How To Understand Accounting For Your Business
The Inventive Journey Podcast for Entrepreneurs
How To Understand Accounting For your Business
The Inventive Journey
Starting and growing a business is a journey. On The Inventive Journey, your host, Devin Miller walks with startups along their different journeys startups take to success (or failure). You also get to hear from featured guests, such as venture firms and angel investors, that provide insight on the paths to a successful inventive journey.
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and so i think on the on the lower side on the on the block and tackle side make sure you have your information in excel format or in quickbooks so that you can manipulate your information and get it clean and then on the other side make sure you have someone to talk to whether it's someone like us or whether it's an investor an advisor to to talk you through things like profitability and ask you the questions that you'll need to answer to you know the tax man but also to future investors [Music] hey everyone this is devin miller here with another episode of the inventive journey i'm your host devin miller the serial entrepreneur that's grown several startups in the seven and eight figure businesses as well as the ceo and founder of miller ip law where we help startups and small businesses with their patents and trademarks if you ever need help with yours just go to strategymeeting.com and grab some time with us to chat now today we have another great guest episode or uh guest uh guest on to do an expert series which is andrew clean or client fine andrew klein like the underwear all right so andrew klein and uh he'll be talking a little bit or a lot of it about an an area that oftentimes as a startup or small business you want to avoid because it's not the fun or the sexy part but definitely is worthwhile and uh and has a lot of benefits to do it which is a lot of times bookkeeping and finances and accounting and kind of what you do that and if you know how to be a cfo is if you're a startup or a small business and how to keep things straight and kind of all of the the software tools and development and kind of all those different areas that while you know it may not be the fun or exciting part definitely has an impact on your business and if you don't do it can get you in a lot of trouble so with that much is an introduction welcome on the podcast andrew hey i'm happy to be here you know i i also am excited to be working with you more and more in the future um i love what your firm does as well thank you i'm always excited to have a great people on board and good connection so before we dive into the area of expertise maybe just take a minute or two and kind of introduce yourself a bit to the audience as to why you're an expert why you know what you're talking about and why they should listen to you yeah i'm the founder and uh managing partner of z counting so we're like accounting but with a z instead of an a um and uh i'd worked at a major accounting firm when i graduated from college i did auditing of large private and publicly traded companies and i just hated my life because you just didn't have the opportunity and freedom that you have as an entrepreneur to really make decisions and do do the right thing you know and so i went uh i then quit that job i and i went into a variety of different businesses tech businesses healthcare food service and eventually after an exit to coinstar we sold the coffee kiosk company to coinstar i joined an angel investment group as the executive vice president and i recognized the reason that my companies were more successful or were you know successful over the the 20 years that i was doing them was because we had a really strong pulse on our accounting and finance and we could explain to investors and stakeholders how our accounting and finance worked and how our profitability worked with our customers and so i started c counting initially to provide cfo support to help with the communication part and then by year two we realized holy crap compliance on the basic level is totally being missed by these entrepreneurs and they're wasting so much time on the weekends when they could be selling to customers and so we launched essentially a 500 a month basic bookkeeping for small business package that's super transparent and allows them to fully outsource everything in accounting and so yeah we've raised over 100 million dollars for clients we just had a client i mean it's probably higher now we just had a client raise 13 million yesterday um which was which was awesome and uh we've helped you know hundreds of businesses on a monthly basis we help hundreds of businesses with their accounting so now no that was a great background and definitely is uh insightful now now diving into the area of expertise so let's say you're taking a startup or a small business and you've got you know a few people they're just getting going and they don't have you know an ability most the time if you're a startup you know you have more things to spend money on the money to spend and so you're always you know most time you're wearing multiple hats you're not able to bring on a full-time cfo or sometimes outsource as much and you know so that's some of what the services you guys offer but for some of them they're saying hey we we don't have any money this is a side hustle of bootstrapping what are some of the things they should initially be thinking about as far as how to keep their fine either get their finances in order or keep their finances order if they're just getting started yeah and in a perfect world i think that you would as soon as you finish your corporate formation and create your company bank account you'd engage an accountant to set up your accounting processes and procedures uh probably quickbooks for small businesses before you know they grow um but when i meet entrepreneurs i we see a lot of entrepreneurs um i'm based in seattle but we've got sort of a satellite office in austin and uh and l.a and so when i meet entrepreneurs a lot of times the entrepreneurs don't have investors right out the door or they don't have the private net worth to be able to sell fund the business and so they're sort of bootstrapping along and you know maybe they scrap up enough money for the the lawyer but they think well i can just you know i'll just wait till tax time to do my to do my books which i say if you don't value your accounting day one it's okay right like like it's not the most exciting fun thing to be doing on on a weekend you know sell to your customers but i know that it's a fun and exciting thing to do on anytime some people like you may find it exciting i always look at it as it's something that i have to do as part of the business and whatever i can do to offload it is what i like to do totally you know and it's great we've we find um you know our employees they get excited about entrepreneurs and the entrepreneurial journey and all of the amazing things you can do but they also just love to sit in their office with the green visor and just chug and when i give them too much client-facing work they're like can we just go back and do the accounting it's really funny but uh you know i so so if you start a business and you're really strapped for cash and you haven't raised money yet i would suggest just go to quickbooks online and get the basic quickbooks online and connect your business bank account right and we actually offer all of our clients and don't tell into it because i'm not supposed to do this but anyone that calls us we give them half off of their quickbooks subscription um because we get it you know we've got thousands of or hundreds of clients on quickbooks so we get it for half off so i just passed that savings on to our clients um but if you just simply plug in quickbooks and connect the bank account then all of the information will be in quickbooks and so if it takes you know if you call us or another firm in you know april 12th right first we're going to say you're going to need to file an extension but second we have all the information oh this this year you get until maybe oh yeah well yeah yeah you get another month yeah may uh another month to procrastinate yeah another month to procrastinate but you know if you have everything in the quickbooks even if you haven't allocated it to the correct expenses or taking your deductions it's it's there for an accountant or a bookkeeper like like our team to go in and clean it up and get you compliant and so i say don't let that go on for more than a year um you know because we've also had that problem where clients are being chased by the irs they're spending so many cycles fighting the irs because they never paid taxes for three or four years instead of running their business so so now so let's say okay so i i take away my my short take way to simplify it for me is at least connected to for first step is connect your friends and there's quickbooks there's fresh books there's a few different softwares but find one that you can automatically connect to your bank account import the expenses and then you can at least walk through and kind of categorize or put those in the right categories of what they are as a starting point or a stepping point now yeah and if if you're a founder and you don't have you don't have a ton of money don't worry about categorizing it until the end of the year and having one of us because go sell some customers right go to your business build your software right don't worry about you know a an accounting thing for a couple months because we can always go back and fix it right like it's not like as long as the data is there we can allocate it right and so my suggestion is make the business work and we can catch the accounting up there's other accountants i'm sure that'll tell you like don't do anything until you do your accounting but you probably don't want one of those they're paying the ass i agree well i mean because i mean and it's always funny you know every time you talk to whatever expert it is it's always theirs is the most most of the time theirs is the most important you should always get started on ip or you should always get started on an llc format or you should always do accounting because it's going to have well yeah they're all going to have an impact on your business but i like to your point if you don't get out and sell it doesn't really matter any of the rest of this because the businesses are going to be in business long and so the first thing is focus on do get out there figure out how to make money and get sales but then start to at least take some initial steps with this so now let's say okay so i got let's say i took that first step and i've got whether it's quickbooks or freshbooks or any you know a few different softwares out there that the accountant can do then you know as i'm going throughout the year what things should i be thinking about as far as the accounting side as far as you know how should i if i get and i'm taking this from from the perspective that i haven't hired a cfo or an accountant yet because i'm a small business you know if i were to do that what are some of the initial steps i should be and or let's say i say okay if i do a good year this year next year i'm going to go and hire someone that knows what they're doing but what are the things that they should at least start to do as they let's say over the first year that they get the business established yeah so i think that the hard thing is if you get an accountant that doesn't see the big picture you're going to be constantly fighting over you know decimal points and pennies on invoices right but how we like to look at all of our clients is is we definitely take a look at the details but at the end of every month we take a zoom out and we look at the financial statements and so i think that it's important for an entrepreneur to take that same perspective and instead of looking at you know the monthly financial statements or the individual invoice details they need to understand what the next milestone is with investors and then track their business to that so if you're a consumer products app like like a social network or something that's that's really about growing the volume of users i think that you need to focus on activities that grow the volume of users and try and match those and so as you're tracking your your uh expenses and revenues and putting them into the categories within you know quickbooks or freshbooks or xero and i actually suggest quickbooks uh online out of all those because every account knows how to use quickbooks and so you're never going to have a problem finding someone that can do the software but if you can track based on what your goals are and so if you're a sole proprietor your goal is going to be having enough cash you know to pay the next three months or so of your expenses and if you have investors it's going to be spending enough cash to hit the milestones whether it's customer revenue targets or engineering successes that those investors need to do the next round so there's breaking up a bit because you kind of hit on almost two different areas one is if you're simply trying to do accounting or otherwise make sure you make payroll that enough money is coming in you're covering your expenses you're going to be able to maintain inventory that's kind of one side of account the other side is if your plan is to go get in whether it's angel investors venture capital or otherwise take on and invest your money then you're going to have to have your books in in order so one that they can do their due diligence see where your books are at how much debt you're in and how much you know shares have been authorized or paris they're you know putting put out there where their money's gonna go so those are two different type of things so let's break those out just a little bit so and you start to touch on kind of two different things but let's say i'm not going to for this year i'm just going to bootstrap and i'm not going out investor dollars i'm not going to do that i'm simply going to try and keep the business get the business established keep it afloat and do it a little bit what are the things that i should be looking at for account and then we're going to jump over to when you are looking for investors but the first step what are the let's say the top two or three things that i should be doing as i get going this you know hard to get going this year that i should be thinking about for counting if we're just bootstrapping it yeah if you're just bootstrapping you know there's a ton of tax strategies you can use and there's a bunch of magic based on the categories and how you allocate expenses but if you're simply bootstrapping the most important thing is having the cash today for tomorrow the next day the next week the next month right and so i think that the most important thing is managing cash in versus cash out so i work for a company that bill gates owned called corbis and corbis because bill gates was the the main um funder of it and they never were really profitable like a lot of these tech businesses go they really focused on how much cash in versus cash out and cash needed to run the business and so i think that that's a really smart way for a bootstrapped company to operate so taking a look at their weekly or monthly or however they run their business cash in versus the cash out versus the cash needed and so you can really scope and especially if you're using quickbooks it and you can do a daily or weekly look you can see how much money you used last month to sort of forecast how much money you'll need next month no i think that that's a good i mean that's it's simple but it's one where hey let's see how much is coming in how much is going out are we at least at meeting our needs of how much is going out versus coming in if not let's see where the money that is coming in where that is so we can adjust maybe get more money there or where the money is going out can we either reduce expenses or otherwise delay that or adjust that so i think that that's a great place to start now let's flip to the other side let's say my my i'm projecting that you know in order to get the business it's going to be a cash intensive business or i i really can't bootstrap it or i do need a minimal amount of investment and that can be anywhere from tens of thousands of dollars to hundreds to even you know millions of dollars so to speak because different startups have different needs but if you're going into an investor and whether it's an angel capital venture capital or angel investor venture capital or anything else what are the things that they should be doing to get their books in order yeah you know i i really like to do product market fit conversations not just with customers but with investors and i like to understand what's important to investors and so on on one level you got to do the basic bookkeeping have basic categories and identify how you've spent the funds thus far and the you know those top categories are direct costs of cost of goods sold for your product or service your marketing expense your engineering expense and then everything else that supports the office and so the more that you can skew into engineering on the early on so if you're spending a lot of your your time and money and you can allocate that to engineering and you're building a tech company it's really easy to justify that to investors if you're building something like a consumer products company you're really going to want to be looking at marketing spend and how that relates to your sales and so the the other thing is you're thinking about what is the most i love talking about positive stuff opposed to like i like the carrots right and i'm actually a vegetarian and so i really do like carrots um but uh but where you can really get in trouble um on your accounting is around payroll and so i think that once you're ready to start hiring employees and contractors i think you need to be really thoughtful and and really get help because a lot of people like if an entrepreneur wants to book a meeting with me i i'll give a 30 minute free meeting to any entrepreneur i i think you'll do the same thing right yeah no and that's exactly i mean we take we'll do a 15 minute what i call strategy meeting but we will sit down with you kind of walk through here's some things to start out with you know and it's probably a little bit the same you do in in the sense that you say hey i understand sometimes there's more money to spend or more things to spend money on the money to spend and you may not be able to afford our service today but let's think about here are some things to get you started here are some where you should start be planning your milestones and kind of figure that out and strategize and it seems like the same thing with financial planning especially if you're going into investors kind of having that same strategy of okay here's where we're spending it here's how it's going to be spent here's how we're going to utilize it here's how we're going to use your money to leverage it to increase the valuation of the business so you get a return yeah and the other thing i think where you can get in trouble is around payroll and so i i say when you start doing payroll don't delay payroll taxes or don't say well we'll catch that up later because payroll will pierce the corporate veil meaning even if you have a business entity an llc or c corporation you're still liable for payroll taxes if they're not paid and in states like california and washington they're very pro-employee and so we actually had a had a problem with a client where they were paying contractors in california because they you know they're based in washington didn't really want to have people in california and because the pandemic one of their employees couldn't move up to washington so they were paying them as a contractor and they filed with the state that they were a w-2 employee meaning an employee with taxes withheld and there were huge penalties for the company and it cost us a lot of money or at least it cost our client a lot of money to fix that that problem and we'd suggest it against it you know if you're gonna pay employees pay employees and withhold their taxes but i think there's so many cheap payroll solutions um one that we use a lot of is is gusto and again if if you have me help set up your gusto i'll set up your gusto for free and give your first month free but there's also adp and you know a variety of other ones um there's also peos like conspirity and you know a variety of other companies but there's so many companies that do payroll compliance so cheap like just use one you know it's it's it's better to pay a little bit extra you know 15 more on your payroll than have to pay a lot extra in the future for all the penalties and and interest no i and i definitely agree and it's one where you know i think that sometimes you say oh we'll catch it up we'll delay it and you know you get yourself into a big world of hurt because often times you push those out and the business doesn't go well and now you've got stuck with a big you know big amount that you are obligated to pay and you don't know how to do it so i think that building those in and saying either we're going to have to reduce staff we're going to have to reduce what we're doing hours whatever but keeping yourself balanced and this is kind of a a side note you know for those are listeners when you mention piercing the corp reveal just kind of as a an explanation there so when you build whether it's where you form whether it's an llc and s corp or c corp you have the presumption that basically your personal ass they people can't come after your personal assets and so if you're to get sued you're to you know you're to have whether it's patent trademark lawsuits or you're to have product liability or other things then they can they can come out to the business and the assets and they can do that but they can't come after your life savings they can't come after your house when you pierce the corporate bill it basically means no we can we can go beyond the llc or the business and actually come after your personal assets for certain types of things and one of those is going to be if you if you mess with the irs generally they they figure out a way to get the money one way or the other yeah and it's not just the past due taxes but it's uh employee wages or presumptive employee wages and so that the governments particularly on the coast will not accept an evil corporation not paying their employees and so if you can't afford employees do lay them off don't make people work for a future promise of pay because it can get you in big trouble that's interesting now one of the other things that i think that is and you can correct me or wrong it's one where i know enough to be dangerous but that's always the worst place to be because then you don't know exactly but on piercing the corporate belt if you start to co-mingle funds is that right in other words i start to use personal funds and business funds and i kind of start to use them interchangeably and this happens a lot especially if you're a one-man guy or a show or you just have a few and you know oh i'll just take out enough for me to live on and so then you kind of you know start to use what money that does come in as an income as a way to a source of living but you never actually pay yourself an income and the business does that and then that can get in trouble so maybe kind of touch on that because i think that that's one where people don't think about oh i just i'll just pay myself enough from what the business is making to get by but they start to mingle those funds they can get in trouble yeah and i i think that's that's probably more of a legal concept than an accounting concept because a lot of these small businesses they can't survive on their own and so there's a personal credit card that will bring into the business because it's used primarily primarily for business the irs will accept that credit card as a business card and as business expenses and so to to some point um you can do that but once you do that that card or that bank account is now a business bank account or a business card so yes it would pierce the corporate veil you would be able to in a lawsuit attack those accounts and so if you're co-mingling between like your robin hood account in your business account you know make it very clear what is an owner distribution what is owner pay and then also when you're doing the accounting if you have to keep throwing out oh this is a personal expense not a business expense it creates a lot of extra unnecessary work so just have a personal card and have a business card and you know use your business for business and your personal for personal and i know a lot of entrepreneurs don't have a ton of personal because they're working all the time so you know take that take that into account but yeah i'd say keep it clean but yeah even and where i've seen it is like you wanna you know you gotta pay rent this month for your you know your apartment or your house and so you you rather what you should be doing and then you can crank me where i'm rowing is just give yourself a seller make yourself make it clear what you're paying and you can pay yourself a salary do a distribution whatever it is but what often happens or they'll just go and they'll take the business card or the business account they'll charge their uh their personal whether it's a rent or utilities or food or whatever and then they'll say oh i'll get it caught up or this is really my payment and then it creates one is it allows it to hey if you start to commingling funds then you're saying that at least on the legal side you're not you're not treating this as an llc you're treating this really as a sole proprietorship or other type of business formation and then they can co-pierce a corporate bail because you're not keeping those are separate but then even on the accounting it gets okay now is this a business expense is this a personal expense and how what is you know having to divvy that up especially like you get in the category of the food was it was this a client meeting with at a restaurant or are you just going out to you know your your with your family to dinner type of thing and it can create a bit of a difficult to sift it out so that's i think a fair thing to just try and keep those separate as best you can well as now as we to start you know to start to wrap up and they're always which was interesting i thought this would be you know it's interesting it's accounting and you're like oh it's going to be accounting but there's a lot of interesting aspects here and i think that there's a lot of things that businesses legitimately do know or shouldn't or should be doing and should know that they'd often times don't spend the time to come up to speed but as we wrap up the podcast and again there's too many things to talk about so maybe someday we'll have chat again soon but if um if we're to if you're talking now to a startup then they're just getting going and they're saying okay i've done a horrible job or i haven't done anything with my accounting and i just want to get started i need to get something going today and you touched on maybe beyond quickbooks or just getting connected up because we already talked about that but they could after they get quickbooks connected up or freshbooks or whichever one they prefer what would be the one step that you would tell them to get going on today that they could at least get started with within accounting and with the within finance of their business yeah what what i'd like to remind everyone is there's no emergencies in accounting you know in it in accounting no one like dies or goes to jail right i mean unless you're in like major corporate fraud like enron or something right but but in general like if you made a mistake or if you did something wrong there may be penalties there may be interest but in general no one goes to jail and there's no emergencies in accounting and so i think first i should just take a deep breath and then think about what's the next step that we can do to gather all of the information to either do it ourselves or to hand it off to someone like us and i think the other thing when i started my first company when i quit the um the cpa firm i started a chain of crepe restaurants and i had some really great mentors when i wrote my business plan when i was in college but when i started my business i was smarter than i ever was smarter than i am now because now i know all that stuff i don't know back then i didn't know what i didn't know right and so so i just ran this business and i and we had the 2008 economic crash and i had no mentors no people that were helping me with my business and so i suggest that founders build a board of advisors um you know or a group of advisors maybe not a formal board so to speak but you know three to five guys and gals that they can lean on when they have questions and so i think there's a lot of investors that have a financial background which is why they're investors and so i think that having an investor participate as also an advisor on your financials even before you talk to an account or meet with an accountant can help you navigate through some of these things that seem foreign and so i think on the on the lower side on the on the block and tackle side make sure you have your information in excel format or in quickbooks so that you can manipulate your information and get it clean and then on the other side make sure you have someone to talk to whether it's someone like us or whether it's a investor an advisor to to talk you through things like profitability and ask you the questions that you'll need to answer to you know the tax man but also to future investors no and i think that that's that's a good uh having those whether it's a formal board whether it's just a group of mentors or there's people you know that you look up to but have those people that for the different areas of your business you can turn to ask a few minute questions get a little bit of advice get a little bit of a guidance at your training going and most people if you know don't don't over abuse it or you know don't abuse it so much so you're going to them every day and spending an hour of their day because they've got to get do their business and do it too but most people are saying hey if you need a few minutes we're you know we've been there we especially they've been there been through it they want to give you a little bit of advice sit down and give you a bit of time and to help you out so i think it's great to establish those people that you can trust and you can um whether it's formal or informal that you can have that as a group well as we wrap up if people want to find out more they want to be a client they want to be a customer they want to be an employee they want to invest in your business because it's so awesome they want to be your next best friend any or all of the above what's the best way to reach out or find out more yeah so our website like i said was zcounting.com so it's like accounting but replace the a with the z so i was going to be accounting.com because i thought web domains are the best but accounting.com was already taken but counting.com was taken counting was taken but i got to z counting and it was still available and so so that's what we ran with and so um so yeah just go to zcounting.com and right at the top and at the bottom of our page we've got a direct calendar link that you can book with me probably similar to your strategy website um i'd i definitely encourage people to go to zcamping.com grab some time to chat and definitely take advantage of doing a strategy meeting or strategy session figure out how to get started and what you know whether or not it's you using you as a services now today or getting advice so you know how to plan for the future i think that's all very beneficial north while well thank you again andrew for coming on it's been a fun it's been a pleasure now for all of you els or all of you listeners out there if you either have your own expertise to share or you just want to come on and share your journey feel free to go to inventiveguest.com and apply to be on the podcast also as a listener a couple more things one click subscribe in the podcast player so you know when all of our awesome episodes come out and two leave us a review so other people can find out about the awesome episodes last but not least if you ever need help with patents trademarks or anything else with their business just go to strategymeeting.com and we're always here to help thank you again andrew it's been fun it's been a pleasure and wish the next leg of your journey even better than the last all right sounds great see you soon you