Setting up basic processing

  1. Get a basic accounting package like Intuit’s Quickbooks (http://quickbooks.intuit.com/pro/).  Determine what information you will need to get out of your system and this will drive what your chart of accounts looks like.  Think forward, look at peers, ask your outside accountant.   Think about the level of detail you will need for management and board reporting.   Having too many accounts is as bad as too few.  Think about the departmental structure you will need, if any.  Set up your accounting numbering so you have room to grow and change.  Right away figure out a good way to back up your system – an online system which automatically backs up each night is a great option.
  2. Establish a legal entity for your business – C Corp, LLC, etc.  The decision of which type is somewhat complex and you need to consider number of shareholders, exit strategies, cost, etc.  But you’ll need this before you can open a bank account.  As part of this process, if you haven’t already done so, put together a capitalization table (cap table) which lists shareholders, shares and percentage owned.  Update this as any equity transactions happen and this should tie to the equity accounts in your accounting records.  Exhibit #1 is an example of how to set one up.
  3. Open a bank account, usually a checking with a companion money market will do.  The choice in who to use as your banking partner also deserves careful consideration because they may be a future source of liquidity, leads and networking.  You need to choose a bank that is focus on and works well with startup/entrepeneurial companies.  You will need to determine who has signing authority and at what levels.  You’ll need to reconcile the bank account with your own cash records each month (and have it reviewed by someone who does not handle cash transactions) and controls in place over who can process online banking transactions.  If you have excess cash from a recent financing, you will need to have the board approve an investment policy which states what types (quality, term) of instruments you can invest excess cash in.
  4. Put an Authorization Matrix in place which outlines signing authorities for checks but also outlines who in the organization can authorize transactions in all areas of operations and for what amounts.  See Example #2.  This is your key boundary setting tool and needs to be distributed and followed throughout the organization.  You should also put a Purchase Order form (Example #3) and matching process in Accounts Payable in place, which documents who may make purchases and that they are in line with the current financial plan.
  5. For Accounts Receivable, figure out how to invoice clients, what you will use for billing templates (a simple word document that is PDF’d can work) and the timetable for when invoices will be sent.  Gain an understanding of how revenue is recognized in your industry so you can translate billings to revenue scored on the monthly financials.  Reconcile your scored revenue with that forecasted by the sales team.  Set up a collections method – will you make follow up phone calls, at what age of the receivable, will you engage the sales or other client facing personnel to assist you?  What will you do if a receivable goes bad, do you have a collections agent you can turn to?  In order to avoid those types of scenarios, consider setting up a client acceptance process where you vetyour clients’ ability to pay before selling to them or doing work for them.
  6. For Accounts Payable, consider whether vendors should be set up for automatic payments or whether you want to cut checks to manage timing and review.  Set up folders to capture unpaid invoices, timetables of when you will cut checks and maintain vendor files for paid invoices.
  7. Payroll is a complex area and one that you do not want to make mistakes in.  My best advice is to outsource the processing to an ADP type service who is responsible for keeping abreast of all the tax withholding regulations and will file all the required returns (like your quarterly 941s) timely and accurately.  Believe me, there is plenty to do in this area even if you outsource it.  You need to set up your basic pay structure (how often will you pay, etc.), you will need to register in all states where you have employees for withholding and unemployment, ensure that you are following workers compensation laws for particular states, you need to determine if there are any local payroll taxes, you will need to issue W2s and 1099s at year end, etc.  Very important in this area is confidentiality.  Whoever is processing the payroll should be very careful about sending payroll information electronically, all hardcopy payroll records should be in a secure area and the person processing payroll may need to have sound privacy.
  8. Expense Reporting – your personnel that travel or incur expense on behalf of the company will need to get reimbursed for their out-of-pocket expenses.  A simple spreadsheet filled out with receipts attached works fine.  See Example #4.  Before you even let people incur expenses, you need to put an Expense Policy in place which outlines which expenses are allowable and which are not (i.e. travel, cell phones, meals).  You need to set timeframes by which people need to submit their expense claims.  You need to review the expenses submitted to make sure they are in line with that Expense Policy, approved by a manager and in line with your financial plan.  Besides Accounts Payable, this area is the other major “leakage” point for your company, guard it well but also remember that your people need to be treated fairly and reimbursed in a timely manner.
  9. Fixed Assets – you need to determine a book capitalization level – amounts spent on long-lived assets above this dollar threshold will be capitalized and depreciated versus expensed.  Consider what you think are the important assets to track in terms of operations, look to peers, consider tax treatment as you will need to maintain both book and tax depreciation information.  Buy a very simple fixed asset tracking and depreciation calculation system – they are a must – this cannot be done on a spreadsheet unless the number of items is quite small.  A good one is BNA Fixed Assets (www.bnasoftware.com).
  10. Does your business have inventory?  This adds a whole layer of complexity to operations, accounting and cash flow.  Make sure you have someone on staff who knows inventory controls and costing.  You will need to determine how you will cost and set prices for inventory items, your system will need to track inventory through the entire cycle of purchasing, receiving, sales and adjustments.  You will need to do inventory counts or cycle counts.  You will need to assess whether you have excess or obsolete inventory at certain points.   If you are adding value to the inventory through a manufacturing process, you will need a way to track and capitalize your manufacturing expenses through bills of material.  All of this is to say, a simple Quickbooks type system may not suffice, you may need a more sophisticated inventory sub-system if your business is heavily focused on inventory management.
  11. Project accounting is the ability to cut your revenue and expense data by project across your financial line items and not limited to financial periods.  If you are a services company or have government contracts, this may be essential for you to have.  Basic accounting packages like Quickbooks can provide simple tracking of jobs but you may need to have a separate solution, many of which are online and accommodate the loading of project budgets, tracking of hours and matching of revenue and expense by job (one example is Open Air by Netsuite).  Integrating the project data into your financial system can also be accomplished in these more sophisticated systems.
  12. Each month you will need to “close the books” to assess how you are doing versus your original plan or any reforecasts you have made.  You need to communicate this assessment to your management team and your board.  It’s critical to make sure that you follow a process that ensures that all of the monthly activity is recorded in your accounting system – you do that by putting together a list of closing procedures, maintaining a close folder with any one off information that surfaces during the month and standard journal entries.  You ensure that you have everything recorded properly by doing reconciliations of all balance sheet accounts.  The most important account to reconcile is cash – you need to make sure that all of the activity that took place in your bank account is recorded in your accounting system plus any in-transit deposits or outstanding checks.  If you use a standard accounting package that has integrated AP and AR modules, then generally you do not need to worry about reconciling these accounts.  But you need to reconcile all non-system generated accounts, revenue, unbilled revenue, prepaids, accrueds, fixed assets and if inventory is not integrated then you need to book month end entries to bring that activity onto your general ledger.  Once you feel that all the activity has been booked, you need to run a preliminary set of financials and compare them to your budget or reforecast P&L for the month to see if there are any major variances which might highlight missed entries.  Once you’ve assured yourself that all the activity is complete, run a final set of P&L, balance sheet and cash flow.  Distribute and review departmental P&Ls with those that have departmental P&L responsibility in order to get explanations for variances and to ensure they agree with your accounting for their activity.  Update your P&L reforecast and cash projection based on the actual results and new information learned about upcoming monthly revenue, expense and cash flow.  Summarize your financials by writing an MD&A (management discussion and analysis) and the use of a Waterfall Diagram (Example #5) which does a good job of summarizing actual revenue, expense and cash results versus budget and updated forecasts.  Do you have bank financing?  Do you need to monitor compliance with debt covenants or deliver any required reporting to the bank – do it!  It is important to set a tight timeframe to get the close done because old information is not as useful to management, operating personnel or the board.  Make sure you are accurate but deliver it timely!  Once you get basic closing processes down, meet with your operations people to find out what additional financial or operating metrics they would like to see and how frequently.  Set up a reporting calendar which sets out when you will report out that information.
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