Avoiding Accounting Pitfalls in Growth Businesses
Avoiding Accounting Pitfalls in Growth Businesses
Fahrenheit Finance, LLC – February 20, 2013
What are the most common pitfalls for start-up businesses when it comes to accounting? I could provide numerous colorful answers given my experiences (this article would be much more entertaining if I did) but the true answer would be a lack of integration.Want to avoid a few pitfalls? Keep reading!
What does integration mean in accounting? Don't be scared. It does not mean high-tech, overpriced ERP systems that track everything from a customer invoice to how much time your employees spend watching cat videos on the internet. It also doesn't mean implementing complex and redundant processes where eight different department heads need to approve an invoice before payment is made.
Integration simply means accounting, like marketing and supply chain, is part of the business process, not separate from it. This means you don't take care of accounting at the end of the month, or the quarter, or more frightening, at year-end. Accounting should happen as often as your business happens, which is most likely every day.
The most successful start-ups think through a business process from inception to end, which includes how each piece of a transaction will be captured in the financials. Here are a few tips to think through when integrating your accounting function:
- Think Backwards – When working on a new process, start with your desired outputs. Do you only want to know how much revenue you had for the month? Or do you want to know the detail of each customer sale including which items were sold, the type of customer, the margin on each sale, and the timing of each individual sale to determine if there is a trend? Once you determine your desired outputs, then you can list your input requirements, the data you need to capture throughout the process. It is significantly more difficult (and annoying) to efficiently gather data that has not been captured and recorded during the original transaction flow.
- Mirror Timing – If your business wants real-time information, recording the debits and credits of a transaction should happen at the same time the transaction happens. One of the most important issues for start-ups is cash flow management. If your company is making payments to suppliers weekly, then payments should be recorded in your ledger at the same frequency. This allows management to have an accurate and timely view of their true cash position.
- Keep it Simple – You don't need to capture the hair color of your customer (unless you own a hair salon). First, make sure your data goals are realistic. Your business process should be set up to naturally gather and record each piece of information at one point only in the process and then carry it through to the end. Hint: Redundant capture of information means the process is flawed.
- You're not Done – If you change one piece of the process, you have to review and update the accounting of that process when implementing the change. Integration of accounting is not a one-time setup. Start-up businesses have the advantage of being flexible and adaptable but they also need to remember to integrate the accounting function each time a process is added or revised. Integration simply means accounting, like marketing and supply chain, is part of the business process, not separate from it. This means you don't take care of accounting at the end of the month, or the quarter, or more frightening, at year-end. Accounting should happen as often as your business happens, which is most likely every day.
What happens if you don't integrate accounting? Nothing at first. When you are small you'll be able to sort through the data manually to record a make-shift, directionally correct income statement at the end of the quarter. If your company grows (which I'm assuming you want it to) you'll get to a point where you won't have enough time to sort through the data manually. Remember you have a business to run! We all agree more information leads to better decision making, so make sure you set up your company to efficiently provide the data you need to guide your company in the right direction.
Rachel Antrobus is a Senior Consultant with Fahrenheit Finance, LLC. She is a CPA with both Big 4 public accounting and private industry experience in an extremely high growth company. Rachel has hands-on experience challenging and restructuring accounting and operational teams at multiple national and international locations to support a company's rapid growth while improving accounting operational efficiencies via process automation and increasing responsibilities of team members. In her last position, Rachel played a critical role in the company's transition from a single product line retailer (with 27 employees when she arrived), to a multi-product line manufacturer (with over 500 employees.)
To contact Rachel about your business and ways to improve the efficiency of your accounting and operational processes, call 804-955-4430 Or email rantrobus@fahrenheitfinance.com