Sambal

Often people who are starting self-employment are advised to get an accountant. This is usually overkill.

First let’s look at what an accountant is. An accountant is a professional or quasi-professional who is skilled at auditing, determining the costs of things, and assessing the value of different business strategies. Given enough data and time, an accountant can tell you how much it costs per day to keep a pallet of Cascade on a shelf in a warehouse, whether you’re selling enough Cascade to justify the inventory you’re keeping, and how much high you’d need to price off-brand dishwashing soap in order to get an acceptable return on capital. Accounting is not particularly dry or boring, in my very limited experience with it.

But since as a software solo practitioner, you’re not managing inventories, have very low captial requirements, and relatively simple expenses, you don’t have much need for the higher-level abilities of an accountant. All you really need is to keep track of your income and expenses, generate a couple of reports at your year-end, and file minimal tax forms with the state/provincial and federal governments. Hiring an accountant to do this is like hiring a Jamie Zawinski to ‘program HTML’.

All you really need is a bookkeeper. So let’s look at the typical transactions after a year of software self-employment: you’ll write a dozen salary checks, deposit checks from at most 2-3 clients per month, and reimburse yourself for some expenses. You will depreciate a computer and maybe your desk and chair. That’s at most 100 transactions per year. For many people it will be more like fifty. Even if you save up all your bookkeeping and do it at the end of the year, it shouldn’t take you more than an hour. (I just looked at my last year’s books and we did 111 transactions, including maintaining bank accounts in two currencies and two sets of monthly payroll checks.)

So: why should you do your own bookkeeping? I’m sure it feels nice when you hand over your mess of papers and receipts and check stubs to somebody else and get back a neatly printed tax return. It feels less nice when you reflect that you’re paying at least $1,000 for work that you could have done in an hour or two — and if you spread the work out over the year, as I recommend, you don’t even notice the minute here and minute there that you spend on it.

Incidentally, $1,000 for a simple business tax return might be obsolete. After the Enron/Andersen mess, accountants got slapped with a pile of new regulation which, as far as I can tell, makes them more liable for failing to detect and document your mistakes, evasions, etc. This has the valuable effect of making accountants more careful and meticulous when they prepare books for large publicly traded companies. It has the irritating effect of making accountants treat everybody as a potential Enron, and also inspiring accountants to carry professional liability insurance, which of course increases their rates.

The other thing you can get from an accountant — auditing — is not particularly useful to you as a solo practitioner. If you’re the only employee and the boss and the shareholders, you can only steal from yourself. (Arguably you could be trying to steal money from the government by cheating on your taxes, but it’s not really the accountant’s job to prevent that.)

Directions this will eventually go: how to set up your bookkeeping, some more discussion of the accountability (or lack thereof) including responding to some of the points raised by Ben in his comments about startups vs. solo practice.

When I started contracting, I had just dropped out of grad school and was doing everything on a shoestring. I think we took an advance on my in-laws credit card just to buy me a machine, and my wife (who was still a grad student at that time) bought Visual Studio 6.0 Professional Edition at the Cal student store so I’d have something to hack with.

I had a copy of Wage Slave No More, which was new at that time, just published the previous year, so I learned how to set up a sole proprietorship and get a fictitious business name and business license and everything. Back in the day when some but not all of this information was available online, and you still had to (gasp) phone people.

I also read various books about business, mostly geared at middle-managers in large businesses or wannabe Donald Trump imitators. I read Rich Dad, Poor Dad. I read a lot of junk about real estate investing. I don’t think I read a lot of books aimed at small business owners or solo practitioners.

But that’s what I wound up being: not quite a real small business owner, which typically means someone with, like, inventory and premises and all that jazz. And I’m not quite a solo practitioner because our business is a partnership between me and my wife, and not just in the “You do the work, honey, and I’ll do the bookkeeping and reception” division of labor that some couples seem to adopt. We aim to be working together on each line of code that we produce and deliver to clients. We achieve that in practice I’d guess about 80% of the time, and the remaining 20% is divided between me haring off in some wild direction and occasionally bringing back some value, random open-source hackery, sysadmin work, and blogging.

So from time to time I’ll write about what it’s like to have a small software shop with no intention of growing and tell some of the stories. We’ve been up and down over the years… I think the low point was when we had agreed to buy a house, and the three months worth of client invoices that were due between the purchase agreement and the closing just kept on being due until a good two months past the closing. And then we took the money and… well, that’s best left for another time.

But accounting — or rather, bookkeeping — is where I’m going next.