In my experience, there are two kinds of entrepreneurs. Those who worked for other companies, saw the pain points and the selling points, recognized the workflow, value proposition, and decided to take a chance on their own. The other entrepreneur is the one who starts as a hobbyist, one who does something in their spare time (for fun or to help out friends) and has the sudden realization, “I can do this for a living.”
Typically, the latter has less to lose but a lot more to learn. Going from a hobby to business may seem like an overnight change, but if you’re serious about the journey, it’s anything but. A chief player in this is accounting.
Accounting, really? Yes. It may be obvious that “budgeting” of any kind requires some level of accounting. You need to know how much money you’re pulling in and how much you’re spending to sustain yourself. However, but there’s a lot more that if you’re not tracking, you’re going to wind up at the end of the year with an modest-to-empty bank account and not understand what happened. There are two categories of financial activities that often go overlooked. Without tracking these two in particular, you will suffer burn out and possibly a premature empty bank account. The two categories are:
- Annual, monthly and one-off fees.
- Time spent on various facets of the job.
Sounds simple enough. You can do that; would’ve done it anyway. It’s important to remember that most businesses, products/services alike, thrive off the impulsive hemisphere of your brain (we’re talking about Daniel Kahneman now). It’s why you get discounts for purchases made in bulk; heck, it’s why you purchase in bulk. You don’t want to run out of toilet paper when you need it, so you buy in bulk so you don’t have to think about it.
It’s the same as buying a subscription. They want you to forget. When you do, say a charge of $5/month goes through, you forgot, but it renewed automatically, so you figure you’ll cancel it later, but within the hour, you’ve moved on because you know you’re locked in for another month already and you’re not going to argue a $5 charge, so you’ll wait, you have time… until it happens again.
Take a product/service like dollar shave club, a business with a clear market, but at $10/month, that’s $120/year which could get you an effective, efficient reusable, electric razor. If that razor lasts you 3 years (and realistically, it’ll be a lot longer than that), you’ve already saved $240 dollars… but they don’t want you to think about that, they want you to remember you’re spending a nominal $10 to stay groomed.
This matters because if you want to grow your business, you need to always keep your eyes open to costs, savings, and cash flow.
Tracking your Time
Additionally, tracking what is eating your time is of paramount performance. By this point in your startup process, you’re likely familiar with the 80/20 rule. Track your time, (I recommend Toggl). It matters because when you have two monthly subscriptions you use for your clients: one is $50/month while the other is $75/month. Over the course of that year, someone pitches you a product that does both of what those tools provide and a little bit more, say one thing automatically whereas with your other two tools, there’s a manual component. The new tool is $2,000/year. On the surface, it could appear as though the solution is simple. Your two existing subscriptions amount to $1,500 vs the new one that’s $2,000/year. By keeping your two, you’re saving $500/year, right? But if they’re tools that don’t scale and require moderation, and manual input, how much time a year are you spending navigating between them? A few hours? A few minutes? Let’s say you spend no more than 30 minutes a week swapping between these or comparing metrics. That’s 26 hours a year. That may not sound like much. But as a startup, and as an entrepreneur wearing many hats, your time becomes your currency. If the tool that’s $500 more a year automates this process by having both tools in one location. If it cuts down 26 hours a year to 13, is that worth your time? Is it worth it to your clients if you can still dedicate 26 hours but now it’s twice a week that you can report.
Look at where your time is going, not just annually but daily. Is your attention constantly pulled away from other facets that need attention?
Take it further. What if instead of a tool, we’re talking about a person, an employee.
Track Successes and Failures
Whether you’re selling a product or service, you should track successes and failures alike. If you’re selling products, you need to guarantee a certain number of sales. Many — if not all — industries are seasonal. In that regard, (in an extreme example,) what if your website requires an exorbitant annual fee to manage your ecommerce sales traffic, but you’ve had a particularly rough season (faulty launch of a new product, or shipping malfunction). Your website is your greatest asset as it’s effectively an office that’s open 24/7. If your site goes down because you didn’t sell enough products, how are you going to make it back?
That’s an extreme example, but take another more moderate look at businesses that render services. Typically services are provided on a contract basis (maybe it’s one month, maybe it’s 3, 6 or “until it’s done”). What if a client doesn’t pay? What if someone terminates their contract early, what if three of your contracts are terminated early or choose not to renew? If you’ve been breaking even every month, now you’ve got to scramble to get more clients and you’re probably a wee bit anxious about your existing clientele, wondering if they’re sticking around? Now you’re not growing your business, you’re in free fall; you’re desperate.
This is why accounting for startups is important. It’s planning to ensure success. It’s planning for hiccups, seasonal lulls, and budgets for the future.
Huddleston Tax CPAs specialize in small business accounting needs. They provide business planning and coaching services to help you get a handle on your company and a strong foothold in your financial planning.