• Yaser Khamis

Accounting For Entrepreneurs

There is an increased emphasis on entrepreneurship in the GCC (Gulf Cooperation Council). Governments are striving to transform our economies by developing the entrepreneurship ecosystem. Globally, there is an entrepreneurship revolution. Social media is making it easier to reach target audiences. Cloud services are reducing the need for the high costs of IT systems. The barriers to entry are also lower, and the time it takes to build successful companies is decreasing. The result is the creation of more companies, increased pressures on margins and profitability and higher levels of competition. In this publication, we examine the relevance and role of modern-day accounting to entrepreneurs, and how to use accounting to build your company.



ACCOUNTING: WHAT IS IT AND WHY DO ENTREPRENEURS NEED ACCOUNTING?

Businesses wishing to sustain and grow must manage their finances. Accounting is a broad term that is understood differently by people. Many people associate accounting with the preparation of financial statements for submission to licensing authorities, banks, investors, etc. While that is true, it's not the most relevant type of accounting for startups and small businesses to use to achieve their ultimate objective - growth.


People also use the terms accounting and bookkeeping interchangeably. Understanding the key differences between the two disciplines and the abilities of bookkeepers and accountants can bring you much closer to understanding what the numbers of your business mean. Understanding the differences can also help you recognize when and how to use each.


There are two basic types of accounting relevant to entrepreneurs. The first type looks back in time and helps with the analysis and reporting of the past performance of your business. Examples include the preparation of annual financial statements or monthly management accounts. These functions relate to record-keeping or bookkeeping. A more descriptive label for this type of accounting is 'Accounting for Survival' as we shall explain.


The second type looks at the present and the future and deals with setting the destination and planning what to do going forward. Examples include setting the strategic direction of the business, setting goals and KPIs, etc. We shall label this type as 'Accounting for Growth'.


In isolation, the first type of accounting is unlikely to help your business grow. However, it supports by significantly reducing the risk of business failure and sustaining the business. It also provides the necessary information and data used as the foundation for the second type of accounting. The second type is the strategic level of accounting and mainly concerned with assisting with growth tactics.


ACCOUNTING FOR SURVIVAL / BOOKKEEPER


Bookkeeping assists with recording financial transactions, posting sales and invoicing, settling bills and paying creditors, etc. It is predominantly transactional and administrative.


The principal objective of your bookkeeping efforts should be the survival and sustainability of the business, rather than growth.

The risk of business failure is higher without bookkeeping. Much higher. Your survival prospects improve when you control expenses and manage cash-flows to ensure that you do not suddenly run out of cash to pay suppliers, employees and the rest of the people who need to be paid. Bookkeeping is a must for all businesses.


Bookkeepers are generally educated up to diploma level considering the transactional nature of the role. The work of a bookkeeper has to be overseen by an accountant or the small business owner if he/she has an adequate level of financial literacy.


The specifics of bookkeeping and how to get it done are beyond this publication. The objective of this section is to highlight the importance of bookkeeping/record-keeping. There are many excellent online resources on the subject, and if you are ever in doubt talk to us.


ACCOUNTING FOR GROWTH / ACCOUNTANT


Accounting is a higher-level discipline that is at the strategic level. It's essential to get into the specifics in this section. Unlike bookkeeping, entrepreneurs focused on building the business cannot wholly delegate accounting. Involvement in accounting matters is a must. However, there are exceptions. Small business owners content with the current status of the company need not concern themselves with accounting, provided the company is sustainable, and they have no plans to grow.


It's necessary to recognize that the primary objective of the small business accountant should be to translate the entrepreneur's vision into measurable goals and help the business grow.

Accountants must promote a data-informed culture, focus on setting goals, provide insights based on financial and non-financial data, assist with measuring performance and giving meaningful analysis. Below we provide a brief of some important considerations and tasks. Note that an experienced Accountant / CFO can help, but the Entrepreneurs/Founder/CEO has to lead on these matters.


Strategic Thinking

Setting the strategic direction is one of the most challenging tasks for a business owner. The accountant/CFO can support by asking the right questions, helping refine thinking and model the financial impact of strategic and operational decisions.​


Capital/Debt-Raising

Raising capital or debt is very time-consuming and more challenging than it seems. The funding party or investor is usually able to impose their conditions since they have an advantage during the negotiation process. You also need to prepare many documents - business plan or pitch deck, financial model, etc.


The accountant/CFO can help streamline the process and do a lot of the preparation and heavy lifting, and work very closely with you. An experienced CFO can provide advice and assistance with the formulation of the capital raising strategy, bank debt negotiations, help with developing a financial model that makes sense, building the company's narrative to share with investors, assisting with negotiations and communication.


Setting Goals, KPIs and Metrics

Startups go through various phases. Each phase has its challenges and critical success factors and therefore require prioritizing a fitting Goal or KPI. A Goal is usually static and should be fixed over some time, whereas KPIs are more dynamic and responsive to immediate needs. For example, an early phase startup may be trying to find Product/Market Fit and therefore decide that they need to optimize customer engagement and retention, and intentionally lower growth and customer acquisition.


An experienced accountant/CFO can assist with setting priorities and refining thoughts, generating ideas for the most critical Goals and KPIs, setting up dashboards and performing periodic analysis.


Other Tasks

The accountant/CFO can also help with financial forecasting, CAPEX planning, operational risk management, setting up dashboards, assistance with cash-flow management, preparation of periodic management reporting, product/service pricing, cost control, etc. Also noting routine duties where accounting assistance is needed such as preparation of financial statements, compliance with accounting standards, VAT returns, etc.


THE SWITCH TO ONLINE ACCOUNTING


The cloud is the future. The world is moving towards a future where cloud integration is the norm, and it's essential for your business to keep up. Even if your current accounting systems are working 'just fine', the risks associated with maintaining old methods isn't a question of capability, it's about staying competitive and growing your business. Businesses that resist change and do not modify practices to integrate new technologies risk failure.


So what exactly is cloud accounting? Traditionally, accounting was done using software hosted locally on a desktop computer (Desktop Tally, etc). Cloud accounting is accounting that is done using software hosted remotely on the cloud (online). Cloud accounting software is available for purchase as a SaaS subscription model (Software as a Service - a method of software delivery and licensing in which software is accessed online via a subscription, rather than purchased and installed on desktop computers).


Cloud accounting software such as Xero and FreshBooks provide a convenient platform for small business at highly cost-effective pricing.

Apart from pricing and efficiency, cloud accounting software offers some other benefits, including:

  • The ability to integrate with other cloud services.

  • User-friendly.

  • Automated backup of data.

  • High levels of data security.

  • Automated software updates at no additional cost.

  • The ability to automate some manual process and automated report generation.

  • Accessible from anywhere (online).

  • Real-time availability of information.

  • Low or no capital investment in systems.

  • No capital commitment and therefore the ability to change, scale-up or scale-down services.

  • Supports a paper-less businesses.


STARTUP AND SMALL BUSINESS ACCOUNTING FIRMS


The services of accounting or business consulting firms were once out of reach for startups and small businesses, however, the evolution of cloud accounting technologies and the operational efficiencies made possible by cloud accounting present a whole new spectrum.


Accounting firms can add a lot of value and a wide range of benefits for startups and small businesses. In earlier sections, we discussed the skills of bookkeepers and accountants and the types of services they provide. That provides a useful framework to think of startup and small business accounting firms.


1. Bookkeeping firms - specialize in providing outsourced bookkeeping services. The two main benefits are convenience and pricing.


2. Accounting firms - specialize in providing outsourced accounting services. The value proposition of accounting firms offering complex accounting services extends beyond convenience and pricing efficiencies, giving access to previously unavailable services, such as a business advisory and Virtual-CFO services.


Entrepreneurs with moderate to high levels of financial literacy are capable of doing their bookkeeping without the assistance of a bookkeeper, but that consumes precious time that they could've utilized in growing the business. A common argument against the use of a bookkeeper is that entrepreneurs need to manage costs. We agree. Effective cost-management is key to the survival and growth of startups. However, always considered delegating:

  1. Low-value admin jobs that do not make the best use of your time (since time is a finite resource), and;

  2. Jobs that require in-depth knowledge and experience of a specific task.


ADVICE ON DEALING WITH ACCOUNTANTS

A word of caution. Accountants, particularly advisors, get very fancy with titles, service offerings, promises, etc. Startups are hard. There is a smart way of doing things, but there are no shortcuts.


Entrepreneurs need to look beyond the adverts and marketing material. Advisory can be a tricky term, review the service offerings of advisory firms, and you'll know what we mean. The problem with the term advisory is that it's broad. Advisory means different things to different people.


Few tips:

  • Assess the firm or advisor as if you are employing the person full-time because this is what you are doing.

  • Check that the proposed services align with the qualifications, experience and skills of the service provider.

  • Ask questions about the actual deliverables or outcome. For example, do not commission a recommendations report when you require is a practical implementation of a solution.


TAKEAWAYS

  • Startups are hard.

  • Every business needs bookkeeping.

  • Use accounting to grow.

  • Cloud accounting is the future.

  • The value proposition of accounting firms that provide complex advisory services extends beyond operational and pricing efficiencies.

  • Accountants, particularly advisors, get very fancy with titles and promises. Be cautious.

  • The line between bookkeeping and accounting is blurred, so do not take claims at face value. Focus on a skill-based assessment and value-proposition.