When should a Startup Hire an Accountant?

The simple answer: the minute you need to do some accounting. That almost smart-ass answer is really pretty profound… because it focuses on something that many harried entrepreneurs fail to grasp: when you need to start looking at accounting data. Unfortunately, many entrepreneurs are not analytical types, and they don’t like to think about accounting or other backroom activities. As a result, they often crash and burn, because the “backroom” is just like the engine room in a boat: lots of critical stuff goes on there. Let’s put it this way: you start out on a journey to someplace you have never been. The first thing you do is consult a map. What’s the difference when you are starting a business? None. Successful business owners know that the roadmap of how they are doing is their accounting reports. They understand that looking at sales, expenses, assets, and liabilities is essential. It’s the measure of where they are and what they are doing. Sure, you can look at bits and pieces from here and there ( so called flash reports) but those have no proof of integrity. When you have an accounting system, the reports you get have a much greater …

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How is the Best Way to Deal with a Trial Balance in Accounting?

I love this question! Lots of great stuff, if you look at it carefully…. “to deal with” meaning, “how do I handle it!” You want to handle it with care. It’s the summary balances of all the accounts and it can tell you a lot. You are probably going to have to make some adjusting entries, and the trial balance will lead you to many of them. “best way” meaning, “what should I do?” Here we want to be methodical. First off, check to see if the thing balances, i.e. debits equal credits. Don’t be fooled by programs like QuickBooks, which force the difference into an imaginary account like “opening balance equity.” (BTW, that should always be zero). Even the best accounting programs can fall out of balance. Got to check that first. If it is out of balance, wow, there is so much potential work to do… can’t live with an out of balance trial balance! Second, methodically go down the balance sheet. Start with cash. The amount in the trial balance is probably wrong. Did you do a bank reconciliation? Do you have the adjustments for things like outstanding checks, bank fees, interest, etc? If all you did …

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What Should You Know to Analyze a Financial Statement?

What do you need to know to analyze a financial statement? The answer is a little complicated. Here are the things you should know: A basic understanding of accounting. You need to be able to appreciate what the various components of a financial are, and where they come from. You need to understand the pitfalls of financial reporting, and the limitations of GAAP. A good understanding of the tools of financial analysis, how they are used and what they reveal. Things like ratios, trend lines, scatter charts, and the like are important tools, if you know how to use them. A good understanding of the industry. You need to know what is expected and what is unusual. Without some comparative information and background, your financial analysis of the company is in a vacuum, and probably meaningless. A good understanding of the business. If you don’t know anything about the business except what you see in the financial statements, you don’t know very much. When I read an annual report, I spend far more time reading the explanatory material than actually looking at the financials. I do a web search on the company, try to understand what their products are, their …

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What’s the Biggest Challenge for Small Businesses regarding Financials?

The biggest challenge most small businesses  have is just getting accurate financials. When you own and operate a small business, 110% of your effort is devoted to marketing and execution. The backroom tasks – including bookkeeping and accounting tend to get second fiddle, at best. As a result, back office systems in most small businesses are not given enough attention, until, that is, the company runs out of cash. Then there is a fire engine approach that takes over, as the business owner attempts to put out this fire and that. Not particularly conducive to developing sound information reporting systems. Most small business owners are not systems or detail oriented. They are big picture people, by necessity. As a result, keeping history, making things neat and developing internal reporting systems falls by the wayside. I have seen dozens of small businesses which ran by dashboard metrics alone. No financials. At year end, the outside accountants would struggle to make sense of the mess and sometimes the financials actually corresponded with the dashboard results… sometimes. Most of the time, the financials come as a rude shock. This is a symptom of being an entrepreneur. It’s a rare one who understands the …

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Keeping Records for a Micro Business

Question: I freelance and make a lot of money, all in cash. I want to be legitimate. What should I do? Do I need to start a business? Incorporate? Answer: Many people make money “all cash” — it’s not that unusual. To make it legitimate, well, it is legitimate, since you are earning it lawfully. You don’t need to “start” a business… you already have one! So the issue is not one of having to come out from the shadows or somehow make what you are doing legal… it’s already OK. What you do have to do is do the things that a good business owner should always do. That includes these things: Keep a record of who pays you and for what. A simple log book or even a calendar would do. You should open an account which is only used for the business. It does not have to be a business account per se. Just a separate account. Banks will try to sell you some expensive business account. No thank you. A free personal checking account will do just fine. Deposit all the cash you receive, intact, on a daily basis. Don’t take some of it for personal …

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How do I Increase Profits in My Business?

How do companies increase profits? The basic equation: Net income = Sales – Cost of Sales – Overhead

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Variance Analysis? How things are different…

Variance analysis is the process of analyzing why actual costs are different from projected costs. The beauty of the process is that it gives insight into the reasons for the differences… and points towards causality. Who knew accounting could be this insightful?  The managerial accounting course is designed for non-accountants and CPAs alike.  It helps clarify the fine art of using accounting information to manage better.

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Accountants Don’t Run Start-Ups…They Run Businesses

Recently I stumbled accross a presentation deck by Stephen Blank entitled, “Why Accountants Don’t Run Start Ups”

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The Ego Driven Business

Looking at the difference between an ROI Lean Approach and something else entirely…

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