BPO (“business process outsourcing”) for Startups

For startups outsourcing isn’t really new.

As a public accountant I have embraced the concept of outsourcing. Most businesses of any size in North America outsource at least some of their tax and financial reporting functions to local or international CPA firms.

And many startups outsource their bookkeeping to local, independent bookkeepers or bookkeeping firms.

FINDING QUALIFIED BOOKKEEPERS

The key problem for startups is that finding quality bookkeeping services isn’t that easy. As a CPA I know that most of my colleagues have difficulty finding qualified bookkeepers that they can recommend. Most CPAs jealously guard their recommendations and keep them for valued clients.

From a public accountant’s perspective, good quality bookkeeping is necessary in order to provide profitable professional accounting services. For the most part our clients want us to help them file their taxes and they may need financial statements for their bank or investors. Whether our clients outsource the bookkeeping or do it themselves, they don’t appreciate paying public accountants to fix the bookkeeping.

However, all too often the lion’s share of a company’s year end fees can relate to bookkeeping problems – particularly when it comes to small businesses.

THE PROBLEM WITH BOOKKEEPING CERTIFICATIONS

If you research ‘bookkeeping certification’ on the internet you’ll find organizations that are trying to ‘professionalize’ bookkeeping by forming ‘institutes’ and similar certifying bodies. In addition you’ll find various colleges that offer courses which culminate in graduates receiving certificates. While members of these institutes and graduates of these courses may do a decent job of bookkeeping, our experience teaches us to be skeptical.

Education is one thing, while training and experience is something else. The discipline of working under professional supervision is vitally important. As far as I am aware, Chartered Professional Accountants are the only accounting professionals that combine education, mandatory supervision and ongoing professional development.

Perhaps most problematic is the tendency for some of these ‘professional’ bookkeepers to take on too much – particularly as it relates to filing corporate tax returns.

 

OUTSOURCING OVERSEAS

In the past I have outsourced bookkeeping and accounting functions to firms and individuals with recognized qualifications in India and the Philippines. I suspect that this may be an appropriate strategy for some CPA firms, however I don’t believe that accounting firms that reside overseas can readily handle local tax issues on a part-time basis.

A few months ago I hired a recently graduated CPA from the Philippines on a full-time basis. I would point out that CPAs in the Philippines receive their designation shortly after graduation. So she was really a bit of a blank slate when I hired her.

Together we are investing in developing her understanding of Canadian tax issues, and professional working paper preparation. While it is awkward dealing with time zone differences – she starts work when I am beginning to wind down – after a few short months she is progressing well and becoming a real asset to our firm.

 

Key Events in the Financial Life of a Startup

Challenges Faced When Designing Financial Systems for Startups
  1. startups change and evolve quickly
  2. an overly complex system either won’t get used or won’t be used effectively
  3. lack of skilled staff to operate a system
  4. conflicting priorities
Key Events in the Life of a Startup that Effect Information Needs
  1. begin to develop a minimum viable product or service – tracking SR&ED projects, time / analytics re user (customer) experience
  2. begin to sell products – invoicing, collections and receivables
  3. hire regular (as opposed to founders or ‘specified’) employees – payroll records and remittances / holiday pay
  4. contract bookkeeping service – outsourced, after-the-fact bookkeeping
  5. start to groom themselves for investment – building business model, iterating with actual experience, investor-facing communication / elevator pitch, due diligence-ready
  6. hire a controller (or part-time CFO)

Of course every startup is different. In some cases each of these key events happens right at the start. For others the process is slower – and the order may be different.

Why Accounting Software May Not Work for your Startup

Today’s small business accounting software was modeled after systems first developed in the 1970s and 1980s for fairly expensive mini-computers. The cost of these systems – and the people required to run them – had the effect of rationing their use to larger, small or medium-sized businesses (“SMEs”). A company needed to be a certain size before they could justify their use.

Let’s take a look at what the market place looks like. Most people would be surprised at how small most businesses really are –

In fact those early mini-computer systems were really designed for use by companies in the top 5% or so of businesses by size. The volume of transactions is orders of magnitude greater for a company with 50 employees than one with 5 employees. Doing an automated cheque run for a company with 50 employees makes sense. It’s a complete waste of time for a startup with 2 employees.

First you have to record all the payables in the accounts payable module. You’ll recall that our cash-basis system ignored this as superfluous for a small company. Then you have to set the printer up with specialized cheque stock and run the cheques – all of which seems harder than simply writing out 5 or 10 cheques by hand.

The theory is that this captures all the data around the payment automatically, since the cheque was generated by the computer software. This should be a time-saver, except that these days your bank very kindly does the same thing whether the cheques are manual or computer-generated…and you have to download the transactions anyway to import into your accounting software.

So startups should forget about using accounting software to automatically capture transaction data each time they write a cheque or make a deposit. The bank already does that whether you use accounting software or not…

Accounting software was originally designed for use by larger businesses (think 20 employees) – and these larger businesses usually have full-time accountants. For startups who outsource their bookkeeping to an independent bookkeeper, they will have accounting software that they use for their clients.

If you intend to do the books yourself or have one of your staff members do it, you need to think carefully about whether you have the skills – and how you plan to use the information. If the financials are only being used to accompany tax returns and SR&ED (scientific research and experimental development) claims, you should check out the following 2 articles:

  1. What a Simple Cash-basis Journal Might Look Like
  2. BPO (“business process outsourcing”) for Startups

What Makes Financial Accounting Complex?

There are at least 3 processes involved:

  1. keeping and storing records
  2. recording and compiling transactions
  3. financial reporting

from a startup’s perspective, accounting software is very badly designed – because the focus is on financial reporting instead of the first 2 processes – and startups are more interested in tax compliance than financial reporting.

If you think about it from the perspective of accounting software publishers, it makes sense from a marketing point of view to put the focus on ‘producing financial statements at the press of a button’

It doesn’t matter much that the numbers aren’t reliable and that management doesn’t know how to interpret them. They look exactly like financial statements – and you don’t need to pay an accountant to produce them. After all, you may not really understand your accountant’s statements either.

As a software developer would you really want to build a sales campaign around something that is supposed to keep your books and records organized? Perhaps the campaign would look like:

Makes Keeping Records Fun!

Try saying that with a straight face. Keeping books and records is necessary for any business. However it is hard to think of it as fun!

The good news is that financial reporting is rarely an issue for startups. It only becomes an issue when other people put money in your business and are sophisticated enough to demand – and understand – financial statements. For startups and seed stage companies, only friends and family are likely (stupid enough) to put money in your company.

Of course you will still need to report to the tax authorities.

What a Simple Cash-basis Journal Might Look Like

Example of a simple cash-basis journal

[office src=”https://skydrive.live.com/embed?cid=DED5DA8C9025C21D&resid=DED5DA8C9025C21D%211797&authkey=AFYVov5tPK8q1sk&em=2&wdAllowInteractivity=False&wdHideGridlines=True&wdHideHeaders=True&wdDownloadButton=True” width=”700″ height=”346″]

The data here was downloaded directly from the bank. With a little formatting the accountant or bookkeeper can quickly develop a useful spreadsheet that can search and filter transactions, calculate totals and generally serve as a useful record for the company.

With some knowledge of advanced spreadsheet techniques (see TRAINING YOUR ACCOUNTANT), your accountant can quickly build a pivot table to summarize a year’s worth of transactions into a single journal entry.

Synoptic

Know Your Compliance Quotient (“CQ”)

Understanding who you are – and being honest with yourself about your characteristic strengths and weaknesses – is important in life and in business. Over the years I’ve worked with entrepreneurs who were extremely well organized and self-disciplined, and who maintained fastidious records.

I’ve also had clients with very high turnover in the accounting department, abysmal financial records and yet managed to be very successful and profitable.

Along the way I’ve come to believe that certain individuals have a high tolerance and capacity for detail – while others rely more on a kind of ‘gestalt’ overview to keep things in perspective. Those with a higher capacity for detail have what I would call a ‘higher compliance quotient’ – a high “CQ” if you like. These individuals are better suited to running companies that are subject to a lot of scrutiny – for example public companies.

High tech startups in Canada typically receive a great deal of funding from our generous tax incentives for R&D. Maximizing benefits under the scientific research and experimental development program (called “SR&ED” or SHRED) generally requires putting development staff on salary and documenting the development activities.

This is not for the faint of heart – or more accurately it isn’t for those with a low CQ. Payroll must be paid on pay day – you can’t put off employees the way can contractors. You should be aware that the Canada Revenue Agency isn’t particularly tolerant of late payroll remittances.

If you are equipped with a low CQ – recognize it and delegate compliance functions to someone more suited to compliance work. In some cases that may mean dealing with an outsourced payroll service.

At home my wife and I buy everything we can on our credit cards, in order to maximize our travel points. However if we miss the payment date, these credit cards have high interest rates, so they need to be paid on time. Left to me we wouldn’t be able to manage accurately enough, since I’m more focused on my clients’ needs and meeting their deadlines than on my own.

On the other hand my wife is blessed with a very high CQ. Over the years we’ve learned to delegate managing credit card debt to my wife. The downside is that I can’t buy anything without her knowing about it….

Records Retention in Canada

Books and records retention periods in Canada are prescribed in Section 230 and Regulation 5800 of the income Tax Act. Generally the limits are set at 6 years after the end of the taxation year to which they relate.

For corporations that are dissolved, the requirement extends to 2 years after dissolution. For a more detailed discussion follow the link to Information Circular IC 78-10R5

The Institute of Certified Records Managers (ICRM)

You’d probably be surprised to learn that there is an international certifying organization of and for professional records and information managers http://www.icrm.org/about/ – clearly they work in the shadows at very large governmental and multinational organizations. Otherwise we’d have bumped into them more often.

For small companies the records management functions are typically outsourced to lawyers, accountants, bookkeepers and payroll services. However they are rarely described as records management services. By default bookkeepers typically end up with the lion’s share of the responsibilities, and many have little or no formal training.

Paper As A Secure Medium For Mission-Critical Records

Technology changes quickly – in some ways it changes too quickly. Relying on a single layer of technology for critical information is VERY RISKY. Some business records are simply too important for companies to rely exclusively on proprietary backup systems. Inconvenient as they are for sharing and manipulating, paper records can be an important backstop – as long as you don’t lose them.

Electronically readable documents are certainly more convenient than paper – however paper is less susceptible to disintegration. Ideally all records should be readable electronically. Best practices for mission critical records (eg. legal records) may include paper printouts stored off-line for greater security.

Computer source code is best stored in electronically readable form. Otherwise it would have to be re-input in the event of failure. Similarly accounting records are much more convenient in an electronically readble spreadsheet or database format. However in both cases it may also be important to make sure that the electronic version isn’t susceptible to inadvertent – or malicious – modification.

Open Source File Formats

Storing files electronically requires that software is available to read the electronic file. One of the problems with accounting software for example, is that publishers continuously update the file formats – presumably to force users to upgrade. For the most part however, there are utilities available to export data to one or more of the most popular open source options. These include text files, many image files and  Adobe Systems’ portable document format (“PDF”).

According to Wikipedia:

An open file format is a published specification for storing digital data, usually maintained by a standards organization, which can therefore be used and implemented by anyone.

In addition to these, Microsoft’s popular Microsoft Office files, has effectively become an open standard with Google and the Apache OpenOffice Foundation providing translations…