You're thinking about creating a business for your new product and so excited about it that you forget about the most basic, fundamental part of a business...the accounting! May I be your reminder. Or, maybe you already have a startup business in the works, but you don't have a connection with accounting services helping you with that element of the business. Either way, this post is for you.
I have been a startup accountant for several years and can tell you from experience, those that had me in place earlier in the process of starting a business, had significantly better success in the longer term. That wasn't necessarily because of me, it was because they were smart enough to hire someone to take care of a very significant part of any business, and its potential success.
So you can enjoy in your own success, listen up because the reasons why you would want to get an accountant involved in the process early, are many fold.
The first realization is that a startup generally does not have a bottomless pit of money waiting for them to blow on whatever they want. Therefore, every dollar should be budgeted and accounted for so that the initial funds last as long as possible. But who is going to manage the cash? The same people wanting to buy whatever they want?
What can happen when a startup doesn't have accounting services in place is that they burn through cash faster because the funds are not being watched and budgeted for correctly. The accountant is a sort of gatekeeper that is there for the owners' own good.
Another important part of a startup having an accountant is because most startups are going to have to raise capital and be able to communicate, to potential investors, the financial aspects of the business in a way that fuels their buy in, essentially mixing finance with sales.
Several times I have been involved with clients that had never had experience dealing with investors and fell flat on their faces when trying to negotiate some kind of deal. But, when they have an accountant that has built an accounting environment that cranks out honest information about how, not only, the company has and is doing, but more importantly, where is it going (without it being a crock of...), the business owner has a much better chance of landing the investor(s). When an investor is talked with on their level of financial understanding, a comfort comes over them. Just remember, the opposite is also true.
As the accountant begins working with the startup, outside of the filing of corporate documents, the first thing that needs to be dealt with is what accounting platform the company will be using.
The accounting software is not to be taken lightly. I have run into clients that bought and "setup" expensive technologies that either did not match up with the type of business they had, or the software was junk.
One client in particular set up Zoho as the accounting technology. Within a week of being engaged with them, I realized that Zoho was absolutely horrible because it was built by computer programmers with little or no accounting guidance. Everything was difficult to work with and ass backwards to how an accountant actually thinks.
Personally, I love working with QuickBooks Online as my primary accounting software. It has everything an accountant needs for a small to midsize business, and is very user friendly.
In addition to the primary accounting technology, the accountant will also need to help guide the selection of the subsidiary systems that should be used.
For example, if the company carries inventory, there needs to be an inventory subsystem that connects to a Point Of Sale (POS) software so that when something is sold, it is taken from the inventory system. Conversely, when inventory is purchased, the technology needs to be able to register what is coming in so that there is always an accurate inventory value.
The next part of developing the startup's accounting department is to build out the accounting processes. Some of these mechanisms have been thought out prior during the installation of the software, but as the business grows, more processes will need to be integrated with those already existing.
Keeping with the inventory theme, there has to be a entire process constructed around the beginning of the inventory purchase, to the end sale of the product.
When the inventory is purchased, there needs to be a process behind that. Who signs off on the inventory purchase? Who will assure there is enough cash or credit available to make the investment? This is just the very beginning of the accounting operations that will account for every inventory purchase all the way through the product walking out the door.
If these processes are not put into play correctly, it opens the business up to risk. Inventory is a compelling area of the business where crooks will take advantage of you. The purpose of the process is to not only make sure the accounting is correct, but also protect the inventory from theft or over waste.
Yes, miscellaneous things like opening bank accounts, credit cards, loans, and other to do's need to get done, but setting up how the accounting trails will flow is an essential job that your accountant will do. Believe me, it's brain damage at times but as long as you understand the overarching accounting flow, you'll do yourself a favor by having an experienced accountant taking the details of the puzzle on.
Once the business is rolling, we will want to start developing Key Performance Indicators (KPI's) to measure current and past performance of the business on a detailed level.
A KPI is a look at a certain statistic or other numerical values and comparisons, that a business is producing. These performance barometers come in all different shapes and sizes, but they are analyzing the most important parts of the operations.
A good example would be a subscription based business. The measure that is most commonly used, is the number of active subscribers. This number would be looked at on a daily basis and used to project into forecasts. It also shows us if the business is growing or declining over time.
Having this type of data is a gift for a business, but again, you need to have someone that understands, not only how to prepare and manage the accounting, but also be able to extract truthful information in ways that will give the owners more decision making power.
Ultimately, the startup accountant will develop a month end package that will be worth gold to the owners and decision makers. Depending upon what type of business it is, this data packet will contain meaningful numbers, like KPIs and financial statement analysis, that will help guide the path for the future.
Every month, there is more and more data building that can be used for more accurate forecasting, which plays into driving capital needs, which then goes to capital raises and investor relations, and around and around the accounting cycle goes.
As for the actual accounting department setup, the number and job titles of the department are completely contingent on how fast the business is going to grow.
Normally, when I work with a startup from the beginning, the only accountant is me. I take on all accounting transactions as I am laying the foundation of the data that I am going to be responsible for in the future.
As I go, I develop the processes that need to be in place like the owner's awareness of the cash transactions and the segregation of duties that need to be in place between the payments/deposits and I. As the accountant, I can't have full control of the cash and the accounting as it exposes the company, and I, to risk.
Once the business starts to grow and the accounting bedrock has been laid, additional accountants can be brought on to start taking care of the transactional information.
A staff accountant can easily be responsible for banking transactions, application of payments, payroll, etc. At that point, the fractional CFO that has built everything can start to focus on more value for the business.
So far I have been talking about what the startup accountant needs to do, but there are also characteristics that should be in this person you are bringing on to head the financial part of the company.
In my experience, the fractional CFO needs to obviously be well trained in the finance world, but also someone that can deal with a high amount of stress.
Building a business is a very difficult thing to do, at least one that is successful. Thick skin is an absolute need when dealing with some of the situations that happen in the startup kingdom.
I have literally had a gun pulled on me because someone, that had fronted the owner some money, that I was never told about, was there to collect. At that moment, I realized two things...I am leaving this establishment and, secondly, I need to be able to take on unnormal happenings if I want to play the startup game.
Finally, why wouldn't a business owner want to engage with an accounting service, especially at the beginning of their business? It's because the owner is trying to be all pieces on the chessboard and/or they are concerned about the cost.
The first thing I'll say is that it is a heck of a lot costlier not to have an accountant involved in the startup process, than to find a talented person and have things done right from the start and avoid some of the horror stories I have been involved with.
Most startup accountants are paid on a fractional basis as the business is not ready for a full time CFO yet, therefore costs are in line with what the entity can afford. The other way to pay is have the accountant may take an equity stake in the business where there services are being accounted for in a way that they receive percentage ownership in the business. It can also be a combination of the two.
Either way the costs fall, the value that accounting services will do for a startup business is beyond the expense as a large part of the potential success that the company has, is going to be directly tied to the accountant's work.
Blue Collar CFO