I’m going to go out on a limb here today in this post about setting up bookkeeping for your new company. I’m thinking that the process is getting simpler every day. Here’s what you do:

1. Decide which bank has your company’s main checking account.
2. Determine which of the so-called accounting software options the bank works easily with. These days most banks will export data to Quicken, QuickBooks or Microsoft Money, at the very least.
3. Choose which of these you prefer, and get going.

There are other reasonable accounting options for startup companies. NetBooks is very impressive, developed by Ridgely Evers, who was the original developer of the first QuickBooks. Sage Software has strong offerings. I just picked up a useful review of QuickBooks alternatives from Ramon Ray at Small Business Technology, and he’s reminding us as well that there are some other options.

But the data transfer link with your bank is so important that it probably overrides other considerations. If you can export transactions from your bank’s database, that helps enormously. In the end, the real problem of managing the books is mostly a matter of data entry.

If you are running a business involving products and inventory, make sure you take inventory management into account when you decide which system to use. NetBooks seems particularly strong for that, especially compared with QuickBooks, which is more oriented toward service.

If you have business-to-business sales, you probably have to manage accounts receivable, meaning waiting to be paid by your customers. In that case, make sure you take the accounts receivable functions (aging reports, collection days, etc.) into account as well.

None of that, however, changes the basic conclusion: Use something that works with your bank’s data.

You don’t want to start a new business in an existing industry without having a pretty good idea how things work in that industry. I realize this feels like a catch 22, as in how can you have experience in these things before you start, but I’m saying it’s hard to start without experience.

There are ways. I suggested one way in “The Telephone Tree in Reverse” and another in “It Doesn’t Hurt to Ask.” Both of those posts are about phoning people, finding people and just asking.

At the very least, you should have a sense of what the competition’s like, how many people are out there and what the standard financials are like.

There is plenty of information available–too much, in fact. Your hardest task is sifting through it all. There are websites for business analysis, financial statistics, demographics, trade associations and so on. The main web searchers are your best friend. There are also some of the old-fashioned reference works, just in case you really need them. Remember, though, that websites are always changing. Your most effective tools are good search techniques.

Multiple vendors offer standard financial profiles of thousands of different industries. So at the very least, you ought to know what the standard composite company in some industry close to yours does as a gross margin (sales less cost of sales divided by sales, usually stated as a percent. A 34 percent gross margin means you’re spending 66 cents of every dollar on cost of goods, or direct costs of some sort) and profit before interest and taxes, as a percent of sales.

Don’t worry too much about finding your exact industry. The financial profiles available are based on one or both of two main classification systems, the older SIC codes and the more modern NAICS. Both of them depend on large databases and standard classifications, so your Web 2.0 business won’t be there. Nobody’s business really fits the standard profiles. Find the one that’s closest to you and be ready to think through why you’re different from all the others.

Some of the vendors of financial profiles–and this is just a quick list, by no means thoroughly researched–include Integra Information Systems, JJ Hill Research, Oxxford Information Technology, Bizstats, Bizminer and–the oldest and most respected by bankers–Risk Management Association. There are lots of others, too. Don’t forget trade associations, trade magazines and the knowledgeable journalists who write for trade magazines.

Starting a business is hard enough without having a fairly good idea of how things work. And this information is available, for the most case; you don’t have to just guess numbers out of the air.

If your new business is going to distribute products in the U.S. retail market, that means what people call “the channel.” Also known as channels of distribution or retail channels. As in stores. Big stores or little stores. Macy’s, Office Depot, Staples, Safeway, whatever. I see too many business plans that underestimate the effort, resources and problems involved in selling things through channels.

So you know, my experience with channels started in 1993 and has been almost entirely in stores and chains selling packaged computer software. I’ve talked to a lot of people dealing in other kinds of channels, and it seems to be quite the same. So that’s a disclaimer.

1. Understand tiers. Most of the major retail channels in the U.S. involve two-tiered distribution.
2. The big retailers, which tend to be chains with hundreds of stores, want to buy from distributors, not from you. No offense intended. It’s just that buying from distributors makes their life simple. One bill, one payment and easier administration.
3. Distributors are tough gatekeepers. They aren’t looking for new vendors. New vendors mean more work. And more risk. So they aren’t anxious to change the status quo. Of course there are exceptions, but that’s the rule.
4. Retailers are also tough gatekeepers, for the same reason. Here, too, there are exceptions, but it’s hard to be one.
5. Both tiers are much happier about new products when they come from existing vendors. Major companies that are already selling into the channel have it easier.
6. Packaging is really important for everybody in the channel and more so for new companies. Obviously this is a matter of different products and different industries, but through retail, buyers make choices based on what they see. We vendors would like them to read reviews and make more informed decisions, but most of the time they decide based on what they see.
7. Channels take a big cut of your money. How much varies by industry, but if you are planning a new business and you don’t know, find out. The distributors take a small cut, but they take forever to pay you. The retailers take a larger cut, and they don’t have to pay you because they bought from the distributors. Both tiers take cuts of the money for co-marketing and things like that. You get a much smaller revenue per unit, and it comes several months after you make the sale.
8. Most channels will insist on being able to send unsold goods back to you, the vendor, and have you buy them back at the same price they paid you, without any allowance for all the co-marketing commissions. This makes financial analysis hard.

One of the things I learned early about channels: They don’t care about your problems. If you’re hard to deal with, they’ll find somebody else to sell into the same segment.

So if you can sell direct, count your blessings. Channels offer volume and branding, and that’s attractive. But direct sales have some very attractive advantages, too.

Blogtrepreneur recently posted “101 Useful Resources” for internet entrepreneurs. I heard about it from Anita Campbell of Small Business Trends, who summarizes very well in “The Online Entrepreneur.” She points out some important differences between online entrepreneurs and the world at large:

Such businesses have unique needs that are very different from their more traditional brick-and-mortar cousins. Online businesses tend to be heavy users of online software applications. They conduct a higher percentage of their business processes and transactions online—they may invoice online, buy products primarily online, pay bills and invoices online, and prefer to be paid online as well.

They are naturally more savvy when it comes to social networking because, after all, that’s where they get most of their business from. Many are freelancers and often hire other freelancers or small businesses, instead of hiring employees.

Campbell makes three additional points about the list of resources:

1. Obviously it is a helpful list of services for online entrepreneurs—you’re bound to find a few useful resources.

2. The list is revealing in how this segment of online entrepreneurs works and how they operate their businesses. It’s very telling in what’s important to them and what products they need. A list like this is a form of “word of mouth.”

3. The majority of the products and services on the list are by smaller companies (with obvious exceptions, such as Google and PayPal). Smaller entities have been fastest to catch on to what this market segment needs, often because it is what they needed, so they created a solution to meet their own needs.

So that’s a very good list. Here’s the URL again: “101 useful resources for online entrepreneurs.”

It started late last week with Jason Calacanis’ post “How to save money running a startup (17 really good tips).” He’s the founder of the search engine Mahalo and a Silicon Valley veteran. Read it. Think about it. The “really good” description in his headline is Calacanis’, not mine. Just so you know, “Fire everybody who isn’t a workaholic,” tip No. 11, doesn’t strike me as a really good tip.

That post set off fireworks. Michael Arrington summarized on TechCrunch. Follow his links for good reading.

Boy was he attacked. Bloggers lined up to take their shots at him. Examples are here, here, here and, especially, here.

He goes on, however, to agree with Calacanis. You should read his post, but read the others, also, and read the comments. Read Duncan Riley’s post on the same TechCrunch blog (interesting that Arrington, founder, owner and head knocker, handles that disagreement disarmingly well, by the way). Read the comments to that one, too.

Read also the related 37 Signals commentary, titled “Fire the Workaholics.”

My own experience argues against what Calacanis, Arrington and others say. I would hate to have a company full of workaholics. I don’t think that works. People burn out. Furthermore, I think that the founders making the big money forget–so easily, and so quickly–that the rest of the company has a few odd shares in options and won’t be making tens of millions of dollars if the company makes it. I think that the best company environments are built with people who have lives that they value, by companies that value their employees as people and respect the rest of their lives.

But that’s just me. You get to decide for yourself. Read about it, think about it, and make it work the way you believe it will work best.

Danger: Don’t confuse not having a business plan event with not needing or wanting a business plan.

The business plan event forces you to present a plan. It might be that you’re seeking outside investment, applying for business financing from a bank or other lender, taking a business class that requires a business plan or entering a venture contest that requires a business plan.

It’s because of these business plan events that people confuse the idea of needing a business plan with wanting business planning. Suddenly experts can make themselves feel good by advising people not to do the formal business plan because they don’t have a business plan event. It sounds like they are saying don’t plan, when what they mean is more like don’t bother to do the big ponderous formal plan document.

This potential confusion is dangerous. Don’t deprive yourself of planning just because you don’t have to present a formal plan to outsiders. Plan your business regardless. That’s why I’m suggesting that you plan as you go.

One of the big conceptual foundations of strategy is what I like to call your business identity.

This is what makes your business different from all others: what you want, what you do well, how you do things and what makes you unique.

What You Want

It starts with what you (as the owner of the business) want for your company. Define success for yourself. It isn’t always a matter of market share, sales growth, profitability and return on investment, although those concepts are always nice. In many cases it’s about living well, or living better. Having more time with the kids. Coaching soccer. And sometimes it’s about being right. Showing that something can be done. A lot of times it’s about doing what you want and making money at it. It helps to think this through. You can’t get to your destination if you aren’t sure where you’re going.

There are several levels of goals in business planning. Use one or more of them to define your identity:

1. The mantra: This is a simple sentence or phrase describing what you do. Guy Kawasaki has a nice treatment of mantra in his book The Art of The Start, and he’s made an excerpt of that available for download.
2. The mission statement: Too bad it’s usually just empty hype. A good mission statement actually defines what your company wants to do for its customers, for its employees and for its owners. That can be useful.
3. Business objectives: These are specific, concrete, measurable goals, like sales levels, growth rates, units, profit percentage, gross margin percentages, customers served and so on. If it isn’t measurable, then it shouldn’t be there.
4. The vision: This is a dream for the future. Project yourself forward into time, say three or five years, and describe what you want to see for your company.

What You Are

Then there is that sense of looking in the mirror, as a company, recognizing what your company really is. This includes:

1. Core competencies: What are you really good at? What do you do better than anybody else?
2. Keys to success: They are different for every company. It doesn’t really go by industry, either; one company’s key to success is better parking, another’s is better food, another’s is better service. Or lowering costs. Or more repeat business. Or better marketing.
3. Strengths and weaknesses: The top part of a good SWOT analysis, the nature of your company. Be honest. First identify strengths and weaknesses, and later you can build strategy based on them: Work toward the strengths and away from the weaknesses.

Think of soccer or basketball. You get the ball near your own goal (or basket), and you want to dribble it forward. Ideally you have a plan. You’re going to pass it up the side, and from there a play will develop. Or you have some other plan.

And things change rapidly. The opposing players surprise you by doing something different from what you expected.

You watch the play developing. You keep your eyes up to see the field (or the court), but you also focus on the ball and the details of dribbling, probably at the same time.

This is a good example of planning as you go. You watch the field and the details at the same time. You expect things to change. You expect to react to the change quickly.

So it’s not that you don’t have a plan or that you don’t want planning. It’s that you want planning to be very fast, flexible and adaptive. The goals remain the same, but the detailed plan changes.

Here’s an e-mail:

I saw that you run a few websites and they look impressive. I also saw that you said you had 130K users of Amiglia. I don’t want to be too forward, but I was wondering if the users drop out when they get to the end of the year-long free trial–I mean how many are really paying? The site looks like a good idea.

I’m thinking of starting a website, but I don’t know if users will pay. Even still, I would hope to have members, but I’m impressed with how many users you have. Again, if you don’t mind me asking–how did you get that many people? What marketing tactics were successful for you or would you recommend? Also, I don’t code so I need all the help I can get.

My reaction:

1. I congratulate this person for sending an e-mail to founders of Amiglia.com and asking these questions.

   It doesn’t hurt to ask. The world of startups is full of people guessing what’s going to happen. Ideally, you get into a team with somebody who has experience to get you through this. You want educated guesses, not just guesses. And if you want to know, one way to find out–if you’re lucky–is to just ask.

   Another good idea, when you’re asking, is to ask who else might know. Ask them to point you to some resource on web membership revenue. Ask them to point you to resources on web marketing. It doesn’t hurt to ask.

2. Teams. You don’t have to know everything to get a team together, combining people with different skills and experience. It does take organizational skills, sharing and working with other people…but it’s hard to start at zero and find out everything you need to know. People learn business from experience, and that’s a matter of teams.
3. Getting money from websites can be mysterious business. There are a lot of beta sites like Amiglia.com that don’t actually charge money. And there’s the website tradition of not charging money, too. Facebook is free, LinkedIn is free, MySpace is free and Google Apps are free.
4. How did Amiglia.com get that many people? The line from Field of Dreams comes to mind: If you build it, they will come. Amiglia built a site offering family-friendly photo sharing and waited for reviews, awards and recommendations.

   And what works for one site doesn’t necessarily work for any other. There is a lot of experimentation going on in this business. The good news is that sites like Amiglia.com get up and running with relatively little startup capital, and sometimes they work. Do a good web search on what it cost Guy Kawasaki to start Truemors.com and Alltop.com.

5. Will people pay to be members, and how much? Really good question. In Amiglia’s case, they haven’t pushed it past beta. People can still get it free. The New York Times went from membership to free a few months ago, and The Wall Street Journal is supposedly thinking about the same thing. Flickr.com and Picasa Web are free. How they make money is a good question. Everybody has a different answer.
6. Oh, dear. “I don’t code so I need all the help I can get.” You can be a marketing guru like Guy Kawasaki and find coding help, or a coder and find marketing help, but it’s hard to be neither. Unless you have a lot of money to spend.

I like to think of this situation as similar to what it was back in the 1980s when I got my first toll-free telephone number for Palo Alto Software. It was pretty obvious that the toll-free number alone wasn’t going to do anything for me; I had to get the word out for people to call.

Things are so much easier nowadays because of Google AdWords and related opportunities. But it’s still pretty hard to guess right, and ahead of time, on any of this.

A final thought: Figure out your burn rate. How much money per month will it cost you to buy both internet marketing and website coding skills? Do you have that kind of money? If not, don’t give up, but keep looking for answers. Get some of the right books, read the blogs, immerse yourself in it, and things will be better, after a while.

11 Myths Debunked is so much better than 10, isn’t it? As far as I’m concerned, Lindsay Holloway absolutely nails it with all 11 of them. But I’m just as interested in the fact that 11 is so much more than 10. Everybody does 10, and we all assume–don’t we?–that 10 was really only seven or eight but that’s so close that you stretch to get 10. And by the way, that might be Justin Kitch of Homestead.com, nailing it; Lindsay is quoting him. It’s not clear whose list it really is.

The 11th point, however, is the absolute best of the bunch. That makes all the rest of them seem stronger:

11. OK, I’ll do whatever you say. “All entrepreneurs have to find their own way,” says Kitch. “It’s a two-way street, so you still have to figure out your own path. Don’t take what everyone says for granted–including myself.”

That’s a really useful point to make at the end. Particularly since Kitch sells website help to small business. That makes this reminder even more credible. He’s not just telling you that you need a website because he’s going to sell it to you; he really believes you need a website. And he’s completely right. Like a business plan (my main expertise), you don’t buy it, you build it. It has to be unique.

I was glad to see the 10th myth, too, because I’m still smarting over those commercials pretending that all the women had to do was set up their bendable sunglasses website and then spend the rest of their lives sunbathing at the beach. If you don’t remember those–from a few years back–never mind. I searched YouTube, couldn’t find them. Here’s the myth debunked:

10. The internet will make me rich. Nothing substitutes for good business sense. Says Kitch, “People skills and your interactions with employees and customers become even more critical when dealing with an internet business. You have to work harder to create those interactions.”

And also, while we’re on that same subject, or close to it:

8. My internet strategy is my website. “Your website is only the tip of the iceberg,” says Kitch. Look to: e-mail newsletters, comparison sites, editorial sites, blogs, Web 2.0, social networking sites, lead generators and more.

Absolutely right, I totally agree.

The whole thing is worth reading: 11 Internet Myths Debunked - Entrepreneur.com

What? What was that sound? A hot trend cooling. The fatal flaw. Damn.

This is what bothers me with the idea that there are types of businesses that can be hot or cold, good opportunities or bad. I think it’s about what you want to do, what your market needs, who you are and so on, as in my mirror post a couple of weeks ago. But people keep asking what’s a good business to start. They keep looking for lists of hot businesses. I worry about that.

Consider It’s on to Plan B as a Hot Trend Cools Off in today’s New York Times:

In 2005, meal assembly shops were the hottest trend in small business, a concept taken on with gusto by mom-and-pop entrepreneurs. In storefront and shopping-center kitchens nationwide, they sold millions of uncooked entrees in freezer-ready Ziplocs and to-go tins, with stick-on instructions for boiling, simmering, baking or stir-frying the contents into quick dinners at home.

The concept boomed, as the number of stores mushroomed from four in 2002 to 1,400 in 2007, almost exclusively by catering to women who wanted to provide home-cooked meals for their families, according to the Easy Meal Preparation Association.

So far, so good, right? There’s a hot business. But then it cooled.

But growth in the industry has slowed sharply, long before reaching expectations. Industry revenue, which two years ago was forecast to reach $1 billion annually by 2010, is now projected around $650 million by then.

Some 264 meal preparation stores closed during 2007, Mr. Vermeulen said, more than three times as many as in the previous year. He forecasts fewer than 50 openings in the United States this year, compared with 562 in 2006.

What happened?

It turns out that lots of people are simply not motivated to plan so many meals in advance. The desire for last-minute convenience remains powerful in America, often trumping the more ephemeral rewards of home cooking.

Choosing a business isn’t a matter of selecting from random business offerings, franchises and models that are out in front as hot trends. It’s about you and what you do. And note that some people got into the meal-assembly shops because they wanted to, they genuinely liked the idea, and they were good at it. Do you want to bet that those are the ones doing fine? It’s the trend spotters and list makers who get in too late. Usually.

Here’s an insight for fairness: Always separate payment for work from equity ownership. I posted arguing with partners over compensation earlier this week, dealing with a real problem in a real company. I got a follow-up question to that today, offering more detail and asking for more detail in return. It’s messy. It also looks like a good illustration for the rest of us.

So hypothetically, assume four people named A, B, C and D. They each have exactly 25 percent ownership in the new company. They are all working in different ways, but one is semi-retired and doesn’t need compensation, another has been working a lot at night and is keeping their day job, and two others have no other income and want to get paid. The argument is whether getting paid for your work should reduce your equity share. Literally, the question is:

Partnership has not agreed yet on compensation levels for all, only for equity levels for partners. Should those receiving monies have their equity levels reduced and shared among remaining partners?

The right way to solve this problem is to have foreseen it and agreed what to do and gotten it in writing. Point one here, and this is me advising you, reader, so you don’t make the same mistake, is read my three vital rules for early-stage equity ownership from last month. The executive summary of that is: “Get it in writing.” It’s too late for these four because they’re already in operation. But I advise you not to get into similar messes caused by not talking these things out ahead of time. Apparently they divided up the ownership very carefully, but they didn’t specify who gets paid and who doesn’t. That’s really tough to deal with after the fact. It would have been much easier beforehand.

Ah, but in this case it is already too late for what they should have done, and they asked me to offer some advice on what they can do now, not on what they should have done earlier (that should-have component is for you, not them). So here’s what I say they might do now (As a disclaimer, I don’t know the people and I have just a description in e-mail; I’m making recommendations as an entrepreneur, not as an attorney or an accountant. This is hypothetical and sketchy):

1. Ignore equity ownership for at least enough time to have a good, honest discussion about what salary levels should be for all four jobs. Be fair and honest, and take into account market values for jobs and what it would cost to recruit somebody with no equity ownership to do the job. Set salary levels for all the owners’ jobs. For those who are working hourly or part time or after hours, let them record their hours. You have to separate ownership from compensation for work. In your case, that starts with establishing who’s working how much. You don’t just ignore work.
2. Don’t let anybody work for free. That’s bad news. Businesses need numbers that reflect reality, and when you have owners working for free you are creating false numbers. It also breeds unfairness and resentment. Ideally you find a capital contribution to give the company working capital to support its expenses. Can all partners contribute equally? If not, then give the partners who contribute more money more ownership. Keep it fair, in writing and agreed upon in the beginning.
3. If you don’t have the money and can’t raise it to pay people for what they do, which leaves working for free the only option, you still have to record the value and keep track of it as money owed. And you have to be very careful with how you handle the bookkeeping and the tax implications. If it weren’t for tax law, you could book the work value as an expense for one side of the double entry, and as a debt–owed by the company to the person who worked for free–on the other side of that double entry. So if the owner’s work is worth $4,000 per month, you record $4,000 as a debit to payroll expense and $4,000 as a credit to liabilities. Unfortunately, tax law is there, so you have to be very careful about the tax implications. You can’t report unpaid wages to owners as an expense. And the tax man wants payroll taxes, too, from the company and from the employee. This takes some professional help to get you through it.

This, by the way, is why I often cringe at the phrase “sweat equity.” Real sweat equity is what you build in your own company when you work it alone. As soon as other people are involved, working for free causes a lot of problems. It fouls up your numbers, which means you have a distorted view of the business. It can also cause a lot of tax problems. What’s more, investors don’t like it, either.