Don't Get "Caponed"!
The importance of Bookkeeping, especially in a start-up!
Bookkeeping, as Wikipedia defines it, is the recording of financial transactions and is part of the process of accounting in business and other organisations. It involves preparing source documents for all transactions, operations and other events of any business.
It is interesting to remember Al Capone, the dreaded gangster in the context of bookkeeping. For all the violence and bloodshed (including the infamous Valentine’s Day Massacre) that he unleashed on the streets of Chicago; and the lawlessness that he manifested by bootlegging during prohibition in Chicago- Capone was eventually indicted on 22 counts of federal income tax evasion!
The arrest of the bookkeeper, at the Union Station in Chicago, that eventually led to Al Capone’s conviction is brilliantly captured in the Director Brian De Plama’s movie The Untouchables.
The actual bookkeeping, though, is far removed from the melodrama as in the movie above.
Considered boring by many- it is not perceived to be as sexy as say working on Data Sciences, Artificial Intelligence or coding a Metaverse!
In reality, bookkeeping notwithstanding the perceived lack of “excitement value”, is extremely critical.
A well kept book or in a broader sense having proper statutory and legal documentation in place, is a reflection of a well-run company. On the contrary, improper bookkeeping out of sheer negligence or malafide intention- the reason is immaterial, is a potential time-bomb and once discovered (or uncovered) could lead to serious ramifications for business and the individuals involved.
As a start-up, bookkeeping is usually not among the top priorities for many of the founders1. Given the challenges of day-to-day operations, the documentation and compliance requirements often tend to get overlooked. We are too small, let’s do it once we get scale is the common refrain!
Pvt. Ltd.
When I had started the venture, I was keen to register the company as a Private Limited Company (PLC). I was told that it is a pre-requisite for fund raising. However, a PLC comes up with a lot of audit requirements as compared to say a Proprietorship, Partnership or a Limited Liability Partnership (LLP).
To put it at a very basic level of utility, in absence of registration of the company I would not have been able to open a separate company bank account. Effectively, leave aside funding etc. which would be premature to think about, it would be difficult to even make payment to vendors/ suppliers and any other service providers.
The person who I connected with for the company registration was Sharda Balaji. She had a rich experience in Corporate Law having worked as a Company Secretary in earlier stints. Sharda came with a strong recommendation of being a specialist in the start-up space. The connect and recommendation from Pranjal Mahanta, my ex-colleague has HSBC, gave an added comfort.
Sharda had identified a very important need of setting up a business that would help businesses to set-up! Effectively, helping start-ups with their Corporate, Legal and IP requirements. Around 2008, when the start-up scene was just about to take a rapid upward trajectory she had set up her company NovoJuris.
Over the course of a few weeks Sharda and her team would very patiently and diligently help me with getting documents in order and registering the company as a Private Limited Company. They hand-held “an impatient” me very deftly- I was keen to get the company started “asap”!
I remember the day when Sharda’s team handed over the entire kit that included a formal Company seal, Shops & Establishment Act certificate, and a Registration Certificate2.
We were formally registered as a Pvt. Ltd3!
The backlogs
A Private Limited Company comes with many statutory requirements, though.
It took me some time to realise that managing statutory compliances is going to be a monthly task especially filing Value Added Tax (VAT) returns, and filing company returns every financial year. (Goods and Services Tax, GST was still many years away4!) If your supplier is filing VAT returns and you are not, the system is going to throw up non-compliance. These returns were mandatory and could involve penal action. By the time I realised it, I had already created a few months backlog of VAT returns!
Given the scale of business, I would have ended up paying a penalty that would have been higher than the actual tax due! Probably, we were plain lucky or given the miniscule business some considerate official would have taken a pity and avoided wasting his time on sending the notice.
In a state of panic I reached out to Vasanth Kumar. Vasanth was running his CA firm, Vasanth & Co. and I had met Vasanth through contacts at SME (Small & Medium Enterprises5) Banking at HSBC.
While Vasanth had started as a CA firm catering to “well-established” businesses, I guess Vasanth had a certain affinity towards entrepreneurs. In his portfolio, he had many start-ups that he would guide with the tax filing and advice for fund-raising.
Vasanth and his team got us up-to-date on VAT filing. We also started filing annual returns though the first year numbers were nothing to write home about!
But these filings requirements forced us, as a company, to become much more disciplined in keeping the records at our end. If we did not keep the records properly there was no way Vasanth’s team could file the returns.
Over time, Vasanth became to be my go to person for most of the matters concerning statutory compliances.
Show Cause Notice
One of the days when I was not in office, I received a call from Head of Operations, Pradeep Kushal. In a shaky voice Pradeep mentioned that there was a Labour Officer who had visited us and was demanding to see the statutory documents.
You have to show whatever he asks for, there is no choice- I mentioned.
I added- Serve tea and biscuits, the good ones!, he might be a little bit more lenient given the warmth of hospitality. The Officer quickly finished off the tea and got down to serious business.
Attendance register- check;
Company documents- check;
Visitor registers- No! (Sar, there are no visitors to our office!)
Company board displayed in Kannada (the local language)- No! Even the English board was not displayed prominently.
Salary summary details and returns pertaining to labour laws in prescribed formats- No! (Oh! what are these requirements?!)
Viola what a find for the day! Guess I can go home after this- the Labour Officer must have thought.
On the phone I tried reasoning with the labour officer but he didn’t budge. He handed us a show-cause notice asking why a serious action should not be taken against the company and the directors for these violations.
My first port of call was Vasanth again. His team helped us in filing a reply to the show-cause notice along with the penalty. The violations didn’t seem so serious (at least to me) to warrant this level of penalty. But this is how I guess the penalties for statutory violations work. Best to be avoided, I thought. And we went ahead setting up a host of mandatories after this incident.
Don’t get “Caponed”
Adhering to compliances is a mandatory, else seemingly small lapses have a potential to lead to unnecessary, and sometimes, serious litigation. In the multitude of worries that could keep start-up founder awake, a good bookkeeping can be one reason less to spend a few sleepless nights on. Given the limited (or the lack of) knowledge of the Company Law, and low bandwidth, it is strongly recommended to get experts to help a start-up in meeting the statutory and compliance requirements!
If book-keeping can prove to be a nemesis for Al Capone; we as start-up founders are small fry!
Click here to read the first article in the series.
Click here to read the entire set of articles in the series.
Views are personal
Incidentally same is the case with many in our personal lives. These seemingly trivial but important things get missed out. I have been guilty of negligence on many counts.
Mandatory requirements for business set-ups in India. A signature on any document needs to have an accompanying Seal of the company. Shops and Establishments Act Certificate is important to have a physical presence and Registration Certificate is a proof of the formation of a legal business entity.
Most of the companies registered in India as Private Limited use the abbreviated form Pvt. Ltd.
GST was launched in India on 1st July, 2018. Prior to GST, the goods were taxed under the VAT regime.
Small Enterprises are classified as having investments in plant and machinery below Rs 10 cr, and annual turnover less than Rs 50 cr. For Medium Enterprises the corresponding figures are Rs 50 cr and Rs 250 cr respectively.