Robert Kiyosaki observes, “Accounting is possibly the most boring subject in the world. It also could be the most confusing. But if you want to be rich, long term, it could be the most important subject.” Most entrepreneurs are passionate about business functions like strategy, marketing, branding, and sales. However, you would find very few who have a liking for finance & accounts. Most entrepreneurs quickly absolve themselves by declaring that they do not like finance & accounts, and even worst do not understand it. They ‘proudly’ state that they have more or less left these functions to their CAs and accountants. Let’s understand the common pitfalls and the likely remedies through this blog.
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“I don't work for money. Money works for me.”
...Robert Kiyosaki
Most entrepreneurs are passionate about business functions like strategy, marketing, branding, and sales. However, you would find very few who have a liking for finance & accounts. Most entrepreneurs quickly absolve themselves by declaring that they do not like finance & accounts, and even worst do not understand it. They proudly state that they have more or less left these functions to their Chartered Accountants (CAs) and to their internal accounts function (mostly consisting of junior to mid level, semi-skilled accountants). The mistake they make is, not to realize how they can use well maintained books as a strategic tool to better steer their business.
Why do entrepreneurs start their business? Isn’t that obvious, one would ask. Don’t people start a business to make pots of money? After all, Stephen Covey is correct in quoting, "Entrepreneurship is living a few years of your life like most people won't, so that you can spend the rest of your life like most people can't".
Unfortunately, research shows that entrepreneurs as a class make only as much money as they could have, if they had been employees! In fact, entrepreneurs make less if you account for the higher risk that they take! If a substantial amount of money is not going to be one of the co-products of all your effort, then the game is just half played, or more appropriately, it is incorrectly played.
Common Pitfalls
1) Lack of Financial Literacy
Robert Kiyosaki observes, “Accounting is possibly the most boring subject in the world. It also could be the most confusing. But if you want to be rich, long term, it could be the most important subject.”
Robert Kiyosaki builds a wonderful case on the importance of financial literacy in his highly famed book, ‘Rich Dad Poor Dad24’. A few of these excerpts, applicable to any professional but more so to entrepreneurs, are presented in the paragraphs below.
“Money is one form of power. But what is more powerful is financial education. Money comes and goes, but if you have the education about how money works, you gain power over it, and can begin building wealth. The reason positive thinking alone does not work is because most people went to school and never learned how money works, so they spend their lives working for money.
What is missing from our education is not how to make money, but how to spend money – what to do after you make it. It's called financial aptitude – what you do with the money once you make it, how to keep people from taking it from you, how long you keep it, and how hard that money works for you. Most people cannot tell why they struggle financially because they don't understand cash flow. Many highly educated, professionally successful people are financially illiterate. These people often work harder than they need to because they have learnt how to work hard, but not how to have their money work for them.
Money often puts a spotlight on what we do not know. That is why, all too often, a person who comes into a sudden windfall of cash – let's say an inheritance, a pay raise or a lottery – soon returns to the same financial mess, if not worse than the mess they were in before they received the money. Money only accentuates the cash flow pattern running in your head. If your pattern is to spend everything you get, most likely an increase in cash will just result in an increase in spending.
Too many people are focused too much on money and not their greatest wealth, which is their financial education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve problems, those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone. We have all heard stories of lottery winners who are poor, then suddenly rich, then poor again.
In the long run, it's not how much you make, it's how much you keep, and how many generations you keep it. If you want to be rich, you need to be financially literate.”
2) Overdependence on Chartered Accountants
I have come across many entrepreneurs who simply maintain some excel sheets of their sales & expenses (some do not even maintain these!). They simply handover these excel sheets along with their hard copy invoice files to their CAs for their book keeping. This is generally done in preparation of some statutory compliance (Income Tax/Service tax/VAT returns etc).
For a typical CA, an SME entrepreneur is generally a not-so-important client and one amongst a few hundred of them. Naturally, some junior level CA intern (in CA’s office) who neither has the skill nor the will to do a good job is assigned with this task. Most important, these fresh interns have no idea of your business & domain and no idea as to what does an SME entrepreneur look for in his books (of course, many entrepreneurs do not even looking for anything!). These fresh interns follow a ‘garbage in, garbage out’ principle and simply produce something that merely addresses the statutory compliance requirement (& in most cases erroneously).
Most SME entrepreneurs do not have licensed Tally software. For some who own, they lack the skill to meaningfully navigate through their books and the desire to even demand their Tally backup files from their CAs.
3) Weak Internal Accounts Function
Most SME entrepreneurs do not have any in-house accountant/s. In many cases, they simply expect some unskilled person to double up as an accountant. In an SME setup, given limited pay scales, very senior & skilled accountants cannot be hired. Since most entrepreneurs have a very step-motherly approach towards the accounts function, they end up leaving the entire bookkeeping to these unskilled/semi-skilled accountants. In addition to the skills gap, these accountants majorly lack the perspective and business understanding required to design and maintain books which can serve as strong MIS for business. Most of them are not mature & disciplined enough to maintain books meaningfully, ultimately leading to a ‘garbage in, garbage out’ approach.
Remedies
1) Build basic level of accounting skills: If you’re like many entrepreneurs, you likely went into business to pursue a passion and not to become an accountant.
Robert Kiyosaki quoted in Rich Dad Poor Dad, “My rich dad encouraged me to know a little about a lot.” Now that you have chosen to be an entrepreneur, it is imperative that you possess a decent level of knowledge and appreciation for every business function, including finance & accounts. You can no longer be oblivious to these crucial business functions. You cannot be totally hands-off and you need to closely work with your CA and your internals accounts team. This would demand that you have a basic level of understanding, if not more, of finance & accounting concepts.
2) Spare a budget for an accountant & maintain books internally: First & foremost, it is important to hire at least one accountant with a fairly decent level of accounting skills. This would also ensure that books (most likely in Tally in an SME setup) are completely maintained internally. Also, make sure that the accountant keeps your books updated at all times. Only when this happens, your books will serve as a valuable MIS to you. Well maintained & up-to-date books result into organizing data meaningfully for you to analyze. It offers you a gauge of your business’ current performance in almost every aspect. Your books provide you with hard facts and figures on what your business has been up to and how it’s faring to date. Through accounting, you get a good measure of where your business is at and how far or near you are to where you actually want to be.
3) Be involved at a day to day (/regular) level: Keep reviewing your books at a day to day (/regular) level not only to ensure that they are maintained well but also to keep getting a holistic view of your business. Keep overseeing your accountants work, and challenging where required, at periodic intervals to ensure that he/she is doing a good job with it.
4) Work closely with your CA and challenge him where required: Most entrepreneurs do not have a direct access to their CAs. It is important that an SME entrepreneur regularly interacts with their CA and work closely with him/her to ensure that their books are meaningfully maintained. He/she should ensure that completely ready Tally backup files are provided to the CA as an input for his review and value add. Various computations (Income Tax/GST/PT) etc should be done internally and provided to your CA. Understand what changes/value additions the CA’s office is carrying out and discuss those with him/her. A CA has limited time/bandwidth available for your work and therefore he/she may miss out on various things. Your detailed review would help you point out these gaps to your CA. At times it may be required to challenge your CA too.
5) Maintain your records carefully: Ensure that you have an intuitive folder structure on your server (/centrally) where you save your Accounts related files (challans, computations, Tally backups etc) with correct naming conventions. Ensure that, as a practice, your files are backed up and regular intervals.
We are all in business to make money (though this may not be the sole aim). However, by turning a blind eye to crucial business functions like finance & accounts, we are jeopardizing our most vital business goal. Can entrepreneurs really afford to do so and get away without knowing Accounts?
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