"So you want to learn bookkeeping?" No. No you really shouldn't. This is commodity, undifferentiated work and will potentially cost you hours (or tens of hours) per month. If you are a business making any sort of money you should go hire someone like Bench.co to do this for you.
It's funny, this is the exact opposite advice I've heard from most business owners. They all have recommended learning enough accounting to make sure that you understand what's going on with your books so that you're never fully trusting someone else to handle your money.
>It's funny, this is the exact opposite advice I've heard from most business owners.
Because a substantial portion of HN considers all parts of a business, besides the product, a waste of time. Marketing? Finance? Human Resources? That's for the plebs who can't program. Meanwhile, this place consistently features debates conflating balance sheets and income statements, revenues and profits.
Seriously, if you a considering starting or running a business, and don't understand the foundations of book-keeping as laid out in this tutorial, you should feel bad. It's not like you require a two-year diploma; understand the basics.
I've seen so many small business owners ripped off by their business managers or partners due to simple ignorance of accounting that it really should be a required course.
My father is an architect and home builder. After building his first two homes after college he made almost nothing. He went back to night school and took financial accounting, real estate/broker courses and sales courses. He's more a business man than an architect.
I second the Bench recommendation. I did my own books for 5 years, had a VA use a (homebrew) single-entry system for about 3, and did Bench the last ~2. Bench beats the snot out of the earlier methods.
On the topic of "How conversant do you want to be with bookkeeping as a business operator?": there is zero value in having you, personally, write up that you spent $4.76 on a coffee at Starbucks. That is an actual thing your business requires someone to do; it should not be you.
Should you know what double-entry books are? I think you can safely pass that off as "implementation detail."
Should you know how to read a balance sheet and income statement? Yes. That's a really critical job function. Are some of the individual entries a little opaque if you know nothing about bookkeeping? Possibly. Member Contribution / Member Drawing come to mind.
There are some less-bookkeeping more-accounting topics which I think software entrepreneurs would be well-served by being better at. "Revenue recognition for SaaS businesses" is a decently good example. I see that bite smart people all the time.
Boy howdy, being down voted into oblivion for a pretty un-nuanced comment on my part. Oops.
More nuance:
I have a MBA, which taught me bookkeeping (cash vs. accrual, double-entry, basic financial statements - the CRUD of accounting) and lots of strategic financing.
Have bootstrapped/VC-financed a couple of firms - having an understanding of double-entry bookkeeping, and how to construct financial statements is/was not particularly helpful. None of those businesses went away because I did - or didn't - perform basic bookkeeping, or could/couldn't read a income statement.
At a very small scale (which is what this article is talking about) almost anyone can read a income statement and balance sheet without a strong bookkeeping fundamentals background. Yes, you can't construct said docs, but you really shouldn't anyway (that's what the bookkeepers ought to do).
Strategic finance, however, is much much more valuable, which this series doesn't really get into.
I'd argue that outsourcing basic bookkeeping then hiring a fractional CFO to help you with strategic financing is far better use of your time than spending 5, 10, or 40 hours internalizing that a new vendor invoice in accounts payable is a credit to a liability account.
Can you elaborate about how revenue recognition has bitten smart people? I wasn't familiar with the term until you mentioned it but I think I have a handle on it now.
I'm guessing an example would be counting a prepaid yearly plan signup as the full year's revenue immediately instead of only counting it as revenue a month at a time as the service is delivered.
Your example is a good one. Another example would be if you have 99.99% up-time guarantee, but don't provide it and have to provide refunds or discounts.
Groupon had troubles with revenue recognition. When it sold the coupons, it would count the full coupon as revenue even though 50% belonged to the merchant.
Oil producers have to pipe the oil to a refinery. The oil producer actually sells the barrel of oil to the pipeline and buys it back on the other end. Then the oil producers takes that barrel and sells it to the refiner. The oil producer has sold that 1 barrel twice.
However, as patio11 mentions, this isn't basic bookkeeping.
It's also helpful when building any kind of system that deals with money. That system will inevitably integrate with some more elaborate ERP/Sales/other system, and for that it's quite helpful to know about the principles of accounting, even for the developers.
(Especially helpful if you live in countries like Germany, where the tax authorities can pretty quickly finish your company if you can't account for every single cent. But I think also in the US (SOX etc) this might be helpful.)
After looking at what constitutes a "custom add-on," it seems Bench is prohibitively expensive for anything but the most simple businesses. Here is what they say are "common examples" of a custom add-on:
- Payroll reconciliation for W2
- Multiple revenue streams
- Employee reimbursements
- Loans and lines of credit
Yeah we'd need all four of those which immediately puts us into the "Enterprise" bracket, which is about $600/year more than we pay our current accountant (who has a local office and many staff so they should theoretically be more expensive than Bench no matter what).
I find this to be an extremely strange attitude and I say this as an accounting major. Of course I'm biased and I don't think that the sort of bookkeeping most small businesses are going to do is actually that difficult - most of my classes involve pensions and stock options and things where most small businesses would not have to worry about that sort of thing. But I find it absurd that someone would try to go into business without so much as the ability to use Quickbooks or read a financial statement. There's a certain minimum amount of education about how business works that I think most people should bother learning before embarking on the financially risky prospect of starting their own business, and knowing a debit from a credit is one of them.
I agree 100% with your comment in the context that you establish (doing your own bookkeeping).
Having said that, as I sit here taking a short break from designing software that deals with accounting data, the fact that I have an understanding of accounting is incredibly beneficial. I use this knowledge in dealing with my clients, helping them understand how to use available technology in their business and in creating new business systems.
What I find surprising is how many software developer types working on business systems don't have this fundamental understanding; true, this is mostly in the SMB market, but still. Many mistakes are made because of this.
On a long enough curve, everything is a commodity. Reading, writing, and arithmetic are all commodity, undifferentiated work that cost time. You don't have to be your own bookkeeper to have basic bookkeeping and accounting literacy - which is something worth spending some time learning since it is the lingua franca of business. If you're a business were Sarbanes Oxley applies and you're a C-level exec, you have legal liability for the financial statements you're signing. Probably not a waste to have a cursory understanding of what you're singing and how those accounts work with one another.
I'd argue how your business receives money, pays out money, and retains money is an essential component of being in business and therefore something anyone in charge of directing a business should know enough of.
As a CEO/President/sole proprietor, it's probably more important than the creation of whatever product it is you are selling, really.
Funny, you make me think of that awesome Donald Rumsfeld quote - "There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know."
Whenever you actively avoid knowledge on a subject, you're bringing a big risk of "unknown unknowns" into your life. In this case, you won't know if your accountant is embezzling your seed money. Becoming an expert in bookkeeping is maybe not the best use of a CEO's time, but I'd definitely want to know enough to be able to ask good questions.
I agree. I'm not particularly worried about mistrusting an accountant with my business's money, but I absolutely think that understanding where my money goes is really important. I am not sure how many small businesses really die by a thousand cuts but a lot of them still bleed unnecessarily.
I simply know my cash flow much better because I do my own books. When my business is bigger and I outsource the bookkeeping, I will still have a more detailed understanding of where the money goes and why. This really creates opportunities to find out where to save money, and the money I save will be my own.
Additionally, understanding how expenses are classified is really important for drafting budgets for things like proposals, projects, tax strategies, buying/selling companies and assets, and of course being audited.
And in general, I think for many small businesses, it's pretty important that the owner/CEO/general manager has the ability to step in and do as many jobs as possible. It's part of managing well and being able to put out fires. Just about any business or institution I have ever worked for (from bike shops to restaurants to rafting companies to research labs to small energy companies) has had emergency situations where this is necessary.
And that's because people confuse finance with bookkeeping. You don't need to know bookkeeping and how debit/credit works, but you do need to understand few very important financial concepts.
That sort of sounds analogous to saying that you don't need to understand your technology (even the basics) to make technical decisions. I...question that.
