The accountant’s advice is obvious: on your balance sheet, you need to list all your business’s assets and liabilities on the right and left sides of the page, respectively. That way, if anyone asks, you can just tally up all the assets and subtract all the liabilities on either side and come up with a number that represents how much money you have.
High-tech startups tend to ignore this advice. They keep their expenses as off-balance-sheet as possible, so they can avoid talking about them or having them count against them in negotiations or looking like they’re not doing as well as they should.
The advantage of this approach is it lets you pretend your business makes more money than it does. The disadvantage is that it often ends up costing more money to do business that way. Which shows what an accountant knows. A
ccountants are great for preparing tax returns, but their skills are not directly applicable to startups. The reason you hire an accountant is to make sure things are legal, but few startups are trying to be illegal. The main thing you want from an accountant is to make sure your taxes are paid on time; otherwise you can do that work yourself.
In our view, the single most important financial statement is the profit and loss account. Profit and loss is a very simple statement: it lists all your income, all your expenses, and your profit.
The easiest way to make sure you are making money is to make sure that your profit is bigger than your expenses. If it is, you’re making money. If not, you’re not.
A business doesn’t pay taxes. Neither does a household. But businesses do have expenses, and that’s where you can get into trouble with tax laws.
One of the trickiest expenses is the cost of goods sold. For some businesses this is easy to figure; if you’re in retail, for example, you know what your inventory costs. If you’re in manufacturing, it’s more complicated; if you make something, how much should you charge each customer for the materials? You don’t want to overcharge (you’d like to make some profit) and you don’t want to undercharge (because then you would be cheating yourself).
If you are starting a business, you have to think about expenses. There are the obvious ones, like rent and payroll. But there are also less obvious things. You have to think about how much time you are going to spend on the business, and how much time is worth paying someone else to take instead of doing yourself.
And then there are all the expenses that aren’t money out of your pocket, but still cost you something. Like time. How many hours are you going to spend trying to make money from this business? And when you do manage to make some money, how much time are you going to spend dealing with it? If it is more money than your accountant says you should pay in taxes, figure that into your expenses too.
Business expenses fall into three categories: direct costs, opportunity costs, and hidden costs. All these will require some thought on your part.
It is important for businesses to keep track of their expenses. Businesses often make the mistake of leaving out one expense or another, and they aren’t aware of it until it’s too late.
If a business does not include depreciation in its calculations, it will be making decisions based on false information. Depreciation is money that must be spent on maintenance. If a company makes $50,000 profit on $100,000 of sales, but has $30,000 in depreciation expenses, then it’s only really making $20,000 profit. That is less than what most companies require as return on investment before they will consider investing in another company.
The next time you hire an accountant to help with your taxes, here’s a tip: Ask him how much he charges. The answer will be something like “$300 for the first couple of hours, plus $80 for each additional hour.”
Then ask yourself how long it takes you to prepare your own taxes. If you use TurboTax or whatever, it probably takes you about 20 hours. So ask the accountant how many hours he thinks it should take him to do your taxes. He’ll say something like “20.” Now multiply that by his per-hour fee. That’s how much you’re paying him just for working on your taxes, not including all the other stuff he does for you, which is what you’re really paying him for.
I had always known that I could save money by doing some things myself instead of paying someone else to do them. But I had never thought about all the other things about my business that are also opportunities to save money—things that are already built into my costs!
When my business is small, I tend to think of it as a sole proprietorship, because the owner and the business are legally one and the same. But as my business grows, I create a separate legal entity, a corporation or limited liability company.
Emil is a contributor at Accountant Log. We are committed to providing well-researched, accurate, and valuable content to our readers.
