"How do startups manage without an in-house accountant?" I was asked this question by a junior accountant recently. To those of you who are entrepreneurs it may sound silly, because of course you manage, plus you can't afford luxuries like accountants in the early days, right?
As I thought about this I started asking myself what are the risks for founders and how can they build a good understanding of their finances early on? When should they hire an accountant and what should they do before they hire their first finance person?
So I decided, for those who are going it alone, to note down the seven most important things to do when you're a founder managing your company's finances.
This is the most important of all; knowing what money you have and where. It may seem obvious, but with the constant stream of payouts for subscriptions (for software and other essentials) this can change quickly. Having a good handle on your available cash helps you make finance-informed decisions.
There are some great user-friendly, low-cost accounting tools like Xero or Quickbooks. Use an accounting product to save invoices and receipts electronically - you don't need to use the whole product. This will save you stress at year-end when your accountant has questions.
If you are not keen on this, you can forward them to a dedicated email address so they are stored out of the way. You need to keep proper records, so whichever method you use, make it easy on yourself and keep it consistent.
Keep track of your spending by categorising transactions. Even basic ones (revenue, software subscriptions, salaries, marketing, etc.) are super helpful as it's easy to not notice when one type of spend gets out of control unless you can see it in a grouped way and compare it to overall spend and revenue (if you have any).
No need to get too granular here - adding too many categories can spread spend too thinly and you won't spot useful trends. Some banks offer this functionality, but if they don't you can use a spreadsheet.
Put time aside on a day with few distractions and get stuck into a good spreadsheet - what could be better? But seriously, with the insight into your category spend and your bank balances you should have a good enough base to create a basic budget.
Perfection is not the aim of the game. Do a first pass where you list your main categories and the last few months of activity in each, that is all you need for a baseline.
Which category is changing the most? Is that good or bad? Ask yourself these questions so you understand the shape of each category. Now you can set a limit for each category that feels appropriate, or start thinking about which categories (revenue?) you want to optimise!
Show your team and treat their questions as areas where you may need to break down the category into smaller chunks or add detail. We wrote more about it here if you want more tips.
Now that you have your finance activity laid out, you can create a basic forecast. It really is the final piece of the puzzle.
Even though all forecasts are wrong, making (at least) a 3 month forecast can help uncover how your company is really performing, and help you focus as a result. You'll need to work with your team to add context here: is there a one-off cost coming soon? Are any spend categories likely to change dramatically? Will you realistically maintain this revenue growth rate?
Bringing this together will help you understand when you will break-even or run out of money and the levers to pull to keep afloat.
If you want to go even further, you can now create a few scenarios and adjust the numbers accordingly:
If you have not been asked a hundred of these questions already, you will be soon - trust me - so you might as well get ahead of the game with your forecast.
Hold yourself accountable and be transparent with these numbers. Share your financial goals with your investors and explain any performance deltas in a monthly update. It helps on many fronts:
If you don't ask, you don't get. By this point you will be so used to rejection that asking for a favour shouldn't be a problem. You will certainly have at least one friend, relative, or angel (even if they have not yet invested in you) who will be ready, willing, and able to help you out with some of the above tasks if you are not quite a spreadsheet ninja.
They may even enjoy tasks like that (I certainly do), in which case, everyone's a winner! Surprisingly, this option is overlooked by founders.
It doesn't always make sense to hire an accountant in the early stages. Although value does come from the finance function, a junior (and therefore cheap) resource won't deliver what you need. Follow these tips and you'll build the right habits to run your business and for a finance expert to eventually take over.
There are part-time CFO's that can add a ton of value for a few hours per month when you are ready to take the next step. Keeping decent records and handing over the basics will also help any finance person get up to speed when the time is right. Whatever you do, don't stick your head in the sand - the word "budget" might not be an exciting one, but it's essential.
In the same way the founder is responsible for sales, product development, design, and recruitment, finance is also in there. Take it in your stride and get stuck in. This guide will help set a good foundation and you can rely on it for a few months but don't assume it will always stay like that. Good luck!
Thanks for reading