Don’t wait for a due diligence or bank review. Clean up your accounting files now.
Clients often ask me to review their accounting files, usually as part of their fundraising preparations. At times, these deep dives can be informative and rewarding, like a scuba outing in Bonaire; more frequently, they are murky and frustrating expeditions, more akin to treading water in the Great Pacific Garbage Patch. So, if soliciting funds from banks or investors is on your early startup’s agenda, consider the following:
Quickbooks, Xero, Sage 50, NetSuite, or something else, the program doesn’t really matter. What matters is making sure that the program’s user(s) understand accounting. Bookkeepers, after all, are relatively inexpensive. Don’t be fooled by ads promising “point and shoot” accounting. If one doesn’t know and debit from a credit, trouble will follow.
That loan to your employee really isn’t a negative liability.
Chart of Accounts
Most accounting programs offer generic and/or industry-specific charts of accounts. For many startups these charts are sufficient. They most often fail when users, with misplaced administrative privileges, add new accounts at random.
A Chart of Accounts printout that is three or four pages long is a very bad sign.
A well populated “Miscellaneous Expense” account is another red flag. In some cases, one sees it paired with similar dumping-ground accounts like, Undefined Expenses, Ask Accountant, or Unspecified. While these postings should be cleaned up during the month-end closing process, they tend to live on unaddressed.
Studies have shown that if one creates a Miscellaneous Expense account it will be overused.
I recently worked with a long established (25+ years) S-Corp whose active vendor list resembled an old yellow pages directory. In addition to entries for long bankrupt stores like CompUsa and Circuit City, it listed nearly every pizza joint within a 25 mile radius. Really? Are these the qualified vendors one wants to show to a potential acquirer?
Investors can use their phones to find a good restaurant, they don’t need to access your vendor list.
Accountants are not just for tax season. Most of the accounting shortcomings that I see could have been corrected long ago had the startups in question worked with their accountants on a regular basis. Unfortunately, many entrepreneurs view accountants or, more specifically, their bills as unnecessary expenditures.
Giving your accountant remote access to your files is not a potential security breach, it’s a necessity.
The bottom line is one of credibility. One’s financial records form the basis for management reporting and decision making. When one’s books appear muddled, the inference is clear: You don’t know what you’re doing. So, clean up your accounting files sooner rather than later.