Manage for Success: Accounting (Newsletter #2, June 2001)
It's my guess that most of you know almost exactly how many copies you've shipped of your latest new release, but do you know almost exactly what that new release cost you to make, what you're spending initially to market it, or how many copies you need to sell through to consumers to break even?
Well, to effectively run your business you'll need that information, and this requires a very good accounting system. It seems elementary, but many companies falter over this critical function of business. You need to know, at all times, exactly where you stand financially. Are you making money or losing it, and in both cases, how much?
How many of you know exactly what your accounts receivable are, or your accounts payable? With a good accounting system tailored to your label's needs you can know, in almost an instant, about these and all the other vital signs of your business.
A good accounting system for the record industry, and just about any other business, needs all of the following functions:
Invoicing of Sales Crediting of Returns Accounts Receivable Customer Statements
Purchase Journal Accounts Payable
General Ledger Trial Balance Income Statement Balance Sheet Profit and Loss Statement Cost of Sales Product P&L (by Artist/Title) Cash Flow
Payroll (plus W2s and 1099s)
Order Entry (optional but very helpful) Inventory Management (optional but extremely helpful)
Most accountants recommend you operate on an accrual rather than a cash basis. Using the latter you account for income when you receive checks, and you account for expenses (outgo) when you write checks. This is sometimes called "cigar box" accounting because it's like keeping your money in a small box -- putting it in and taking it out.
Accrual accounting, on the other hand, keeps track of everything as it occurs. For example, as soon as you ship an order to a customer you generate an invoice which posts the amount to an accounts receivable journal and tells you, based on information in the invoice, or due to a prior account set-up, exactly when you should be receiving payment. In other words, if you send an invoice on June 20th and have given 60 day terms, you will expect to receive payment on or shortly after August 20th. (Being in the record business however, you won't be holding your breath, and will probably be delighted to receive payment by the end of September!)
Additionally, the sales information entered earlier in invoices (or, even prior to that, in your order entry journal if you're using one -- a very good idea) can be used to construct a sales report, by catalog number, quantity, customer, etc.
On the other hand, when you make a purchase by use of a purchase order, you would enter the purchase information into a purchase journal, noting when payment is expected to be due; for example 30 days after receiving the goods and receipt of an invoice from your supplier. The accumulation of all purchases will generate an accounts payable ledger or "aging" which will tell you what you'll have to pay out over the next week, or 30 days, 60 days, etc.
The more detailed you make your entries (and you only have to do this once per event) the more information you'll be able to extract. For example, at any given time you should be able to know exactly what you've spent thus far on making your newest hit -- in studio costs, musician fees, print graphics, etc. You'll also know how much business you've done with your key accounts for each month and in aggregate since the beginning of the year, including how well they're paying you, and what you can expect to receive in payment during the next month, and so forth.
With a good double entry accounting system you should be able to maintain all the information a label needs to survive and prosper: Accounts Receivable aging, Accounts Payable aging, Income Statement, Balance Sheet, Project or Release P&Ls, Cash Flow data, etc.
(Double Entry: every transaction has two sides -- where the money comes from, and where it goes to. For example when you pay a bill you'll be deducting money from your checking account but also applying it to your supplier's account, reducing the amount you owe him.)
There are lots of accounting systems available. Some of them are very good, and some rather poor. Some are over-simplified, others way too complicated. You will need to do research to find out which one's right for how you want to operate your business.
Are you using "Wintel" PC's or Apple's Macintosh? Will you be needing more than one person to handle maintenance of your accounting? You may need a LAN (local area network) so that two or more people can be entering data or running a report at the same time.
Don't get a system that is too elementary. Although a simple package may seem right for a start-up, be sure it can grow as your business grows. You certainly don't want to have to change packages in a year or two, conceivably having to re-enter all of your data! That's a nightmare, but I've known it to happen many times.
On the other hand, don't get a package that's too complicated for you and your staff to handle. Think like Goldilocks -- it's got to be just right!
Be sure the software you buy is from a well-established company -- one that looks as if it'll be around for years to come. You'll likely need tech support from time to time, and you don't want to find the company has gone out of business and your new software will be unsupported.
In addition, before you settle on a particular system, consider using an accounting software specialist to assist in the installation and set-up. This may save you lots of grief. But be sure the specialist will be available for the first few months you're using the new package to answer questions and troubleshoot problems. And be sure they know your chosen software cold!
Although I'm not recommending accounting software for your particular label, you may want to look into one or more of the following before you settle on your purchase. It's likely that one of these will work for you.
MYOB (stands for Mind Your Own Business) (www.myob.com) has a different package for each platform: MYOB Accounting Plus for PCs (about $185), and MYOB AccountEdge for Macintosh (about $230.) Either of these programs will probably work well for a start-up that plans a few years of solid growth. You'll have to buy additional licenses for each additional user, but that's at considerably reduced prices.
QuickBooks (www.quickbooks.com) is the simplest system, but may not be flexible or sophisticated enough for a growing company. A simpler version sells for about $150, and a more complex one sells for about $250. It's available for both PC and Macintosh, but the Mac version is single-user only and hasn't been upgraded or supported for years.
Here are some PC-only offerings, but be sure this software is compatible with the type of Windows system and/or server you use:
Peachtree Accounting (peachtree.com) (from $100 to $1600 depending on complexity and number of users)
Business Works (www.Business-Works.com) (ca. $1400)
ACCPAC Simply Accounting (www.accpac.com) starts at about $90 building up to their VisionPoint or Executive Series. The latter are highly modular and there's a charge for each module. This can get quite costly and complex.
There are also web-based version for some of these (QuickBooks and Peachtree) but I don't recommend them because, if you use a modem to access the web, it'll be in constant use, and if you have broadband access but your ISP (Internet Service Provider) is down, you won't be able to get to your data.
Lots of research material is available on the web. So be sure to thoroughly research all available options. But it's imperative that you discuss these with your accountant before you make a purchase. It's also a good idea to check with your friendly competitors to see what they're having success with, or listen to horror stories about their experiences so you'll know what to avoid.
Of course you will back up your accounting data (and all other vital databases and business information) on a daily basis, rotating your back-ups and keeping them off-site. (For more about back-ups see www.Dantz.com for their Retrospect family of back-up solutions.)
Finally, whatever you decide, be doubly sure that your new accounting system, and your personnel, will be able to handle all of the details and masses of accounting data you will need in order to properly and effectively manage your business for success.