How is “accounting debt” similar to technical debt?
A lot of startup founders know about technical debt. It basically means when you’re working fast you’re not going to architect everything perfectly. You’re going for speed and you’re going to get your software and product built, but you know that the code you’ve written is going to need to be rewritten or refactored. It’s just kind of a fact of life in any large software product or for any fast-growing company doing engineering work.
But that obligation you are incurring, the need to go back and fix stuff later, which is going to cost time and money, that’s called “technical debt.”
So, accounting debt is very similar. Accounting debt caused when you and your company are moving so fast that you’re mainly focusing on technical aspects of your product or customers. You don’t really think about your accounting infrastructure. And so, by just neglecting that, you’re actually incurring accounting debt. It’s a pretty interesting term.
But the good news about accounting debt is that it’s even easier to avoid than technical debt. The following few steps can help you avoid incurring accounting debt. It’ll save you a bunch of money, but more important for startup founders, it’s going to save you a ton of time.
Rules for avoiding accounting debt
So, the first thing you should do to avoid accounting debt is just get a corporate bank account. The best banks for startups are First Republic, SVB, Rho and Mercury, but getting a corporate account and putting money into that account, and then spending money only from that account, makes your accounting so much easier down the road.
Now, if you don’t have time to get a corporate account just get a corporate credit card. But you know, even that may be a little bit hard for you. So start documenting all the expenses, either through Expensify, or a spreadsheet. All the stuff you’re putting on your personal credit cards, because you don’t have time for that company credit card or company bank account, document it carefully so your accountant can go back later and update it.It’s super easy to fix later if you’ve documented it. If you don’t document it, then it will take a lot of time.
So that’s a great example of accounting debt.
There’s a couple of other ways you can save time and money and keep your books clean.
The next rule is to set up a payroll system if you’re going to start paying employees. There is nothing worse than a founder who just writes a check to an employee, without taking payroll taxes out and submitting those payroll taxes. This is probably my least favorite form of accounting debt. If you set up on Rippling, or Gusto, or Justworks, Sequoia, TriNet, any of those systems, it will be really easy to pay the person, and your bookkeeper will not have to go back and wade through a bunch of IRS payroll tax, angry letters and penalties. So accounting debt, please, please just pay your employees via a payroll system.
The next one is just do your taxes. And, you know, for companies that are just formed, sometimes that’s as simple as just filing an extension and moving the deadline from April 15th to October 15th. But do not neglect your taxes. And the other important thing about doing your taxes on time, and ideally, always filing an extension, is you can get that research and development tax credit, which is a rebate on your payroll taxes. There’s nothing worse than when founders use an outsourced tax person or someone who’s just not very good and they miss out on the R&D tax credit. Oftentimes that’s a $30,000 or $40,000 mistake.
The final rule is to a really simple QuickBooks Online account. And all you gotta do is just connect your bank accounts into the bank feed in QBO. It’ll probably take you five minutes max. But what that does is it starts bringing in the transactions into QuickBooks and then once you engage a professional accountant they can go in there and automate a lot of the recognition and the classification and labeling of the vendor, etc.
Accounting debt it’s so similar to technical debt. And I think a lot of founders can really relate to this because they live technical debt every day in their life. But again, if you just take these four or five simple steps, you’ll be able to avoid it. Think of it as using systems to save time, which is always in short supply if you are running a startup.