Unlike this city in the desert, you only get a chance to set up best practices once.
Photo courtesy of Christopher Michel.
Those going to Burning Man next week will be arriving to a city that did not exist a few weeks ago and will cease to exist in just a few days. It is one of the very few examples of its kind where everything is temporary, and can be re-done better next year when the entire city will raise again from nothing.
Unfortunately, startups do not have the flexibility to start over each year. The systems that are put in place early on form a foundation that will affect the company’s performance for the foreseeable future.
Here at Burkland Associates, we help our startup clients set up scalable systems that not only minimize the friction from everyday accounting, but also ensure that the business runs smoothly over time. While supporting startups with on-demand bookkeeping and accounting services for many years, I’ve identified five important items that should be kept in mind when setting up your systems. Here are some of the details on these five set-up practices, so you can be mindful and avoid unnecessary pains as you grow.
Quite often I find that many startups that are poised for fast growth choose bookkeeping systems that can’t keep up. Although Freshbooks, Bench.co, and Indinero seem like simple solutions to start, their automation and integration with outside apps and services are far inferior to other solutions such as Quickbooks Online and Xero. This ability to connect easily to outside services offers the flexibility to optimize accounting systems to each company’s specific needs. As for expense reimbursement software it’s best to choose one, such as Expensify and Abacus, that not only syncs with existing accounting software, but has the ability to structure multi-tier approval paths (although a young company may only have one approver at the moment, this almost certainly will change as the company grows). The same for bill payment solutions- chose one that syncs and scales such as Bill.com.
Opening a bank account early on for your startup not only is the easiest way to begin organizing your company’s finances, but it also offers the opportunity to develop a relationship with an important business ally- your bank. Co-mingling personal finances with your company is a no-no, and the opening of a business account (along with appropriate debit and credit cards) has the added benefit of less expense reporting and reimbursement activity. So, avoid using your personal credit or your savings account as soon as possible. Also, be sure to select a bank who is supportive to the startup community. Here in Silicon Valley, several banks, such as SVB and Square 1, have developed special services for startups that result in lower costs and red tape for you, with the added benefit that they help their clients network. In addition, when you develop a relationship, there will be someone you know on the other end of the line when you need your bank to work with you.
With ever changing payroll tax laws, periodic filings, and the need to make sure your employees get paid on time, there is a lot that can go wrong during the payroll process. Make it easy on yourself and hire a low-cost payroll provider that will handle these responsibilities and more. Gusto, for instance, not only syncs automatically with QBO and Xero, it provides your employees easy onboarding, digital pay stubs and direct deposits right into their personal bank accounts.
This is the time to set precedent. Take some time to think of best practices regarding issues that impact your bookkeeping and accounting systems such as credit card usage, expense reimbursement approvals and limits, collection of accounts receivables, client and vendor onboarding, etc. Document these policies and procedures then share and train you crew. Early adoption can help avoid bad habits and ensure that your team is singing from the same sheet of music.
Your startup will begin generating tons of information regarding your finances. However, for this information to be meaningful, you need to become familiar with accounting principles that signal different aspects of the health and growth of your company. Sales, COGS, Gross Margin, Net Margin, Burn Rate, AP/AR, and Cash Flow are only as important as your understanding. Websites such as Accounting for Management, Accounting Coach, and books such as Financial Intelligence can help, but for a deeper understanding you might want to consult with an experienced CFO or Controller.
Although the five items listed above seem obvious, with hectic days of coding and acquiring your first customers, it is easy to ignore the accounting/bookkeeping function. Yet, you don’t want to; as an initial focus on setting up scalable and efficient accounting systems will save you time, money and energy in the future. And if you get stuck, there are several terrific and cost effective on-demand bookkeeping and accounting services (like ours!) that can help you get on track.
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No matter your size, you’ll need financial guidance to gain or maintain momentum.
Photo courtesy of Silicon Valley entrepreneur Christopher Michel.
Medium’s blogger John Cutler wrote an interesting article on startup complexity (Complexity is a Startup Killer. Don’t Grow Up) in which he analyzed how the two advantages of a startup – speed and focus – start to evaporate as your company grows. His advice is to resist the complexity that comes with growth and avoid the temptation to: Let features reproduce; Add endless sales tools; Multiply enhancements; Add more people to the Board; Find more and more partnerships; and Hire “experienced” people.”
To this last part about hiring experienced people, Cutler adds “Company experience doesn’t equate to Startup experience.” As an on-demand CFO at Burkland Associates, I’m a member of a team that enables access to startup experience on a fractional basis, enhancing a Company’s ability to scale up with the guidance of a strategic financial resource – when you need it!
A forward-thinking startup rents before buying whenever possible. Posit the following two scenarios where “renting” a CFO can help you minimize growing pains and burn.
Scenario 1: All the low-hanging fruit is coming your way.
A friend with a green thumb tells me “plants usually die out of an excess – not lack of – water”. Sadly, this is the case for many startups that find money and initial traction come their way relatively easily. I’ve been at more Board meetings than I would like to count in which investors were pushing their portfolio CEOs to scale up faster. On the surface, there is of course nothing wrong with scaling quickly; after all, startups are about speed.
The problem comes when scaling up follows little planning – tracing a horizon based on the initial traction that a talented business development person may have generated. Planning involves understanding how the interdependencies of product delivery, market expectations, and customer management could evolve. If you follow short term thinking without considering longer term context you may find yourself in a quagmire in future growth stages. As your strategic financial partner, people like me can help you craft the right plan.
Burkland CFOs can help develop a sound business model that plans growth looking at likely and unlikely scenarios (developing contingencies for them), and evolves your business in the right direction with models that show how to sustain and improve margins while optimally servicing existing customers. Smart investors look beyond traction, they want to see “smart traction” that doesn’t dry up and lives up to the market challenges you will inevitably face. A sound plan helps you to attract the additional capital and key resource hires you need as you scale, and becomes critical to sustaining momentum.
Scenario 2: You’re struggling to gain momentum.
If you’re losing sleep, it’s most likely because you’re not growing as fast as you expected and the solution is not obvious. You’re draining cash and not building the business growth story you need for your next round of financing which, by the way, is around the corner.
The challenge becomes one of creating processes to drive efficiency, fine-tune key variables such as pricing and levels of service, and buying time to figure out your market and educate prospect customers. You can’t justify hiring a full time CFO given your size, but you need a strategic minded CFO more than ever to stabilize your business, or face dire consequences. A part time CFO from Burkland is a huge asset in your corner to help you find traction. In this case, renting is a no brainer because a hired gun brings the relevant experience you need to figure out how to start sales momentum in context of a plan, as most of us have seen this problem several times even in your own industry.
Lack of traction can be a blessing – just ask SaaS star Slack, which came out of a failed gaming company – if and only if you have the right guidance to know where and how to tweak your model. A strategic CFO from Burkland could give you the partner and coach you need to help solve the puzzle and develop sustained traction.
Please contact me at firstname.lastname@example.org to speak further. Thanks