Starting a Business

How to grow up your business

Businesses often have a life cycle similar to people. In my last post I described this life cycle and gave some tips on how to know if it’s time for your business to grow up from high-growth but awkward teenager to more stable adult.

Some teenagers never grow up. Uncle Rico is stuck in 1984 (although I heard the Broncos may be giving him a second chance…). But due to biology and societal expectations, most teenagers find their way into adulthood.


Businesses don’t have the same outside influences. It’s up to you to intentionally grow it up. Growing up often means turning some attention to the boring stuff you neglected while focusing on sales growth.

You know it’s time to grow up, but how do you do it?

You shouldn’t try to do it all yourself. In fact, you shouldn’t try to do much of it. But you need to make sure it’s getting done.

Task someone on your team who is capable of taking the lead, or hire someone to help. An experienced, full-time person might be expensive, but you can hire a consultant to whip you into shape and inexpensively monitor your business going forward.

Not that I’m biased, but an experienced, part-time CFO would often be a good choice for this role.

Here are some areas to consider.


Are you legally structured correctly? Are there things you can do to increase liability protection?

Would it be better to move real estate to a separate legal entity? Similarly, do you have unrelated business units that can be spun out separately? Structuring like this can prevent lawsuits against one part of your business from affecting other parts.

Unfortunately, lawsuits are a part of doing business. I don’t think I’ve been involved in a business that hasn’t been involved in some kind of lawsuit.


Have your auto, property, general/product liability, director/officer liability, workers compensation, and/or professional liability insurance policies kept up with your growth?

Are the limits and coverage adequate and correctly structured?


Hopefully you’ve been handling taxes correctly from the beginning, but part of growing up is making sure. Have an accountant review income tax, sales tax, payroll tax, and property tax filings and processes to make sure its all being done correctly.

When you’re not making much money, tax penalties and interest caused by mistakes may be minor, and you’re less likely to be audited. This changes as you grow.

Believe me, you don’t want to be audited before you’ve grown up.


Cleaning up your books is part of growing up. Can you rely on your books to make good, timely decisions?

If you don’t choose to clean up, you’ll eventually be forced to clean up by government agencies or capital sources like banks or investors.

Like many other messes in life, messy books are much less expensive to avoid than to clean up, so the earlier you grow up your accounting the better.


Startups usually hire based on desperation. Stuff to do is piling up, and they quickly throw bodies at the piles.

You need to be more intentional as you grow up, especially when you’ve grown past the point of being involved in every step of every hire. Those handling the hiring need to pay more attention to cultural fit, on-boarding, and a host of other HR and payroll issues.

This is not an exhaustive list, but it gives you an idea of things to think about as you try to grow up.

You or your person overseeing the growing up doesn’t need to be an expert in all of these areas, but they do need to know enough to communicate effectively with experts like outside attorneys, insurance brokers, tax accountants, etc.

Just a final thought. In this post I’m observing typical juvenile business behavior and giving advice on how to grow up. Typically, startups wait until after a period of high growth to start worry about these less exciting issues.

However, I’m not recommending they wait. As long as you don’t let it stifle your growth (and not have a business to grow up with), the sooner you grow up the smoother your growth will be. When it comes to legal, insurance, tax, accounting, and HR, an ounce of prevention is worth a pound of cure.

The trick is to prevent business-killing problems without preventing business-making growth.

Question: What other areas are involved in help a business grow up? 

It’s time for your business to grow up

Businesses often have a life cycle similar to people. Starting up is like infancy. Clean slate. Innocent. Impressionable. Learning rapidly but not accomplishing much. Lots of messes.

Thank goodness the mortality rate is much lower in humans than startups!


If a business survives infancy and makes to toddler, it starts moving forward, albeit a bit shakily. Through the tween years growth is slow and steady. It still has some innocence without full exposure to the big bad world.

The inflection point where sales start to take off is like hitting puberty. It’s a time of rapid growth, rapid change, and a lot of uncertainty. In those teenage years it can get away with being a bit wild and crazy. It can do dumb things because it doesn't know any better. It defies conventional wisdom. It can focus on the fun stuff and sluff the boring stuff.

Growing sales like crazy is fun. Putting systems and processes in place is not fun.

In business, the teenage stage is a good thing. There won’t be much of an exciting business without that period of wild and crazy growth.

However, if the business wants to make it in the world, it eventually has to grow up. It needs systems and processes to catch up to the growth.

Otherwise, the business may implode on itself. At the very least, the business will struggle to continue its growth trajectory.

It’s a common theme in any businesses I look at. The entrepreneur is focused on growing sales and doesn’t want to be bothered with the boring details. He will use minimal processes to get the job done, but will hesitate to make the investment of time, money, and attention to put robust systems in place.

But how do you know when it’s time to get serious?  Here are some signs to watch for:

Waste becomes painful. When you’re small, mistakes don’t cost very much and are easy to catch and fix. A mistaken shipment, some missing inventory, or a billing discrepancy might not be a big deal when you’re selling $1000 per month. Waste is compounded when you’re selling $1 million per month.

Customers satisfaction drops. A small number of customers are easy to keep happy. You can personally make sure 10 customers are all well taken care of. It takes good systems to keep 1000 customers happy.

Employee satisfaction drops. This is similar to customers. When the team is small, you hire and work closely with each team member. You need good systems to maintain employee satisfaction when the team grows too big for you to personally manage.

You don’t know what’s going on. When you first start up, you know everything about everything going on in the business. You know about every order. You are involved in every new hire. You know what customers are complaining about. As you grow, you can’t and shouldn’t know everything. You need good systems to be confident everything is going okay.

Now you know it’s time to grow up, but what do you do about it?

Stay tuned to find out in my next post!

Question: How do you know when it’s time for your business to grow up? 

W9 and 1099: Two Tax Forms Every US Entrepreneur Needs to Know About

In my last post I described the benefit of hiring contractors while bootstrapping a startup. I also explained the tax obligation that goes along with hiring contractors, which is to file a 1099-MISC form for contractors that meet certain requirements. I also mentioned severe penalties for not meeting this requirement. In this post, go into more detail about who to issue 1099-MISC forms to, how to file, and what the W9 form has to do with it.


Who do I send a 1099-MISC to (and what does the W9 form have to do with it)? 

There’s a long list of requirements for who businesses have to send 1099-MISC forms to, and I encourage you to familiar with the rules so you know what applies to your business. This post is focused on contractors.

You must provide a 1099-MISC form to contractors if they meet the following criteria:

  • they provided a service, not a product
  • you paid them at least $600
  • their business is not classified a corporation (C-Corp, S-Corp, or LLC filing as a C- or S-Corp)
  • the corporation rule doesn’t apply to attorneys: you must provide a 1099-MISC form for all attorney fees
  • you didn’t pay with a credit or debit card

To find out whether or not the business is a corporation and to get their business address and tax ID number, you should ask the contractor for a W9 form before making your first payment. An electronic copy is fine - you don’t need paper.

The W9 is a simple form that states the business or individual name, tax classification, address, Tax ID. Most contractors should already have the form on file, and if not, they should be able to quickly produce it. Here’s a link to the form.

You don’t need to request a W9 if the business has “Inc” or “Corp” at the end of their name. That tells you they are a corporation.

If a vendor refuses to provide a W9 form, you are required to withhold 28% of your payment and remit to the IRS (or better yet, don’t hire them!). If you don’t issue a 1099-MISC (you can’t without the information from the W9), you could be responsible for that 28% on top of the full payment already made to the contractor.

How do I file a 1099-MISC form and what is the deadline? 

Like filing your tax return, there are many ways to file a 1099-MISC. You can mail in paper forms, but I recommend using your accounting software or another online service.

For example, some versions of Quickbooks Desktop and Online allow you to flag vendors as 1099 vendors and save their address and tax ID. At the end of the year it’s very easy to file with information already in the system.

Even if your accounting software doesn’t issue 1099’s, other services may integrate with your accounting software so you don’t have to enter the address and Tax ID, and amount for each vendor. is a service that integrates with most accounting software.

Other services include Intuit’s standalone 1099 filing service and

These services are very inexpensive (around $3/form) and well worth the cost.

The deadlines are as follows:

 Jan 31 (or next business day): provide the 1099-MISC form to contractors

Feb 28: paper file forms with the IRS (not required if electronically filing)

Mar 31: electronically file the forms with the IRS (recommended)

It’s after the end of the year and I didn’t request W9’s. What do I do? 

  1. Run a report in your accounting software to figure out how much you paid each vendor in the previous year.
  2. Make a list of vendors who you paid more than $600 for services and aren’t obviously a corporation.
  3. Request a W9 from each one (attach a blank form for convenience)
  4. See above for filing options
  5. Start a process now for collecting W9’s from each new contractor!

What if I haven’t filed 1099-MISC’s in the past? 

You have some risk of tax liability to the IRS. In an audit the IRS will identify vendors you paid for service. Each vendor you don’t have a W9 on file for and you didn’t send a 1099-MISC forms will have to prove they included your payment in their tax returns.

If they didn’t report your payments or can’t/won’t prove it, the IRS can bill you for 28% of what you paid to the vendor (good luck getting that amount back from the vendor).

If you haven’t filed 1099-MISC’s in the past, start now. Make collecting W9’s a standard part of your process for hiring consultants (don’t make a payment until you get one). Make the filing process easy each year.

Although this requirement is convenient, don’t get on the wrong side of the IRS by neglecting it.

Question: How do you make issuing 1099’s easy each year?

Do you hire contractors? You need to know about the W9 and 1099 tax forms.

Bootstrapping entrepreneurs hire employees only when absolutely necessary. They hire to alleviate significant pain, not because they might need the employee in the future. Building a team of great employees is key to building a successful business. Every leader knows that. However, taking on the cost and commitment of employees too early can hold back and even kill that success.


To lessen the risk of hiring too many, too soon, most entrepreneurs start with contractors. A startup entrepreneur wouldn’t hire a full-time accountant or an in-house lawyer.

Contractors can be anything from a freelancer with a specialized skill, such as a graphic designer, to a large businesses that provides certain services, such as a law firm.

Hiring contractors allows you to avoid many of the costs and complexities of hiring employees. You don’t have to follow labor laws intended for employees, register for payroll accounts with state tax agencies, or pay employer payroll taxes.

However, hiring contractors still comes with tax-related consequences. This post is for a United States audience, but other countries might have similar requirements.

First, you must be careful not to classify someone as a contractor when they should be an employee. The IRS doesn’t like that. They will charge you for the payroll tax you should have paid (plus penalties and interest). But that’s a subject for another post.

In this post, I want to make sure you are aware of another tax risk with contractors.

Did you know that if you don’t handle payments to contractors correctly, you may have to send the IRS 28% of whatever you paid the contractor (on top of what you already paid them)? 

The IRS wants their (our) money 

Here’s the deal: the IRS has a harder time collecting tax from contractors than employees.

Employees have tax withheld from every paycheck. In most cases these withholdings are more than what the employee owes, which is why most people get a tax refund each year.

The IRS doesn’t have that luxury with contractors, so they came up with a system that increases the likelihood that contractors will report and pay taxes on their income.

What is the 1099-MISC form?

The system revolves around the 1099-MISC form and specifically Box 7 of that form, Non-employee compensation.

You must send to employees and file with the IRS W2 forms after the end of each year. Most business owners don’t need to think much about this because payroll service companies handle it all.

Similarly, you must send to certain contractors and file with the IRS the 1099-MISC form. Usually, this process is a little messier than payroll.

Not every contractor needs a 1099-MISC, and most businesses don’t pay all contractors in the same way. Some might be given checks, some might be paid through the payroll system, and some might be paid by credit card.

Issuing 1099-MISC should be an easy process if properly planned for, and the consequences for not doing so are severe. If the IRS finds that a contractor didn’t report and pay tax on your payments, you will be responsible for 28% of what you paid them (plus penalties and interest) to compensate for the lost tax revenue. Good luck collecting this from your contractor.

In my next post, I will go into more detail about who to issue 1099-MISC forms to, how to file, and what the W9 form has to do with it.

Business Lessons from Disneyland

I spent the last week at Disneyland with my family. I tried to unplug from work as much as possible, but I couldn’t help but notice aspects of my experience that I could apply to the businesses I am helping to build. Disney gets a lot of attention from business writers for good reason. At the risk of tackling a cliche topic, here are five lessons I learned about building a business from my Disneyland experience:


1. Stand out from the competition Traditionally, my wife and daughters spend five days in Disneyland, and my son and I take one of those days to do something else. Last time we went to Legoland, and this time we went to Universal Studios.

Those would be incredible parks when experienced on their own, but they don’t measure up when experienced during the same week as Disneyland. Even though we had fun, we wondered if we would have preferred an extra day at Disneyland.

Businesses have to stand out from their competition in a significant way to attract loyal customers.

2. Be present with people Disney characters are masters at being fully present with the one child at a time. Meeting their favorite characters creates much of the Disney magic that kids experience, and the characters make sure each interaction is memorable.

Meeting Elsa and Anna from Frozen is one of the most popular attractions. It requires waiting in line to get an assigned time to wait in line again later in the day. Only one family at a time is allowed in the small room with Elsa and Anna. The interaction only lasts for a few minutes, but the characters are fully present. They make kids feel like they are the only people in the world at that moment.

3. Enforce the rules In most cases, Disney “cast members” are extremely friendly, kind, and accommodating. However, they are not afraid to enforce the rules when a guest’s behavior infringes on the experience of others. We watched as someone cut to the front of the Disneyland Railroad line and jumped on the train. The conductor loudly called him out as a line cutter and ordered him off the train. The one man was probably offended, but it enhanced the experience for the many people watching.

To build a high-performance business, some rules need to be strictly enforced. Of course, unethical or illegal behavior can’t be tolerated. Lackluster performance by one member can also bring down an entire team. It’s often better to deal firmly and swiftly with one person that let an entire team suffer.

4. Bend the rules On the flip side, rules should be bent when they don’t infringe on others experience.

At the Haunted Mansion a person appeared to be cutting in line before approaching the nearest cast member. At the first the cast member good-naturedly called her a line cutter, but he let her through as she explained that she had been separated from her family who were now further ahead in line.

5. Get out of the comfortable routine This last point is not directly related to Disney, but it’s something I learned on the trip.

My family’s default is to find a hotel when we travel. There are many options, we know what to expect with the brand we choose, and it’s easy to book and cancel as needed.

We had a hotel booked for this trip, but someone mentioned they found a vacation rental through VRBO for their last Disneyland trip. My wife and I settled on a townhouse that is over 50% bigger and 60% cheaper than the hotel we had booked. It was immaculately clean and nicely decorated with Disneyland themes.

I also tried Uber for the first time. Our townhouse was about 1.5 miles from the Disneyland gates. I would drop them off every morning and pick them up every evening, which added 3 miles to my daily walking distance.

After one particularly tiring day, I wasn’t looking forward to walking back. I could have tried to figure out the bus routes or paid for an expensive taxi. Instead, I decided to try Uber. The app showed a few drivers in the area, so I requested a pickup. Within a few seconds a driver called me from across the street. I was back to our townhouse within 5 minutes, and the app automatically charged me $4 so I didn’t have to worry about payment or tip.

We often get stuck in our comfortable routine. There are many ways to rethink conventional wisdom. Consider virtual assistants instead of full-time employees for some roles. Build a virtual team to save on office space and find the best talent regardless of location. Use VRBO or Airbnb instead of a hotel. Take Uber or Lyft instead of a taxi or bus.


It’s important to take time off and unplug from work. During these times our minds can be freed from the usual distractions, making us more open to lessons we can apply to our careers and other areas of our lives.

Expect the Unexpected

What a wild start to the year it’s been already! I’m writing this 3 weeks into 2016. The markets are in turmoil. The Dow Jones Industrial Average, a good indicator of the stock market as a whole, finished 2015 at 17,603.87, down 2.2%. Yesterday it closed at 15,766.74, down 10% in just 3 weeks.


Oil has dropped more than 50% in 6 months, which has contributed to the Canadian dollar dropping over 20% against the US dollar in that same time period.

Obviously oil companies have been hit hard by the drop in oil, which hurts local and regional economies dependent on the oil industry. Those who buy US goods and services with Canadian dollars, like a business I’m involved in, have seen their costs go up by 20% over 6 months and 50% over about 3 years.

No one can consistently predict shocks to the market like this, but there is one thing we can always expect: the unexpected.

Unexpected events are a part of life. Our success and happiness depends on how well we plan for and then deal with the unexpected.

I’m reading Pour Your Heart Into It: How Starbucks Build a Company One Cup at a Time by Howard Schultz, the Starbucks founder. It has many great lessons about the challenges of building a business that is now ubiquitous throughout the world.

In 1994 the price of green coffee, which closely tracks the price of their raw materials, went from $0.80 to $2.74 in a short time. The price increase was caused by an unexpected freeze in Brazil, the largest supplier of green coffee. Starbucks' stock price tanked, threatening its ability to continue its expansion and even survive.

Schultz and his management team struggled for months with when to raise prices and by how much, how much inventory to buy and when to hedge against continued price increases, how to manage shareholder expectations, etc. They made mistakes, such as buying millions of dollars in inventory right at the peak price, but they had built so much goodwill with their customers, suppliers, investors, and employees that they were able to survive the crisis and continue thriving.

By definition, we don’t know what unexpected events will be and when they will happen. But we can design our lives and our businesses to be ready for the unexpected.

Expect it

The first step is to simply expect the unexpected. You won’t get too comfortable if you always acknowledge that the unexpected will happen.

By nature we think that the status quo will continue. If our business is thriving, we tend to think the good times will never end (talk to anyone involved in the housing industry in 2006). If we’re going through a struggle, it’s hard to imagine life without that struggle (ask them how they were feeling in 2009).

However, we need to fight against our natures and remind ourselves that anything can rapidly change.

Scenario plan

Although we never know exactly what is going to come, we can think through the possible scenarios. It may help to consider both likelihood and impact.

It's not very likely that you will die young, but if you do, it will probably have a huge impact on your family and business. The solution is cheap and simple: life insurance.

It's likely that the various financial and commodity markets will experience periodic shocks. What impact will that have on you? How can you prepare? Minimizing debt, diversifying, keeping a cash reserve, and hedging all help prepare for financial shocks.

Leave plenty of margin 

We usually think of margin in terms of the money left over from selling a product. It’s important to have margins as high as possible in business so we can cover our fixed costs and leave cushion fluctuation in sales and costs.

Margin is a helpful concept for many other applications. Don’t plan your schedule so tightly that you have no room for health challenges, family crises, etc.

Don’t give up

Do be shocked and discouraged by unexpected events. Don’t give up. As Winston Churchill said, “if you’re going through hell, keep going” and “never, never, never give up.”

Our character is strengthened more in hard times than good times. People who achieve their dreams are the ones who persevere through challenges. The businesses that thrive are ones who survive the lean times.

Unexpected events will happen. Your success and character will be defined by how you plan for and react to these events.

Question: What helps you prepare for and react to unexpected events?

How To Save your Business Bundles on Foreign Exchange

Most businesses deal with foreign currency exchange to some extent. It could be as simple as travel to foreign countries for conferences or as significant as paying millions of dollars to overseas suppliers. If you are not intentional about minimizing the cost of exchanging foreign currency, you are probably paying 2-5% more than necessary on every transaction.


If you spend $5000 on a foreign conference, that’s $100-250 more out of your pocket than necessary. That may not sound like a lot, and maybe it’s not a big deal if your only foreign experience is once a year. But these extra costs add up quickly.

If you pay a million dollars to a foreign supplier, you’re paying $20,000-$50,000 more than you need to. That’s significant.

First, some terminology 

For me to write concisely about foreign exchange, we need to understand some terminology. I’m not a foreign exchange expert, so my explanations might sound elementary to an exchange trader, but it works for the purposes of this post.

The actual exchange rate between two currencies is not an exact science. The published exchange rate between two currencies can be called the spot rate. However, when you actually exchange currencies, you never pay exactly the spot rate.

Those who trade currencies, such as banks, make money on a spread, which is the difference between what they are willing to buy the currency for and what they sell it for. The larger the spread, the more the trader makes (buy low, sell high).

For example, if a spot rate between Canadian dollars (CAD) and US dollars (USD) is 0.80 USD/CAD, is a bank might be willing to buy a $1 CAD for 75 cents USD and sell it for 85 cents. Their spread is 10 cents.

If you exchange foreign currency, you want the rate you exchange at to be as close as possible to the spot rate. As a benchmark to keep in mind while reading this post, you should never exchange foreign currency for more than about 0.5% from the spot rate (unless it’s such a small amount the convenience outweighs the cost).

For example, if you are buying CAD with USD and the spot rate is $0.800, you should not pay more than $0.804 USD for the $1 CAD.  If the amount exchanged is in the thousands of dollars or more, you could pay as little as 0.1-0.2%.

With the technicalities out of the way, here are some tips for saving money on foreign exchange. These actions aren’t reserved for big businesses. Even the smallest of businesses can easily take these steps.

NEVER let your bank exchange foreign currency (at least at their published rate)

Okay, “never" might be too a strong a word. If you need $100 worth of foreign currency, $2-5 may be worth the convenience of a local bank.

As I write this, Wells Fargo’s online rates say they will sell you $1 CAD for $0.7703 USD. The spot rate is $0.7337. This means their rate is 5% more than the spot rate (remember the benchmark is 0.5%, 1/10 of what they are charging). If you buy $10,000 CAD with USD at this rate, you are spending at least $450 more than you should be.

Like any good business, most banks are willing to negotiate their rates, especially for large amounts. Their published rate is just a starting point and what they will charge if you don’t ask.

Every bank is different, but they should be willing to go down to 2-2.5% above spot for small transactions or under 1% for large transactions.

Banks may be okay if you exchange foreign currency infrequently and in small amounts, but to avoid banks, let’s move on the next tip.

Get an account with a foreign exchange service

Many foreign exchange services offer rates at a fraction of the price of banks. This is where I get the benchmark of a maximum of 0.5% above the spot rate.

There are many services out there, but I am most familiar with GPS Capital Markets in the US and Western Union and Citizens Bank in Canada. Some banks have in-house foreign exchange services that provide better rates than their retail branches, but I’m not very familiar with those options.

Here is the actual exchange rate schedule for a foreign exchange service I recently set up for one of the businesses I work with.

$0 -$5,000                          0.50%

$5,000-$10,000                  0.40%

$10,000-$20,000                0.30%

$20,000-50,000                  0.20%

$50,000 +                           0.15%

They have no minimum transaction amount or minimum volume over time. It was easier to set up than a bank account.

Unless you have a physical location near you, these services doesn’t work if you need a small amount of foreign cash for a trip. But they work great for paying foreign suppliers, receiving funds from foreign customers, or moving money between your own banks accounts in different currencies.

The process varies, but in general you deposit or wire funds to their account in one currency, and they wire or deposit the funds to their final destination in the foreign currency.

I work with a company that has locations in Canada and the US. Most of the revenue comes in Canada and most of the expenses are in the US. The foreign exchange service I use has an account at the same bank we use in Canada.

Any time I need to move funds from Canada to the US, I fax a request to the bank to transfer Canadian funds from our account to exchange service account, the service exchanges the CAD to USD at a great rate, and they wire the USD to our US bank account. It takes me about 30 seconds to send the fax and notify the exchange service, and a few hours later the funds appear in the US account.

That’s enough foreign exchange fun for now. I’ll save more tips for my next post.

As you can see, even the smallest businesses can save a lot of money on foreign exchange by taking some simple steps.

Question: How do you save your business on foreign exchange?

Two Common Accounting Mistakes Business Owners Make


Most business owners would rather focus on building their business than dealing with accounting. They know it’s important to have good numbers to base decisions on. They know they need to file and pay their taxes accurately and on time. But many struggle to make it happen without getting bogged down in the details themselves.

In a perfect world, companies' accounting should be accurate and up to date without requiring the business owners to think about it. They should be able to review the key metrics as needed and be confident that all other details are being taken care of.

However, many business owners operate far from this ideal. In several years of helping small businesses with accounting, I’ve seen two common mistakes that business owners make.

At one extreme, business owners pay too little attention to their accounting.

One mistake I see at this extreme is turning over accounting to inexperienced bookkeepers.

They may not realize there’s a problem until they have serious issues. They may have tax agencies coming after them for inaccurate or unpaid taxes. They may get in a cash crunch because they don’t understand their numbers.

For example, a business may take prepayments from customers, which makes their bank balance look good at times. If the customers aren’t profitable, the cost of providing the product or service will eventually drain the cash from taking prepayments.

I worked with a company that had grown rapidly to several million dollars per year in sales. As they grew, they didn’t invest in their accounting. They had hired and lost a series of low-cost bookkeepers and paid little attention to what the bookkeepers were doing. Taxes weren’t filed accurately. The books didn’t accurately show their profitability. It took a lot of work (and a high cost) to clean up the mess and put proper procedures and people in place.

Small business accounting doesn’t have to be complicated and expensive. Most business don’t even need a full-time, experienced accountant. However, it takes someone experienced to set up the systems and monitor less experienced staff.

At the other extreme, business owners try to do the accounting themselves.

Even if business owners can do their own accounting, it doesn’t mean they should. They have much more important things to do, like build the business. They shouldn’t get bogged down in the accounting details.

I saw this with another business that had grown to several million per year in revenue. The owner knew accounting basics, and as the business grew he continued to handle all the accounting. He was spending almost half of his time entering bills, sending checks, reconciling bank accounts, etc. The accounting was being done well, but it was taking the owner away from more important activities.

I helped him set up a system in which a part-time experienced accountant trained and supervised a low-cost, part-time bookkeeper. Now he hardly has to think about accounting, and half of his valuable time is freed to build his business.

A better way

There is no right way to find the balance between these extremes. It depends on the nature and size of the business.

At the small and simple end, the company’s tax accountant may be able to advise a team member who spends some of their time taking care of the day-to-day bookkeeping.

At the large and complicated end, some businesses may need one or more full-time experienced accountants led by a full or part-time CFO.

Most small business are somewhere in the middle.

A structure I’ve seen work well is to contract with a part-time, experienced accountant. This accountant could help the business’ own staff, such as an office manager, handle the accounting. Alternatively, the accountant could completely take over the accounting function, typically with his own bookkeepers.

I'm biased because I provide these part-time services, but it works well in the companies I’m involved with.

Accounting is important, and business owners need to make sure their accounting is handled properly while not spending much of their time thinking about it.

Question: How do you handle your small business accounting? 

Key Differences Between Canada and US Tax - Small Business Tax

The US-Canada border is one of the friendliest in the world. As a result, many people move back and forth across the border. I am one of those people. I grew up in Canada, went to university and worked in the US, moved back to Canada for a few years, and now live back in the US.


It’s important for people considering moving across the border to understand the difference between the two countries' tax systems and other factors impacting cost of living. Although the principles in each country are similar, the implementation is quite different.

I’ve been writing a series of posts on the topic, including various topics, tax agencies, impact of moving, filing status, and income tax ratesdeductions and credits, payroll tax, health care and other insurance, and capital gains.

In this post I’ll compare small business tax.

Small business owners will find business tax to be one of the most significant differences between the two countries. As you will see, the difference is more in the structure than the total tax burden.

Sole proprietorships are the most simple business structure, and they are treated roughly the same in both Canada and the US. Beyond that, business tax structure is quite different between the countries.

Canada: Corporations are king

In Canada, most small businesses operate a C Corporations. This is surprising to Americans who are double taxed at at very high rates when using C Corps.

There are two reasons C Corps work in Canada:

  1. The federal corporate tax rate is much lower (15% in Canada vs 34-35% in the US - yes, only 15% - you American read that correctly)
  2. The small business deduction reduces the federal corporate tax rate to 11% on the first $500,000 in taxable income

Provinces also have a regular rate and small business deduction rate. In Alberta, for example, the rate is 3% on the first $500,000 (14% combined federal and provincial) and 12% above that (27% combined federal and provincial). Provincial rates in Canada are higher than state rates in the US, but the combined rates are still much lower in Canada.

Important caveat: the small business deduction is subject to some restrictions, including the requirement that the corporation be a Canadian-controlled private corporation (CCPC). To be a CCPC, Canadian residents must own a controlling interest in the corporation. If you and/or your spouse control the corporation, and it continues to do business in Canada after you move to the US, it will lose CCPC status.

Aside from tax rates, corporations allow income splitting between spouses. Even if one spouse does all the work for the corporation, both spouses can own the corporation and take dividends in proportion to their ownership. This isn’t an issue in the US where spouses file together, but in Canada spouses file separately.

Income splitting of regular income under certain conditions was recently added to Canadian tax law, but the newly elected Liberal government would like to repeal it. Until this change was made, corporations were one of the only ways for spouses to split income. They may soon return to that status.

Of course, money taken out of a corporation by the owner is included in the owner’s personal income. Personal income tax can be deferred indefinitely by leaving money earned by the corporation in the corporation. That money can then be invested in assets unrelated to the main corporate activity.

Many owners use corporations to build wealth with minimal taxes. For example, an attorney who earns fee income through a corporation can take just enough out of the corporation to live on and invest the rest in assets like rental properties, mutual funds, etc. This is the single biggest advantage of using the C Corp structure.

Finally, money taken out of a Canadian corporation is not double taxed. Money taken as a salary or bonus is deducted from the corporation’s taxable income, preventing double tax.

Unlike the US, even income taken as dividends is not double taxed. The ingenious Canadian tax code writers devised a way, in theory, to make owners indifferent to taking income from a corporation as salary or dividends. It’s too complicated to get into here, but income taken as a dividend can be partially credited against personal income tax. As a result, there really isn’t much difference either way in the amount of total tax paid.

Corporate tax in Canada can be complicated. Like the small business deduction, some tax rates and other benefits are subject to restriction. However, if your Canada corporation is complicated enough to worry about these restrictions, you probably wouldn’t be reading this post for tax information anyway.

US: LLC’s rule

US small business tax is much simpler. The C Corp structure is only used by businesses that are either large or have a large number of shareholders.

Many small businesses in the US operate as LLC’s. LLC are much easier to set up and maintain than corporations. LLC’s provide personal liability protection, and the tax structure is like a sole proprietorship or partnership. The LLC itself is not taxed. The LLC’s net income flows through to the owners’ personal tax return and is taxed as ordinary income.

I wrote a post here about the different types of LLC’s.

Are you American business owners ready to move to Canada yet? Are you wondering why I moved to the US?

Well, before you get too depressed, realize that corporations in Canada are not a huge advantage. Rather, Canadian tax law has simply removed the disadvantage of using a C Corp for small business. Since small business don’t use C Corps in the US anyway, nothing is lost.

If anything, Canadians should be disappointed LLC’s are not available in Canada.

Even though the structure is much different, most small business owners wouldn’t notice much of a difference in their overall tax burden.

I mentioned in previous posts that my tax bill went up slightly when I moved to the US, but it was only because I was able to use a corporation to split my income with my wife. Without this benefit, my Canada tax bill would have been slightly higher.

The biggest advantage in Canada for small business is the ability to keep money in the corporation and avoid the personal tax component. However, most people need most of their business income to live on, negating this benefit.

The bottom line: most small business owners won’t see much of a difference in their total tax bill between Canada and the US, but it is important to understand the difference in structure.

Disclaimer: I am a CPA in both Canada (Chartered Professional Accountant) and the US (Certified Public Accountant), but I am not a tax expert and this post is not meant to be professional advice. My goal is not to write a definitive guide. Rather, my goal is to give you a starting point for your own further research and/or discussions with your tax advisor. 

The Building Materials Industry is Ripe for Disruption

If you’re reading this, chances are you own a smartphone and can’t remember the last time you rented a DVD from a store (i.e. not Redbox). You may not have a landline, and if you do, you may only keep it because it’s free when bundled with Internet and TV service. The telephone and movie rental industries are just two examples of the countless industries that have been disrupted by newcomers with new technology, better products, and/or better methods of delivery.


Value gained, value lost

Think of the value gained and lost with each disruption. Since 2007, the year iPhone was released, Blackberry has lost 94% of its market value (from about $67 billion to $4 billion). During that same time, Apple's market value has increased by about 850% (from about $70 billion to $650 billion). That’s almost $600 billion of value created in only 8 years!

Investors who correctly predict (1) the industries that will be disrupted and (2) the companies who lead the disruption realize the bulk of the value created. Of course, on the flip side, investors and management stand to have their value destroyed if they fail to see the disruptors coming and adapt accordingly.

Industries ripe for disruption

Two industries I’m involved in are ripe for disruption. Both generate 95-97% of sales from brick and mortar stores. End consumers pay inflated prices due to the costs of physical locations and layers of middlemen who each take their cut.

Startups have just begun entering both industries with disruptive business models. They are using technology and other innovations to reduce the layers of cost between the manufacturer and the end consumer. They are making the customer experience better AND cheaper.

Building materials industry

In my last post  I wrote about the mattress industry. In this post I’ll write about the building materials industry.

Due to high mark-ups at each distribution level, consumers typically pay more than four times the cost of materials and labor to assemble a mattress.

The building materials industry doesn’t have quite the same margins, but participants make up for it with volume. Compared to the $14 billion US mattress industry, US home improvement is a many times larger $520 billion industry.

The buying process hasn't changed much for a very long time. The industry has maintained the status quo largely due to the size and weight of most materials and the perceived need by consumers to spend time choosing products from showrooms.

Startups are disrupting the building materials industry

However, new startups are now figuring out how to disrupt this entrenched industry. They are finding that they can match buyers and manufacturers online, quickly ship samples for review, and painlessly arrange the delivery logistics.

Build Direct is a leader is this disruption. Late last year they raised $50 million to build out their Home Marketplace platform, which they are now launching.

This platform is doing for building products what Amazon has done to other products like books, music, and electronics.

This platform allows homeowners and contractors to buy directly from manufacturers at wholesale prices. Build Direct ships free samples to aid the buyer decision, and then its proprietary logistics platforms figures out the fastest and cheapest way to ship the product to the buyer’s door. Buyers can do all this from the comfort of their own homes.

The platform gives manufacturers direct access to customers throughout North America and even the world. It provides analytics to help the seller with pricing and warehouse location decisions.

Traditionally, building product manufacturers don’t have access to the people who actually use their products. They can’t gather data about who they are, where they are, and what feedback they have. Any information is filtered through retailers who have no incentive to facilitate this contact.

Build Direct is leading the way, but like the Blackberry’s and LG's of the cell phone market, there is potential for further disruption by innovative new entrants.

What does this mean for you?

There’s a good chance that you’ll be looking for home-related products in the near future. You can be aware of cheaper and easier ways to buy.

If you’re an investor, you can look for opportunities to invest in this new trend and share in the value creation.

If you’re an entrepreneur, you may see opportunities to contribute to the disruption.

If you’re involved in any other industry, you can recognize that your industry will be disrupted. You can adapt and be part of the disruption, or you can be one of the value-losing stories. Be a student of your industry. Be aware of the history and the newest developments. It’s not easy to predict which trends will be fads and which will be disruptive, but at least be aware of what’s out there.

Look for significant value to be created by new startups and significant value to be lost by incumbents that don’t adapt. This is the world we live in, and it’s an exciting time to be alive!

Question: What other industries are ripe for disruption? 

The Mattress Industry is Ripe for Disruption

If you’re reading this, chances are you own a smartphone and can’t remember the last time you rented a DVD from a store (i.e. not Redbox). You may not have a landline, and if you do, you may only keep it because it’s free when bundled with Internet and TV service. The telephone and movie rental industries are just two examples of the countless industries that have been disrupted by newcomers with new technology, better products, and/or better methods of delivery.


Value gained, value lost

Think of the value gained and lost with each disruption. Since 2007, the year iPhone was released, Blackberry has lost 94% of its market value (from about $67 billion to $4 billion). During that same time, Apple's market value has increased by about 850% (from about $70 billion to $650 billion). That’s almost $600 billion of value created in only 8 years!

Investors who correctly predict (1) the industries that will be disrupted and (2) the companies who lead the disruption realize the bulk of the value created. Of course, on the flip side, investors and management stand to have their value destroyed if they fail to see the disruptors coming and adapt accordingly.

Industries ripe for disruption

Two industries I’m involved in are ripe for disruption. Both generate 95-97% of sales from brick and mortar stores. End consumers pay inflated prices due to the costs of physical locations and layers of middlemen who each take their cut.

Startups have just begun entering both industries with disruptive business models. They are using technology and other innovations to reduce the layers of cost between the manufacturer and the end consumer. They are making the customer experience better AND cheaper.

Mattress industry

In this post I’ll write about the mattress industry, and in my next post I’ll write about the building materials industry.

The mattress industry has long been lucrative. Manufacturers typically earn a 50% gross margin, and then retailers require up to a 55% margin on top of the wholesale price. This means, for example, consumers pay over $2200 for a mattress that costs $500 in material and labor to assemble.

The industry has maintained the status quo through tactics such as creating complex product lines, often customized for each retailer to make comparison shopping difficult. Often mattresses with the same materials are branded differently and sold at different price points.

Further, mattresses are big and heavy, requiring delivery by trucks rather than courier. This adds to the costs and requires consumers go to a retail showroom to try before they buy.

Startups are disrupting the mattress industry

However, new startups are now figuring out how to disrupt this entrenched industry. They are finding that they can make a mattress from the same high quality materials, compress the mattress to fit in a box that can be shipped by courier, and sell online direct to the consumer.

Through effective marketing they are convincing consumers that they don’t need to try before they buy. They can rely on website descriptions and reviews. If they’re not happy, they have between three and six months to return the mattress for a full refund, no questions asked. The seller will even arrange for free pickup of the unwanted mattress.

The so-called bed-in-a-box sellers are doing extremely well. They are paving the way with new technology and spending millions on marketing to gain acceptance for the concept in the consumer mind. They are in the process of pushing online mattress sales from 3% to potentially 20% or more of all sales. With a $14 billion US mattress market, this is opening a new 2.4B online channel.

Room for further disruption

However, like the Blackberry’s and LG's of the cell phone market, they have flaws that can be improved upon by new entrants, such as:

  • Limited selection. Casper, the leader in this disruption, sells exactly one model, as do most of their competitors.
  • Average materials. Most use average foam and/or latex much like mid-range conventional mattresses.
  • Antiquated compression techniques. The bed-in-a-box concept is not new. It’s simply being legitimized by startups innovating marketing and customer service, not materials and superior compression. The boxes are small enough to courier, but still quite bulky, and the mattresses take several hours to expand to full size.

The incumbent manufacturers and retailers are worried. Mattress Firm, the largest mattress retailer in the US, just announced their entrance into the market with their online-only, bed-in-a-box "Dream Bed."

What does this mean for you?

You’ll need to buy a new mattress several times in your life. You can be aware of cheaper and easier ways to buy.

If you’re an investor, you can look for opportunities to invest in this new trend and share in the value creation.

If you’re an entrepreneur, you may see opportunities to contribute to the disruption.

If you’re involved in any other industry, you can recognize that your industry will be disrupted. You can adapt and be part of the disruption, or you can be one of the value-losing stories. Be a student of your industry. Be aware of the history and the newest developments. It’s not easy to predict which trends will be fads and which will be disruptive, but at least be aware of what’s out there.

Look for significant value to be created by new startups and significant value to be lost by incumbents that don’t adapt. This is the world we live in, and it’s an exciting time to be alive!

Question: What other industries are ripe for disruption? 

Should I Use Xero or Quickbooks Online?

Choosing the right accounting software for your business is an important exercise for small business owners. It may not be the most exciting exercise, but the choice will affect your business every day going forward. Plus, switching is difficult if you make the wrong decision. vs.

Your business runs on accounting software. How well the software fits your business will determine how much time and money you spend on separate products and processes. How well the software works will be a big factor in how productive (and sane) your team is. The information you rely on to make decisions needs to be accurate without taking too much extra work to generate.

I’m a big fan of online accounting software, or software as a service (SaaS), as opposed to desktop software. With SaaS you don’t have to manage software installations or data on your own equipment.

Two of the leading accounting SaaS products for small business are Xero and Quickbooks Online (QBO).

I wrote a post almost a year ago extolling the virtues of Xero. I criticized Intuit for how slow they were to release QBO and build out its features.

However, I recently noticed that QBO has rapidly improved. I think it’s time to update my opinion.

I still love Xero and use it for most of the companies I’m involved in. It was good when I started using it five years ago (much better than QBO), and it has improved since then. QBO was extremely bare bones at the time and didn't come close to having the features we needed, such as bank feeds and multi-currency.

I recently took another look at QBO, and it has come a long way in the last 5 years. As far as I can tell, it has all the features of the Quickbooks desktop version, and possibly more. It just added multi-currency support and redesigned many of its standard reports.

Here is a comparison between Xero and QBO in a few key areas.

1. Data entry

Quick and easy data entry is essential, especially for high-volume businesses. Even a few extra seconds on each transaction adds up over time.

Both Xero and QBO have bank feeds, and the process for entering transactions from the bank feed is similar. Both allow you to create new transactions or match to existing transactions right from the feed.

Xero has a feature called cash coding. Cash coding puts all new and unmatched transactions in a list with fields that can be edited without going to a new screen. This allows you to quickly tab through and assign a name, account, and description to a long list of transactions.

Winner: Xero

2. Flexibility and ease of use

Xero is easy to use, but it is not very flexible. Usually there is only one way to do something. In addition, you can’t edit some transactions. Instead, you have to delete and re-enter if you make a mistake. For example, you can’t edit bank transfers or payments applied to bills/invoices.

Also, you can’t apply one payment to multiple bills denominated in a foreign currency. You have to pay each bill separately, and then match the separate payments to the actual payment in the bank statement.

QBO is extremely forgiving. As far as I can tell, any transaction can be edited. Further, any transaction can act as any other similar transaction. For example, you may add a bank feed withdrawal as an expense. After reconciling the bank account you may realize the withdrawal should have been a bill payment.

You can simply change the name on the expense to the vendor name and change the account to Accounts Payable. This creates a credit on the vendor account, and then you can apply the credit as a payment against the bill. No need to delete the expense, re-enter a bill payment, and re-reconcile the bank account (as you would have to do with Xero).

QBO also has familiarity going for it. Many accountants are familiar with Quickbooks desktop version, and the QBO functionality is similar.

Winner: QBO

3. Stability

Software bugs are frustrating. QBO seems to be more buggy to me. I don’t have specific examples, but often screen don’t load properly or features don’t work as expected. Sometimes the Xero site will go down for a few seconds, but I don’t remember coming across any bugs.

Winner: Xero

4. Reporting 

Neither product has the great reports compared to more expensive systems, such as Netsuite. Of course, you can find all of the standard reports like Income Statement, Balance Sheet, Aged Payables, Aged Receivables, General Ledger, etc. However, customization options are limited.

Xero has better options for customizing individual report layouts. You can group accounts together and create various detail and summary templates. It has the awesome feature of being able to use the same template across multiple companies. For example, I customize the layout of the income statement and balance sheet based on the range of account codes (from the chart of accounts). I use the same chart of account rules in most companies, which allows me to use the same template.

QBO has a wider range of reports and better ability to drill down into detail. They have also recently released a new set of nicely redesigned reports.

Winner: it’s a toss-up with a slight edge to Xero

5. Payroll integration 

Both products have integrated payroll. Xero’s service is relatively new and is being gradually rolled out to US states, but it still has a ways to go. I haven’t used Xero payroll so I can’t speak authoritatively, but it appears that state and federal filings are not automatic (a big drawback in my opinion).

QBO has both basic and full service options. I use Intuit full service payroll for several companies, and I find it extremely simple, easy to use, and inexpensive. Tax filings are completely automated. All you have to do is enter hours (if you have hourly employees) and press a button to submit payroll.

Winner: QBO

As you can see, Xero and QBO have their strengths and weaknesses. Until recently I would have recommended Xero hands-down. However, QBO, with its recent improvements, is now a contender.

Rather than recommending one over the other, I suggest signing up for a free trial and exploring the features that are most important to your business.

If you are moving from Quickbooks desktop, you can automatically convert the Quickbooks data file to either Xero or QBO. This will allow you to test the software with real data. You can re-import the data file when you make a decision and are ready to move forward.

Good luck with your accounting software search!

Question: What other accounting software should small businesses consider? 

Nail Your Small Business Accounting

Small business accounting is like staying healthy. Everyone knows the importance but few enjoy it. Although important, usually only a crisis makes it urgent. Staying reasonably healthy only requires that you understand (and follow) a few basic principles. For example, excess sugar and processed foods are bad for your health. Walking 10,000 steps per day and elevating your heart rate for 20 minutes, 2-3 times per week is a good exercise plan.


Likewise, you only need to know a few basic principles to maintain a good accounting system.

At a minimum, you need to understand the accounting roles needing to be filled and then assign people to fill those roles. You may not even need to hire anyone. Think of your accounting team as a collection of roles that need to be filled and not necessarily a collection of people.

Your accounting may be so simple that you fill the roles to start with. You may have another team member who can handle a few extra duties. You may hire a part-time bookkeeper for a few hours per month. It doesn’t matter how. What matters is that these roles get filled from the beginning (before a crisis).

Getting your accounting done doesn’t have to be complicated or expensive. You just have to know what to do.

The followings are accounting roles that need to be filled in most businesses:

Chief Financial Officer (CFO). Don’t be intimidated by this title. It takes a fairly large company to need a full-time CFO, and it may be a while before you formally give this title to anyone. The title simply describes a role that needs to be filled.

Someone needs to oversee the accounting. Someone needs to make sure the accounting roles are filled effectively. Someone needs to make sure the books stay clean. Someone needs to make sure the data provided by the books is both accurate and interpreted correctly. Someone needs to use the numbers to advise other leaders on decisions. Someone needs to make sure you are complaint with tax, labor, and other laws.

In the beginning, this role may be filled by you as the business owner, ideally with help from a CPA or contract CFO. Someone needs to make sure the rest of the accounting function is operating effectively.

I’ve written other posts about why a startup needs a CFO and what your CFO should do for you.

Bookkeeper. This function makes sure the books are accurate at least monthly. The bookkeeper should follow a month-end checklist to make sure all transactions get into the accounting software and the bank accounts are reconciled. Depending on the nature of the business, they may handle other transactions such as fixed asset purchase/disposal/depreciation, inventory adjustments, loan and investment schedules, etc.

Once the books are accurate for the month, they can run financial statements and other reports helpful to management.

Accounts Receivable. This function is responsible for the process from customer order to customer payment. This role is simple in a retail store with only point of sale transactions. However, in many businesses customers get billed for products or services and then pay on agreed terms. Someone needs to make sure customers get billed accurately and pay on time. They also need to make sure payments get entered in accounting software so customer accounts remain accurate.

You won’t be in business long if you don’t pay attention to this role. Customers will be frustrated by inaccurate billing and statements. Failing to invoice a customer means lost revenue. Cash flow will suffer if customers don’t pay on time.

Accounts Payable. This function is responsible for the process from making a purchase to paying for that purchase (the mirror of Accounts Receivable). This usually involves receiving bills, verifying they are legitimate, entering them into accounting software, and making sure payments are on time and accurately entered. Even point of sale purchases require the receipt to be tracked and the transaction to be categorized accurately in the books.

HR/Payroll. The function handles hiring and compensating employees. It makes sure new employee paperwork is complete. It makes sure working conditions and practices comply with labor laws. It makes sure employees are paid accurately and on time. It administers employee benefits. Perhaps most importantly, it makes sure payroll tax is remitted accurately and on time.

This function can be completely outsourced to a professional employer organization (PEO). At a minimum, every company should outsource payroll. An abundance of service providers make payroll extremely cheap and easy. You shouldn’t spend more than a $100 and a few minutes per month on payroll if you have a small team. Company like Zen Payroll and Intuit do everything from calculating taxes to direct depositing pay into employee bank accounts to submitting payroll taxes.

Putting it all together

If these roles' workload doesn’t justify new full-time employees, how do you fill them?

I’m biased because this is the work I specialize in, but I recommend hiring a contract CFO to help you set up accounting systems and plug your existing team into the necessary roles. The future headaches you’ll avoid is well worth the hourly rate you’ll pay for an experienced CFO. It shouldn’t take very many hours.

For example, many businesses already have some kind of administrative assistant. A CFO can set up a system simple enough to be run by someone not training in accounting. The admin can handle 99% of the work, and the CFO can be available as needed to answer questions and handle the more complicated transactions. A contract CFO combined with low-cost administrative staff can inexpensively handle the accounting for most small businesses.

That said, there is no one-size-fits-all approach to accounting. Business owners must first recognize that a good accounting system is important, and then they must understand the roles that need to be filled. From there they can build a team to make it happen.

Question: What tips do you have for running small business accounting?

Why You Should Create Systems to Automate Your Business

In my last post, I wrote about why it’s important to keep your business books clean. Accounting is one of those mundane details that most business owners don’t like to deal with. They would rather spend time building and selling their product or service. However, it is important to invest some time, attention, and money in keeping your books clean. This will allow you to make better decisions and help you avoid costly and distracting tax nightmares and clean-up projects.



Hopefully I’ve convinced you that it’s important to invest in clean books.

Now where do you start? Unless you have an accounting background or lots of business experience, getting started may be intimidating.

The answer is to start by creating systems. Creating a system begins with defining roles that need to be filled and then building a team to fill those roles.

Before diving into accounting systems specifically, I want to talk about the importance of creating systems in all areas of your business.

In business and life, the key to creating order out of chaos is systems. Systems allow us to automate the mundane so we can focus our greatest efforts on fine tuning rather than cleaning up messes.

It doesn’t mean smart and skilled people aren’t required to carry out the system. It means these smart people don’t have to waste their brainpower trying to figure out the process each time. Instead, they can use their valuable mind to work on the business rather than in the business.

Those familiar with with The E-Myth will recognize the principle of working ON your business rather than IN your business. The author encourages business owners to look at a business like a system. That system needs various roles to be performed to operate smoothly. You start by defining what roles need to be filled and then plug people into those roles. The roles should be so well-defined that they can be performed by almost anyone (within the parameters of certain skills sets).

No role should be completely dependent on a specific person. People should be interchangeable. This may sound cold, but the reality is people come and go. Turnover is always somewhat disruptive, but having well-defined roles and systems will minimize the disruption.

Hopefully I’ve convinced you that you should create systems in all areas of your business, including accounting.

In my next post I will get into more detail about how to create accounting systems specifically.

Question: How have systems helped your business? 

Why Your Business Should Invest in Clean Books

Most business owners prefer to focus on building and selling their product or service rather than being bothered with the many mundane details that go along with running a business. I’ve written before about how nothing else matters until a business has a product or service to sell and customers to sell it to. However, many of these mundane details can hinder or even kill a business if not tended to.

Business books (accounting records) are often an afterthought, but having clean books is one of those important details.



I started writing a post about how to keep clean books, but I realized that you won’t care how to keep clean books until you understand why it’s worth your precious attention.

I’ll save the how for next week. For now, I’ll try to convince you of why you should make clean books a priority.

First, what does it mean to have clean books? 

Clean can mean different things to different businesses, but in general clean means having accurate, up-to-date, and understandable financial information. You should be able to rely on the financial information in your books to make decisions.

To get specific, for many businesses clean means having accounts receivable (money owed to you) and accounts payable (money you owe) records  always up to date. Otherwise, you hurt your cash flow by being slow to invoice customers and follow up on late payments. You hurt vendor relationships by being late on bills.

Clean also means having an accurate income statement and balance sheet soon after the end of each month. Having accurate financial statements usually means bank accounts are reconciled, revenue and expenses are matched in the correct period, inventory is accurate, and depending on the nature of the business, other accounts are up to date.

Now, why should you make clean books a priority? 

1. To help you make the best decisions possible

You are never going to have enough information to make a decision. But you can at least make sure you have all the information possible. The primary reason to have clean books is to give yourself as much accurate information as possible for decision making.

Do you have enough cash to invest in that new piece of equipment? How will you know unless you have a current picture of cash in the bank, money owed to you (receivables), and money you owe (payables)? An accurate income statement showing a history of healthy profit can give you confidence that cash will keep coming in.

Often business owners make decisions based on cash in the bank, but cash by itself is not a good indicator of business health.

A high bank balance might give you a false sense of security if you don’t realize that your overdue payables are more than cash available. This problem is common for businesses, such as retail stores, that collect money up front from customers but pay their suppliers on terms.

A low cash balance might keep you up at night, but accurate receivables might show that you would have plenty of cash if could collect overdue balances from customers. A simple collections effort might solve your cash problems.

Clean books will show you really how well your business is doing regardless of cash levels.

2. To help you avoid tax nightmares

You may think it will never happen to you, but government agencies and insurance companies do perform audits. Income tax, sales tax, payroll tax, worker’s compensation and liability insurance, are examples of potential audits.

Many businesses have gone down, bringing the personal lives of the owners with them, for failure to accurately report and pay taxes.

Even if you have nothing to hide, messy books will make audits time-consuming and expensive. Clean books make audits quick and simple.

It’s better to preempt these problems by investing in clean books up front.

3. Books are expensive to clean up, and you will have to clean them up

You will eventually need to clean up your books. It may be forced a government agency. It may be driven by your own desire for better information. It may be required by capital sources, such as banks or investors.

Like many other messes in life, messy books are much less expensive to avoid than to clean up.

Cleaning up books takes a different, and more expensive, skill set than maintaining books.

For a small up-front investment, an experienced accountant can help you set up accounting systems that low-cost bookkeepers or clerks can maintain. Periodic informal reviews by this accountant, such as quarterly or annually, can ensure those systems are operating properly.

In contrast, an experienced accountant will have to do most of the work to clean up your books. The clean-up can’t be done using simple systems that low-cost staff can perform.

I’ll write more in my next post about how to set up systems and people for keeping your books clean.

Keeping clean books is not the most exciting part of running a business (unless your business is an accounting firm). However, clean books will help the more exciting aspects of your business run more smoothly. Clean books can also help you avoid distracting audits and clean-up projects in the future.

Question: Why do you think it’s important to keep your books clean? 

How to Lead a Virtual Team

Using a virtual team to carry out at least part of your business can provide greater flexibility, cost savings, and access to talent when compared to an on-site team. My last two posts have been about why you should consider building a virtual team and how to build a virtual team to take advantage of these benefits.

I will continue on that theme in this post by writing about how to lead a virtual team.


Leading a virtual team isn’t much different from leading a traditional on-site team. However, some leadership and management principles can be implemented a little differently.

The following are some thoughts about how these principles can be applied to leading a virtual team.

Invest in documentation and training

Business owners and managers build a team so they can leverage their time. As their businesses grow, they can’t do everything themselves. They need to hire and train people who can take some of the workload.

The best-run businesses have well-defined roles that need to be filled and operating procedures for carrying out those roles. The E-Myth is a great book about building a company that relies on roles and procedures rather than specific people.

Having well-defined roles and procedures may be even more important for a virtual team compared to a local team.

When business owners are in the same location as the rest of the team, the owner can model correct performance, observe team members directly, and provide training and feedback in person.

These dynamics are different for a virtual team. Clear written procedures are important for virtual teams. Team members can primarily learn how to do their job by reading and following these procedures. Owners can monitor results and provide feedback.

Good documentation also makes turnover less disruptive. A virtual team gives you more flexibility to grow and shrink your team as needed, but that flexibility goes both ways. You may have more turnover with a virtual team than a traditional team. Having written procedures makes it much easier to insert someone else into that role.

I just started using a combination of Sweet Process and Snag It for documenting procedures, and I am happy with the results so far. I can write out steps and attach screen shot images and videos with annotations.

Track status and review promptly 

On site, you can check the status of a project by walking around. If revisions are needed, it’s easy to pass the work back for quick edits. It’s not that easy with a virtual team.

With a virtual team it can be tempting to do the work or make revisions yourself rather than incur the overhead of status updates and revision cycles. Especially if your team is on the other side of the world, the revision cycle can take 24 hours.

However, you can handle status updates and revisions easily easily with technology tools.

Email is not a good tool for managing tasks and projects. Files, status updates, and instructions can get scattered across several email strings, and it can be time-consuming and difficult to stay organized.

I prefer to use Basecamp and Google Sheets checklists for managing tasks and projects.

With Basecamp you can create projects, task list categories, and individual tasks. When I need something done, I will assign a task in Basecamp to a team member and add instructions and files to the task. The team member can make comments on the task with questions. When they are done, they assign the task back to me so I know it’s ready for my review.

For recurring and multi-step tasks, such as month-end accounting procedures, I use Google Sheets checklists. This allows me to check the status at any time.

As you assign tasks, it’s important to review and provide feedback quickly. I’m guilty of not reviewing tasks right away, and sometimes mistakes get repeated if I don’t catch them early.

Communicate regularly and clearly

Since a virtual team is out of sight, it’s easy for them to be out of mind. To be an effective leader, you need to keep them in mind just as much as an in-person team.

If team members are working on a long project or if their duties only require periodic action, it’s easy to neglect them. Just like a good in-person leader, check in regularly, even for no reason other than to see how they’re doing.

Don’t just dump tasks on them and expect them to figure it out. Provide clear instructions along with prompt and patient responses to questions.

Provide regular feedback, preferably using the sandwich approach. Start with something positive, provide constructive feedback, and then end on a positive note. People are people everywhere in the world, but some people and cultures are especially sensitive to negative feedback.

An effective method for maintaining morale can be to frame mistakes as your fault. “I’m sorry, I must not have given very good instructions” or phrases like that.


Principles of leadership are the same whether those you lead are in the same room or on the other side of the world. However, it’s important to adapt your leadership practices to effectively manage a virtual team. As you lead effectively, you can take advantage of the flexibility, cost savings, and access to talent possible with virtual teams.

Question: What practices have you found helpful in leading a virtual team?