Looking at Accounting Information for Startups
As a finance person, I spend a lot of time talking about how to organize and break out charts of accounts. Accounting information and how it is tracked and categorized can be the key to understanding what is going on in a business. I talk about clarity of information a lot, but it’s hard to explain exactly what I mean until I work through a company’s accounting with them and see the light bulb go off. I want to dig a little more into the details of how accounting data can change your business understanding.
Accounting Confusion for Startup and Business Owners
Here is a typical “accounting” list of accounts. I file my own taxes every year and if you do as well, you might notice these categories for what they are: tax categories!
Not surprisingly, these categories cause some confusion among startup and business owners, primarily because many of them don’t really relate to how business owners run their businesses these days. QuickBooks Online has a drop-down when you are setting up a chart of accounts to identify the tax category of an expense, but especially when business owners set up their QBO themselves, this classification is basically ignored. In contrast, if you have your tax CPA do your books or a “just get the books done” accountant work on your books, you will find your categories looking a lot like this “tax ready” set of accounts.
Side note: Speaking of categories, here’s a great article on why it’s important to classify meals and entertainment separately!
This can be helpful once a year when you file taxes, but the rest of the year it can lead to a lot of head-scratching about “what exactly is this?” Typically, when a company starts out they don’t pay a huge amount of attention to where they or their accountant are “booking” or categorizing things. This usually means the accountant uses the category that looks right for tax categories, then in a year or so, the founder tries to present the financials to investors and realizes they don’t know what half of the categories are. Or more importantly, they have little idea what types of expenses are included in them. Try this: go look at your chart of accounts and guess what’s in them, then ask your accountant for a list of vendors and see how close you are! To make matters worse, when you are only hiring a bookkeeper or CPA for 2-4 hours/month ($200-$400), you may find inconsistent categorization.
Another side note: This is a normal problem with teams that are only working on your books for a few hours, they are trying to get your books done quickly (as you’ve often asked or implied you’d like them to keep costs low), but this means they will categorize expenses as they “usually do” more frequently than not. If you have asked them to categorize those expenses differently at some point, or if more than one person works on your account, categorizations will be inconsistent. It’s a classic case of “you get the time you paid for.” It would take significantly more time (2-5x more time for the accountant to confirm which category each vendor is “supposed” to go into with the client, then to double-check before each categorization that this is how this particular expense has been categorized in all previous periods.
Categorizing Accounts for Startups and Business Owners to Understand
So here’s the big question. How do you categorize your accounts so you can actually understand them? The answer is simple, really. You pick standard categories and names that are specific enough, without creating an account for EVERYTHING, that (most importantly!) make sense to YOU.
Every business is different, some industries have specific GAAP rules and some have typical ways investors like to see the books organized. Below is a chart of accounts I often use for early-stage SAAS businesses. These are just example categories your startup may want to use, not a complete list.
- Contractors (this can also be broken into additional groups like R&D, marketing, etc.)
- Salaries (I like to see this broken out into the following for planning purposes)
- Payroll taxes
- Payroll fees (your monthly payment to Gusto or ADP or Justworks)
- 401k benefits paid by the company
- Healthcare benefits paid by the company
- Ad spend (I like to break this out into the major vendors like Google, Facebook, etc.)
- Affiliate commissions
- Website design
- Marketing contractors
- Legal (I like to break this out as for companies receiving funding this expense can change a lot from month to month)
- Accounting & CFO services
- Other consulting fees (such as a business coach or admin-level consulting)
- Office supplies
Research and Development (I also recommend breaking out any items that might be R&D tax deductions into separate categories [where reasonable and appropriate] to make that process easier later)
Other Business Expenses
- Bank fees
- All the other various expenses
Getting to these groupings can be done at the accounting or QBO level (warning, your bookkeeper is likely to sigh heavily at you) but they can also be done in less than an hour with the help of our CFO support. After our setup call we will send a list of notes for you to follow up with your accountant. Ready for your accounting system to make a little more sense? Set up a call with a CFO now to get your business organized and your cash forecast set up in as little as 2 meetings and 1-3 weeks (yes—that quickly!).