With prompting from Fred Wilson's recent blog post regarding accounting for startups, my own recent experience makes me revisit the topic of finding a good bookkeeper or accountant early in your startup's life. (At this point many entrepreneurs will switch off - don't do that! You need to read this!)
Fred did his post as part of a new series of posts educating entrepreneurs on financial fundamentals. Bear in mind Fred is a V.C. - he's invested in Twitter, Etsy, Zynga (Farmville, Mafia Wars), FourSquare and so on. The man knows what he's doing - and saying. The main points in his post:
"If you have a company, you must have financial records for it. And they must be accurate and up to date. I do not recommend doing this yourself. I recommend hiring a part-time bookkeeper to maintain your financial records at the start. A good one will save you all sorts of headaches."
and
"There is always a temptation to skimp on this part of the business. It's not a core part of most businesses and is often not valued by tech entrepreneurs. But please don't skimp on this. Do it right and well. And hire good people to do the accounting work for your company. It will pay huge dividends in the long run."
I'll give you some examples in a minute that support his views - from when it hasn't been done right. But I would say that Fred also misses a key point - which is that even the best bookkeepers often need guidance, just as the best engineers, customer support or sales people need guidance and direction. In accounting this comes from having an experienced part-time CFO or financial expert on your advisory team (very part-time, maybe for equity only or a little cash). That person will help the bookkeeper and entrepreneur determine key policies like revenue recognition that invariably trip up the unwary and can really help the entrepreneur think about how to structure his sales deals, etc.
If you don't follow Fred's advice - or mine - what happens? Well, you get these real-life examples:
- A company which has misstated it's revenues for more than 5 years and which has allowed sloppy business practices to become institutionalized. And which is costing a lot of money to fix before they can get more funding. In this particular case its also clear that the lack of proper accounting raises big question marks about the overall management of the business.
- A company which has for 3 years used an under-qualified bookkeeper to "save money" and declined to get outside financial or auditor guidance. The result? Receivables on the books that sit there for years and are not collectible, revenues that don't align with underlying sales contracts, debt and equity accounting that doesn't match the company's historical financing events, inventory on the books that doesn't physically exist, non-existent accounting for a joint-venture, etc ....
- At the extreme, another Canopy Financial ....! OK, Canopy looks like a fraud perpetrated at a senior executive level. And yet paying attention with the right skills from the right people at the right time could have nipped this in the bud instead of taking the company down along with well over $70 million of investor money.
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