Monday, June 24, 2013

Tips for Forming a Successful Partnership

Beth and I have helped a few clients form partnerships in addition to forming our own.  We have also seen some business partnerships fail do to poor planning.  Here are a few keys points to consider when contemplating a business partnership.

The most important element to a successful partnership is the compatibility of the partners.  They need to make sure their visions for the business are in sync before the business launches and they also need to set up the infrastructure for decision making as the business grows and develops.  The best way to insure that your visions match is to put everything in writing.  It is easy to hear what you want to hear and be fooled into thinking you want the same thing.  It is much harder to make this mistake if your vision statement or mission statement is written out in great detail.  This may not be the statement you make public as it may be more detailed that the world needs to see, but it is crucial to determine if the people are meant to be business partners.

The next subject that needs to be tackled is the division of ownership.  What ownership percentages work best for the potential partners?  Beth and I are equal partners which was discouraged as many people feel having equal ownership with only two partners can created stalemates.  We have not found this to be the case, but it is worth considering. 

Once you determine what the ownership percentages should be, the partners need to decide what the buy in will be.  This is a much more complicated decision which we will address next week.  After the buy in price is determined, the next subject will be division of duties.

The partners should create a list of all duties the owners will be responsible for (and for a small business, this will probably be everything!) and then split them up based on individual skills and preferences.  Make sure you think how best to divide up the unpleasant as well as fun jobs to try and balance each partner's workload.  You will also want to look at tasks in terms of time they take on a daily, weekly and monthly basis to make sure the workloads are balanced and achievable.

The final thing to determine is how the owners will be compensated.  Partners in a LLC generally do not get paid with paychecks, but by taking draws.  The method for determining how much the draws should be is also very important.  It may not be equitable to pay yourselves based on ownership percentages.  One partner may have had more money available to invest in the business and therefore may own a larger percent of the business, but if the partners are working equal hours, equal draws may make sense.  However the draws are calculated, make sure the process is documented in writing to, once again, prevent misunderstandings or miscommunication.  Partners should also be open to changing the manner in which draws are calculated if they find their original method doesn't create the results they were looking for.  What they want is for each partner to feel as if they are being fairly compensated for their work on behalf of the business. 

Tuesday, June 18, 2013

Best Practices: Accounting Part III

Small business owners wear many hats which often includes the accountant's.  Sometimes they wear that hat because they can't afford to hire someone to handle the accounting.  Sometimes they do the accounting because they feel it gives them more control.  No matter what the reason, the accounting has to be done so if the owner isn't finding the time or isn't doing it correctly, then delegating the job is a must.

We recommend all entrepreneurs start out doing their own accounting so they fully understand what is needed for their business.  If the owner doesn't have training in accounting, getting help setting up the accounting program is always a good idea.  Once the program is set up and the owner is trained on how to use it, it does make sense to have the owner doing the work during the start-up phase of the business.  It saves money and it really lets the owner understand how it should be done. 

As the business grows, the cash flow should improve which may allow for the hiring of an employee or a contractor to handle the accounting.  The decision on whether to use an employee or sign a contractor to handle the process depends on several factors.  If the business only needs someone part-time and the work isn't complicated, hiring an outside service is usually practical.  As the business grows, there may come a time where a full time accountant is needed.  At this point, bringing someone in house is a good idea. 

The next stage of accounting growth occurs when the business has reached a point where a CFO is needed.  This often occurs before the company has the cash flow to hire a full time CFO.  Fortunately, the development of outsourced CFOs allows small business owners to fill the gap by hiring an outsourced CFO until they grow the business to the point where the can have their own CFO.

So in the best scenario, a business begins with the owner handling the accounting, grows to where an part-time accountant comes in to handle the work, then the company hires a full time accountant.  Next, the business adds to its roster an outsourced CFO and finally grows to where a full time CFO is hired.  The additional knowledge and sophistication each step gets is what allows the business to grow to the next stage.

Tuesday, June 11, 2013

Best Practices: Accounting II

When I am speaking to potential entrepreneurs, I am often asked if they should hire someone to help with the accounting.  With the emergence of accounting software programs, many small business owners go it alone when they start their business.  This usually is a mistake unless they have an accounting background.  While QuickBooks, Peachtree, and other programs are very user friendly, there are some common setup errors that occur.  There are also differences in how the programs function so picking the right one for your business is very important. This is where an accountant can be very helpful.

Spending the time to make sure you have the right program for your business and the right set-up can make the accounting process function smoothly right from the start.  Having good accounting means you will have usable financial statements which a new business owner needs as they are working through the crucial start-up phase.
Many business owners only think about accounting at tax time.  Accounting software programs cost money so utilizing the information available from them year round is sensible.  Trends can be seen in financials if you know how to read them so using accounting information from a management perspective is also crucial.  We meet with many of our clients quarterly to help them review their financial statements.  Having fresh eyes look at the numbers often provides insights the owner may miss.  While the owner knows the business inside and out, they usually do not have the experience analyzing the financials and this is where your accountant can be useful.
If your business is going through a growth spurt or a slump, you may also need an accountant’s expertise.  Figuring out how to manage cash flow through a period of rapid growth or putting together a turnaround plan if your business is struggling is another useful function of accounting.
When do you need help with your accounting?  When you are starting a business, on an ongoing schedule to keep your business on track, when you are growing or when you are struggling.

Tuesday, June 4, 2013

Best Practices: Accounting

I have a saying I like to use when discussing accounting:  good record keeping allows for good bookkeeping and good bookkeeping allows for good accounting.  Good accounting gives you good financial reporting and good financial reporting helps you run your business.  We have discussed record keeping and bookkeeping best practices in earlier columns.  This week will start the accounting portion of the equation.
One of the best innovations in accounting has been the invention of accounting software programs.  Programs such as QuickBooks have eliminated much of the need to understand debits and credits which means lay people have a much better chance of completing their accounting themselves.   Successful users of accounting software programs take the time to select the correct program for the business and make sure the program is set-up correctly.  People often run into problems and frustrations when the program doesn’t work for the type of business they are running or the set-up is incorrect and therefore the numbers are wrong. 

The best way to insure success with your small business accounting in 2013 is to take the time to select the best accounting software program for your specific business and to get help with the set-up and training as to the correct usage of the program. 
Once you have purchased the right program and had it set-up correctly, you will find the accounting process to be much less arduous than you feared!