If you think you don’t have to understand accounting, your startup is doomed, our blogger wrote. (Photo: Kelly Sikkema for Unsplash.com)
GUEST BLOG. At my conference “The best way to predict the future is to invent it”, I recounted one of my stays at the Beauce School of Entrepreneurship (EEB) on the theme of finance where the entrepreneur -trainer released a simple phrase, but one that will change my life in some way: “a corporate CEO who doesn’t care/understands their finances is not a great corporate CEO!”
At the time, I was just over 23 years old and head of a very fast growing mobile marketing agency. However, other than tracking growth, I’m not too looking for company numbers. When I decided to really dive into it, I quickly discovered that hundreds of thousands of dollars were missing. A long nightmare happened that I will recount in the next blog.
Now, as an advisor on various accelerators, traders often ask me which books I recommend.
Certainly, there are important books that explain key concepts like “The Lean Startup” and “Business Model Canvas.” There are classics like “Crossing the Chasm” that define how we evaluate customers.
But there is really only one book that every entrepreneur should have in their library: an accounting manual.
Eh? I hear you say, I am a businessman, not an accountant.
I can hire an accountant to do the accounting for the business, the same way I hire a lawyer to handle legal matters. I don’t need an accounting textbook any more than I need law books.
Well … if you think you don’t need to understand accounting, your startup is doomed. Just like what happened to me.
Accounting is not just a tool for paying bills and taxes – it is the process of evaluating the health of a business, and every founder should at least understand it and perfectly master the various important indicators, including ratios.
This is the language of business and if you are in business, you should speak it like your native language.
Here is a small quiz I am doing for my entrepreneurship students at the École de technologie supérieure.
You have a SaaS product. You have 1 customer who paid $ 1,200 on May 1. What is your company’s turnover?
It’s simple isn’t it? You won $ 1200. Sure.
The answer depends on how you do your accounting – cash or accrual. If you do your accounting on a cash basis, you sell $ 1,200.
However, if you are serious, you should be on an accrual basis. It provides a more accurate and nuanced understanding of the state of the business than just cash inflows and outflows.
In this example, $ 1,200 is probably for a one year subscription at $ 100 per month.
While $ 1,200 is prepaid for a full year, which is good for the company’s cash flow, the money is only earned for the service provided, in this case, a month until now, so $ 100. The rest is just a down payment.
When you show your numbers to investors and they ask you for your sales, you’ll be more likely to answer $ 1,200 than $ 100. This is normal! On the other hand, if you tell them $ 1,200, you will give the “wrong” answer.
In fact, it is common for a founder to respond with $ 1200. So investors are scratching their heads. And honestly, that’s usually where the adventure ends! Investors are looking for founders who control their numbers (and therefore the health of their business).
In personal finance, a look at your salary and bank statement is enough to know if you are prosperous or on the brink of bankruptcy.
If you run a small business like a coffee shop, you can get a good idea of how things are going by looking around at occupied seats, daily receipts, etc.
It doesn’t work for start-ups where every day is different. Quickly understanding what works and what doesn’t is critical to your success.
The P&L, balance sheet and cash flow statement, shows where you went and where you are going.
Personally, for too long I thought accounting was boring and a waste of time. It was only then that I lost almost everything that I understood the importance of controlling your finances. It’s a little late you say!
Now you have a choice: continue to live in ignorance and blindly trust others to manage the finances of your start-up or quickly buy your first accounting book, take an online training course or register for a Class .
If you choose option two, the next time you are asked about your earnings, you can reply with a smile, “Our earnings are X, accrued on a monthly basis in accordance with generally accepted accounting principles, but let let me also show you our order book which is even more wonderful! ”