Accounting for startups can look different depending on the size and specific work of the startup. Early on, most startups can skirt by without an accountant, but there comes a time when startups need professional help with their books — enter their first accountant. Early decisions that accountant makes can make a big difference in the future, and it’s important that both accountants and startup founders are aligned in what to expect during this crucial transition.
Here are three rules to keep in mind when working with startups:
Rule #1: Get scalable systems in place
Young startups can grow rapidly, so having a scalable financial system in place is essential to collect accurate data, especially when startups see exponential growth. It’s important to build a system that can easily track data across different platforms and activities automatically, so creating a cloud based stack will streamline your work and make the entire system more efficient. This is essential for freeing accountants up to focus their time on what matters most when time is of the essence.
The most basic systems include expense management tools, payroll software, bill pay platforms, along with accounting and tax compliance software. These systems all have to work together in order to scale without the friction and risk of platform migrations and other potentially devastating headaches down the line. Experienced accountants will lay a solid foundation for growth using tools that will scale, withstand the test of time and upgrade when the time is right.
Rule #2: Pick the right financial partners
For founders to succeed, they need their accountants to pick the right financial partners. That can mean many things, but the most important is that partners understand the mechanics of a startup. For instance, there are specific banks that specialize in dealing with young, venture-funded companies. These bankers are experienced in the intricacies of cash-burning, VC cash-infused businesses, which are very different from traditional small businesses. Choosing the right banking partner can make a huge difference because they have experience in the intricacies of startups finances.
One recent example that demonstrated the importance of choosing the right banking partner was apparent during the rush to get PPP loans. Startups with the right banking relationships were able to secure loans through the ever-changing loan application process. The bankers who understood the importance of impressing the top tier VCs rushed to get their startups PPP loans. Many of the traditional SMB focused banks treated their startup clients like cash-flow negative businesses (which they are) and didn’t step up to the plate fast enough for their VC backed clients.
Similarly, VC backed startups should choose the right credit/corporate card provider. With normal, small-business credit cards, founders are usually personally liable for all charges. Startup-focused credit cards put all the liability on the corporation, therefore protecting founders if the startup fails. Many founders that chose both the wrong banking partner and the wrong credit card have ended up regretting their decision not to go with specialists. And accountants can guide their startup clients to the right providers.
Rule #3: Understand startup-specific requirements
If you are a company raising venture capital funding, your books have a very particular set of requirements. Your investor is aiming for your business to go public or be acquired for hundreds of millions of dollars — so your financials need to be accrual based and as close to GAAP compliant as is reasonably possible. It’s the accountant's responsibility to make this happen, and to educate the founder on why it is necessary.
Venture funds are also generally metric-driven. New potential investors are going to want to see the numbers to determine if the company is a sound investment. VCs will want to look at burn rate, cash out date and expense trajectories. They’ll also want to calculate metrics like lifetime value and customer acquisition cost, or other industry-specific measurements. These are based off of the financials the accountant produces, so understanding how potential investors will use the finance metrics during due diligence matters.
Later stage investors are beginning to hire accounting firms to conduct tax and financial diligence, and we’ve seen an increased emphasis on tax compliance can also be a complex issue. One area where savvy VCs don’t want to get burned is if a startup has state tax compliance issues. This is another opportunity for accountants to add value to their startup clients.
Once they’ve invested, VCs are going to expect regular access to your data. The accounting team will be responsible for metrics on trends, revenue traction and recognition on a monthly basis. While many venture partners have their own, particular set of monthly or quarterly dashboards that they like to see, an accountant can help prepare standard dashboards that will make this reporting easier — and make their clients look good.
If accountants can follow these rules when working with venture funded startups, then they’ll be laying the foundation for success.
