Startup business survival rates are at a dismal 10% in the long term. One of the main factors this percentage is so low, is because they lack one of the most important aspects of a business, an accounting department that tracks and projects the finances of the company.
Entrepreneurs tend to be very intelligent and intense people with a risk taking side that can create very positive business results, or disastrous losses of money. Just the intensity of the situation itself can cause a ship to sink, let alone a genius that is extremely good at some things, and just not, at others.
My experience with these business builders is that they are highly right brained and visionary which is what is absolutely needed to conceive something that will bring value to the world. But, it can also create issues when they try to run their finance department themselves.
Accounting is a logic based language and a deeply talented entrepreneur with ambitious energy, can completely miss the boat when it comes to understanding how to financially run their business.
Point being, one of the factors why start ups fail is because they are avoiding the importance finances play in the survival, and thriving, of the business. Essentially, they are paying more attention to the building of the business versus financially planning correctly.
Problems arise such as financially overextending the business or growing to rapidly without the necessary funding in place. An established CFO can take this part of the equation and build the necessary accounting infrastructure and lead the financial direction of the company to mitigate this deadly component.
Where does this thinking come from, where the owners of the startup put less importance on the financial aspects of the company?
I get it, the bottom line is that the business needs to initially create products and market them. The cash that is needed, just to do these two things, can be monstrous!
So what ends up happening is that accounting and finance get their budgets shaved down. Sometimes to down to nothing.
This is where things go south as, many times, the owners themselves try to wear the hat of an accountant which can, and usually does, create headaches and overspending down the road.
Financial restatement, fraudulent activity, tax problems, and the like, are just a few of the battles a business can face if they don't have proper accounting in place. If they just would have hired an accountant in the first place, not only would they have avoided these matters, but the business would probably be more pointed towards the road to prosperity versus the great canyon fall.
There are obviously many other factors that go into the success or failure of a startup. From securing funding to start the business to a down economy, these elements of a startup business can easily drive that success rate down.
Assuming that the startup wasn't doomed from the beginning simply due to it being a bad idea, ignoring the importance of accounting in a startup is a big reason why startups fail.
So my last words of encouragement for anyone thinking about constructing a startup business is, put your accounting at the front of the bus and learn as much as you can from your accountant. Knowing the financial pieces of your business's puzzle will take your chances of succeeding up dramatically.
Blue Collar CFO