Common Assumption: The Back Office "Runs Itself"
Friday, June 19, 2009
OBSERVATION
It is very common that entrepreneurs and business enthusiasts approach us with ideas about starting a business. Being a business consulting, software and tech company often allows us the opportunity to build a company from the ground up with our clients in terms of infrastructure and operation.
The type of owners we typically deal with are "front-end minded" individuals who have almost always thought through a way to enter an "untapped market" with some kind of web-based technology and marketing plan to bring some product to market. The ideas we hear are usually compelling, impressive, well-thought out from a front-end perspective, but almost always lack any kind of plan or more importantly--cost structure for control, accounting or administration that would be necessary if the "organic viral" concept were to "catch fire" or "take off."
It is very common that entrepreneurs and business enthusiasts approach us with ideas about starting a business. Being a business consulting, software and tech company often allows us the opportunity to build a company from the ground up with our clients in terms of infrastructure and operation.
The type of owners we typically deal with are "front-end minded" individuals who have almost always thought through a way to enter an "untapped market" with some kind of web-based technology and marketing plan to bring some product to market. The ideas we hear are usually compelling, impressive, well-thought out from a front-end perspective, but almost always lack any kind of plan or more importantly--cost structure for control, accounting or administration that would be necessary if the "organic viral" concept were to "catch fire" or "take off."
KEY ASSUMPTION
When asked about whether or not considerations have been made for administration, accounting, and details like this, the most common answer we here is: "The web system should handle that." There is a common assumption today that a web system or software can completely replace accounting, reconciliation and administration, and this just is not true. Consider the following example.
When asked about whether or not considerations have been made for administration, accounting, and details like this, the most common answer we here is: "The web system should handle that." There is a common assumption today that a web system or software can completely replace accounting, reconciliation and administration, and this just is not true. Consider the following example.
EXAMPLE
Company X develops a fantastic website to market widget X as a re-seller. Widget X is purchased from Company Y at a cost of $1.00 and is sold over Company X's web POS for $2.00. Company Y is recovers its cost by tapping Company X's bank account for items sold in a week, and the quantities charged are determined by a weekly data batch sent from Company X's web system to company Y's.
Eureka! Month's 1-12 are a complete success. Company X sells twice the Widget's as expected. And the money invested to create a web system sure paid off--because everything's automatic! No hand-written checks, invoices, or anything have to be exchanged between the producer and the reseller. All the owner of company X have to do is monitor online banking to make sure the money is coming in. Outstanding.
One small problem. When customers arrive at the website and order widget X, if they are using web browser X that has pluggin Y installed (popular toolbar from their favorite social networking site) it causes a rare phenominon in which the count for widget X ordered is over-stated in the data batch by tripple. In other words--every time customer order widget x, Company X gets bill 3 times for it instead of 1.
Now instead of making money on this product, they lose money. Luckily, the phenominon works out to only be 5% of their customers. But--their successful start brought in 100,000 customer transaction for purchase of widget X. That amounts to $10,000 in being over-billed for cost of goods sold.
The problem is that since the error made by the web system only affected 5% of the transactions, without any substantial accounting or administrative processes in place when the entrepreneurs of Company X created the company, the billing problem is not easy to find--it becomes like a needle in a haystack. This billing phenomenon could go on indefinitely at Company X, causing it to lose money unknowingly.
Company X develops a fantastic website to market widget X as a re-seller. Widget X is purchased from Company Y at a cost of $1.00 and is sold over Company X's web POS for $2.00. Company Y is recovers its cost by tapping Company X's bank account for items sold in a week, and the quantities charged are determined by a weekly data batch sent from Company X's web system to company Y's.
Eureka! Month's 1-12 are a complete success. Company X sells twice the Widget's as expected. And the money invested to create a web system sure paid off--because everything's automatic! No hand-written checks, invoices, or anything have to be exchanged between the producer and the reseller. All the owner of company X have to do is monitor online banking to make sure the money is coming in. Outstanding.
One small problem. When customers arrive at the website and order widget X, if they are using web browser X that has pluggin Y installed (popular toolbar from their favorite social networking site) it causes a rare phenominon in which the count for widget X ordered is over-stated in the data batch by tripple. In other words--every time customer order widget x, Company X gets bill 3 times for it instead of 1.
Now instead of making money on this product, they lose money. Luckily, the phenominon works out to only be 5% of their customers. But--their successful start brought in 100,000 customer transaction for purchase of widget X. That amounts to $10,000 in being over-billed for cost of goods sold.
The problem is that since the error made by the web system only affected 5% of the transactions, without any substantial accounting or administrative processes in place when the entrepreneurs of Company X created the company, the billing problem is not easy to find--it becomes like a needle in a haystack. This billing phenomenon could go on indefinitely at Company X, causing it to lose money unknowingly.
CONCLUSION
Sadly, things like the scenario above happen to start-up companies all the time. We see it from two different perspectives all the time: beginning a consulting relationship with company AFTER a problem like the example is already occurring in an effort to fix it, AND assisting the start-up of a new company advising on how the potential for pitfalls like the example can occur in the future.
We find business owners to be much more receptive to our advisement to invest in best practices in accounting and administration in the situations where it has already happened. We too often find it very difficult to get new business owners to imagine that such a scenario like the example could actually happen to them, and unfortunately investment in best practice to avoid this gets overlooked.
Situations like the example above can happen, do happen, and need to be considered as if they will happen. If you are considering a start-up that relies on technology, websites or software to be your company's sales front or payroll (which is becoming more common every day), make sure to have expertise around you during the start-up process that considers the back-end company necessities like accounting, administration, reconciliation and control. This can not only help alleviate a great deal of hardship in the future, it could be the difference between a company surviving or not.
If you liked this blog, here are some other sites that might interest you:
Do you know anyone who has a technical project--large or small, such as a website, software project, or network setup that is stalled or half complete? I'm never too busy for a referral, so if you think I could help--feel free to drop us an inquiry by clicking here...
Sadly, things like the scenario above happen to start-up companies all the time. We see it from two different perspectives all the time: beginning a consulting relationship with company AFTER a problem like the example is already occurring in an effort to fix it, AND assisting the start-up of a new company advising on how the potential for pitfalls like the example can occur in the future.
We find business owners to be much more receptive to our advisement to invest in best practices in accounting and administration in the situations where it has already happened. We too often find it very difficult to get new business owners to imagine that such a scenario like the example could actually happen to them, and unfortunately investment in best practice to avoid this gets overlooked.
Situations like the example above can happen, do happen, and need to be considered as if they will happen. If you are considering a start-up that relies on technology, websites or software to be your company's sales front or payroll (which is becoming more common every day), make sure to have expertise around you during the start-up process that considers the back-end company necessities like accounting, administration, reconciliation and control. This can not only help alleviate a great deal of hardship in the future, it could be the difference between a company surviving or not.
If you liked this blog, here are some other sites that might interest you:
- Connect with my business partner, Andrew Hollamon at LinkedIn
- A networking organization we co-founded--we have been die-hard believers in structured business networking for years: see ReferralTree.Net
- Did you know we make our own accounting product? See PiAccounting.Com
Do you know anyone who has a technical project--large or small, such as a website, software project, or network setup that is stalled or half complete? I'm never too busy for a referral, so if you think I could help--feel free to drop us an inquiry by clicking here...
