Friday, July 8, 2011

Lesson #61: Set Up Proper Accounting Controls

Startup entrepreneurs are typically too busy executing on their vision, that they sometimes forget to implement the proper accounting controls for their business.  And, the sooner you put these controls in place, the easier it will be down the road, when dealing with banks, investors or auditors, during a due diligence process or otherwise.

I don't think you need anything fancy here.  All you really need is some basic and inexpensive small business accounting software, like QuickBooks or Peachtree, to track all revenues and expenses of the business, all balance sheet accounts (e.g., accounts payable, accounts receivable) and related cash flow items.  In addition, keep a good paper trail in your files (e.g., invoices paid including check numbers, invoices collected including deposit records), that backs up all numbers entered into the accounting software system, in case an auditor ever needs to see them.

I do not think a startup needs to engage an auditor, nor will prospective investors require them.  As, formal audits can get expensive and are not worth the investment for small, private businesses with limited capital to spend.  That said, I would engage a competent accounting firm that can assist you with your annual tax filings.  They will ask to review your internal financial reports from the business in preparing your tax filings, and that is like getting professional third-party validation that your financial reports are "clean", assuming you have a proper paper trail backing up everything you entered into the system.  Annual tax work should cost you no more than $5K-$10K a year.

Prospective investors will be impressed with accounting controls like this, to ensure their invested monies are in "good hands" with competent business people.  And, if you don't have your accounting controls set up like this from the start, investors will most likely make you set it up this way before they invest, as part of the due diligence process, which can be a complete distraction, trying to recreate all the historical financial records down the road.  And, frankly, it is just good business sense to run your business like this, whether investors require it or not, as it will give you an easy and immediate look at all your financial accounts, for any period and at any point in time.

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