Tag Archive for 'accounting'

The important business skill in life

I believe there is one true lesson that matters for anyone running a business in whatever space you find yourself in. A skill that if you learn the manage techniques in executing them, are transferrable to any business. Thee core concept is called “working capital”, and although they teach this as a basic accounting concept — the meaning of it is not something you can learn, but simply feel have to feel as a CEO founder.

Have you ever had to worry about not being able to pay payroll next month? Have you ever had to raise financing to *continue* (not start) the operations of your business? That’s what I call the working capital burn. And while the tech press is littered with “acquisitions”, the truth of the matter is that the majority of businesses that get acquired knew their future was limited and/or their working capital was running out. An acquisition is a failure in the ability (which may also mean fatigue, not just lack of skill) for an entrepreneur to expand their working capital.

Working capital is a deep concept that incorporates a lot of skills in order for it to successful function. It means fundraising and revenue; it means cost control and hiring. Working capital management is one of the three core functions any CEO — big or small business — that s/he needs to be responsible for outside of setting the strategy and building the team. But the truth is, it’s something everyone in the businesses needs to be responsible for — it’s just the CEO is the only person who has a true picture of the operations.

One of the sad things about the recent financial crisis that has had many economies go into deep recession, is that thousands of businesses went bankrupt despite existing for many decades in some cases. And the reason, was because the banks stopped lending when even $20k may have been enough to boost the working capital of an existing business to continue its operations. Because you see, working capital is not something you solve once you graduate from being a startup — it’s the thing you need to think about from the first day of starting the business and the last day of ending the business.

When I hear of a CEO who is hiring staff faster than the revenue growth of the business, I shake my head. When I hear of a person giving me advice on how to run my business about investing the businesses’s cash in a certain direction despite more short-term challenges being apparent — I dismiss them because they clearly have never had to *feel* the stress of the working capital burn. When I have people claim “profit” is bad even in non-profit organisations, I can only put my hands up in despair because they don’t understand that business has costs — many of them indirect — which you need to always be thinking about and building up the cash reserves on seemingly unrelated activities.

The working capital burn is a thing that all entrepreneurs that have experienced can relate to, and why they can connect despite decades between them in age and a world of difference in terms of what business they work on. And I have to admit, despite my six years of tertiary education and three years work experience to become a chartered accountant where working capital was just one of many accounting concepts I had to learn; it wasn’t until I started my own business that I *felt* the working capital burn and really understood it. Which is why before I can trust anyone in a position of authority for a business I run or a business I invest in, I look to see if they not only get working capital, but if they’ve felt the working capital burn before.

The most important lesson in business

Over the weekend, I attended a conference (I was even quoted in the press, despite disclaiming before one of my presentations I was scattered from a terrible hangover!). In one of the sessions, where the brilliant guys at Australian start-up company Good Barry shared some of their lessons, an audience member asked the question of when should they get lawyers and accountants to help them out.

I think this was a very good question and one I will answer here. Why can I? Because I am (nearly) a chartered accountant ; an experienced external auditor; and an employee in one of the biggest firms in the world that makes money from guys like me doing services for people like you.

There are four areas accountants help a business:

1) Reporting & compliance. Whether you run a business and want to know what’s happening (ie, measurement on your employees output so you can track how big their bonus will be) – or you need to create some type of reporting to external stakeholders (like investors, banks, shareholders) – accountants have the skills to ensure you create the appropriate reports. Reports can vary from custom internal ones to help assess things, to government mandated ones like financial reports to statutory authority’s or the tax office

2) Tax. It wasn’t until I studied tax, that I realised how valuable tax accountants are. Tax is the biggest expense of anyone – individual or company – and there are plenty of legal tricks to avoid paying. Specialist accountants can help you structure your business in a way, where you minimise this expense. People can spend an entire life understanding just one aspect of the tax code. It’s massive. Trust me, a good tax adviser is worth their weight in gold.

3) Assurance. If you produce financial reports, you need to get audited by special types of accountants, who will verify your numbers to make sure you are not talking crap. However auditors are also very experienced in understanding how businesses should be run (so would you if you visited dozens of companies every year analysing them inside out), so they can also add a lot of value by helping assess your business during the audit and making recommendations on improving how you run. They do this, because during an audit they see everything and often have a more complete view of a business than management. A very useful thing accountants can help with, is by developing your internal control framework. What this means, is helping set up systems so that it runs like a proper business. For example, making sure two people sign a cheque is a ‘control’ – and a very important one, because without it, people can be signing cheques to themselves and running away with your money (it happens more frequently than you think).

4) Decision making. These types of accountants are called management accountants, and they can help analyse the numbers of a business to assist strategic decisions. For example, should you buy a company? A management accountant has the skillset to provide the analysis on whether it will be worth while. Management accountants help interpret information, to make important decisions for the business.

What help does a start-up company need from an accountant

The most important thing you need to know, is CASHFLOW. You need to maximise the amount of working capital – cash you’ve got on hand – at any one time. It’s seems simple enough that you need to make sure you make more money than you spend, but you will be surprised how easily people overlook this. Possibly in the Internet startup culture funded by vulture venture capitalists, people forget that the money they are spending is not real money.

Accountants can help maximise your cashflow. They can help with cash strategies like for example all that money sitting in the bank, why not put it somewhere and earn interest on it? They can help with cash management to maximise your working capital: smart ideas like pay your creditors as late as possible (people you owe); chase your debtors every day (people that owe you). However you don’t need an accountant to watch your cashflow. You just need you to recognise its importance. Get that? Accountants can do a lot. But if you are a startup, cashfow is all you need to know.

Do you need an accountant for fix up your controls? This only matters when you have hundreds of people in an organisation and things get complex. Controls are the difference between a small company run like a family business, and a big business. Matured startups like Atlassian that make $30million a year, need to consider controls. You? No.

Do you need an accountant for your tax strategies? Well hey buddy, if you aren’t making money, you haven’t got any tax to pay, right?

Do you need an accountant to help make management decisions? Sure you do – but if you have common sense, you can to. Accountants can give you a better analysis of your business from your untrained mind, but you need cash to pay them to do that.

Do you need an accountant for financial reporting? In Australia, unless your gross operating revenue is over $10 million a year; and you have over 50 employees or $5 million in assets, you are considered a small private company that is not required to lodge reports. So stop dreaming about your goal to list your company on the stock exchange, and get back to thinking about the cashflow.

So going back to the question of when does a start-up need an accountant. Well look, if you hire me I can whack some sense into you. But if you have half a brain, you will take this lesson in understanding that cashflow in king. Focus on that first, and then you can worry about the rest if the cashflow is there.

Half the problem has been solved with time spent

On Thursday, I attended the internal launch of the Australian Entertainment & Media Outlook for 2007-2011. It was an hour packed with interesting analysis, trends, and statistics across a dozen industry segments. You can leave a comment on my blog if you are interested in purchasing the report and I’ll see if I can arrange it for you.

One valuable thing briefly mentioned, was the irony of online advertising.
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