Be your own accountant
Creating a social enterprise is hard. In early stage social ventures, founders often find themselves juggling payroll, marketing, R&D and more. The prospect of setting up an accounting system may seem daunting, but it’s critical to the financial health of your organization. It’s hard to make decisions without a full understanding of your financial situation. Furthermore, potential investors and donors will want to see your financial records, and creating these reports will be much easier if you’re already tracking your progress.
Careful accounting doesn’t require an advanced degree- at least not at first. I’ve teamed up with CPA Jeremy Park, who has worked with social ventures large and small, to offer some tips for creating and maintaining an accounting system.
Set up a business bank account. Accounting will be much easier if you clearly separate your business expenses from your personal expenses. Make sure to choose a bank with a good online platform.
Build a tool to keep track of all your expenses. If you’re conscientious enough to regularly log your expenses, you can use an excel file. Once or twice a month, download your bank statement and add all the transactions to your file. Add another column in your file to categorize your income and expenses. Your categories will vary depending on your industry, but examples include revenue, payroll/commissions, meals and entertainment, supplies and rent.
If you’d rather track your financial performance in real time — or if you simply can’t be bothered to download your bank statement every month — choose an accounting app to do the busywork for you. We like Wave and Xero. Both link directly to your bank and credit cards, so transactions appear in the apps automatically. And both come with a standard set of income and expense categories, but you can also add your own. Make sure you’re categorizing each transaction, just as you would in an excel file. Wave offers free accounting, invoicing and receipt scanning, but you’ll have to pay for credit card processing. Xero is pretty cost-effective too, with plans ranging from $5 to $70 per month. The Xero app also works seamlessly with over 500 other apps, like Square, Bill.com and Shopify. Finally, Xero learns as you interact with it, so that eventually it will offer suggestions for your transaction categories. You can even set rules for categorization. For example, every payment from Whole Foods is labeled revenue and every payment to John Doe is labeled payroll.
Get paid. How are you going to charge customers? If you plan to take credit cards, you have a lot of options. Stripe is best for web-based merchants looking to create payment platforms, marketplaces and in-app shopping. Square is better suited for in person (also called point-of-sale) transactions. Use Square’s external card reader — which connects to your smartphone — or simply key in the credit card number to charge your customers. If you’re a wholesaler or a service provider, you’ll likely be invoicing your clients for future payments. Accounting apps like Wave and Xero offer invoicing services that make charging clients a breeze.
Track it. Careful accounting will help with more than your tax returns. You’ll be able to easily put together a financial package for potential investors. With Xero, a simple click of a button will produce an income statement and a balance sheet with your assets and liabilities. Even if you aren’t interested in investors, set aside time every month or so to look over your balance sheet and income statement. Pay attention to trends in monthly spending and expenses. Does this reflect an underlying business cycle? For example, maybe the summer months bring higher sales through outdoor markets, whereas December sees a boost in online sales. This will help you create a projection and budget going forward. Wholesalers and service providers should take a look at the aging of accounts receivable. In layman’s terms, how long have your invoices been unpaid? Call up clients who have taken longer than 30 days to pay you.
Accounting is a year-long process. Tracking your transactions will keep you up-to-date on your financial health, alert you to growing trends in your spending and identify your most lucrative sources of revenue.
If you need more help, SEA members can sign up for a free half hour consultation with one of SEA’s experienced advisors, like accountants and financial advisors.
