can always clean up your books later because he is one of the luckier companies out there. Through my career, I have seen many companies that weren’t quiet as lucky – companies who went out of business because of 1) cost to fix the compliance penalties ended up being too great for company to afford or 2) they simply ran out of money because they never knew for sure how much was coming in or out. You don’t see many (famous) examples out there because those that were seriously impacted are no longer around.I hope you found this helpful. Best.