The Smarter Startup

The Top Four Finance Pain Points for Consumer Startups

Consumer startups face unique scaling challenges related to working capital, sales tax, cost of goods sold, and inventory management.

I’ve spoken with hundreds of founders at Consumer startups over the years, and from a Finance and Accounting perspective, the same four pain points come up over and over again.

  1. Lack of Working Capital is keeping me from growing faster.
  2. What is my Sales Tax exposure? Should I be doing more?
  3. I do not know my true COGS.
  4. I do not believe the Inventory number on my balance sheet.

This article examines the issues facing Consumer startup founders and offers helpful next steps to tackle them head-on.

1. Lack of Working Capital is keeping me from growing faster

For a founder with limited access to capital, it can feel like growth is threatening the long-term viability of the company. Without access to sufficient working capital, the entire business is at risk.

While venture-backed startups with little or no inventory can focus on burn rate, consumer goods companies need to focus on how to forecast and fund working capital to support growth.

Next Step: Whenever possible, avoid funding working capital with equity. Equity has a higher risk factor and just plain costs more. Consumer startups should focus equity capital on areas that will accelerate growth and long-term value like sales, marketing, infrastructure, and R&D. Working capital should support the growth you already have in your sights.

Seek out a bank that understands your business. Today there are local and national banks that specialize in and understand the needs of Consumer companies with inventory and purchase orders. Take advantage of their lower-cost capital with a line of credit, or venture debt if you can get access to it. Some lenders will factor in your current purchase orders. Evaluate companies like Rho Banking, Brex, and Divy. Silicon Valley Bank has also strengthened its offering to consumer startups with a combination of venture debt and line of credit. The bottom line is to find service providers that understand your business.

Related Information:

2. What is my Sales Tax exposure? Should I be doing more?

Generally speaking, a good hint that a finance function might be too much for early-stage companies to tackle on their own is when other startups develop software to perform that function for them (think Shopify, Carta, etc.). Sales Tax is one of those functions – companies like Avalara, TaxJar, and Anrok exist because sales tax is full of complicated and arcane filing rules and requirements that can differ substantially by state, product, or service. Even the definitions of what is and isn’t taxable vary dramatically by state and even seasoned sales tax professionals can arrive at very different conclusions when discussing a company’s sales tax obligations.

Founders are often blindsided when learning that their products or services are actually subject to sales tax and that their business has nexus in states they didn’t realize.

Next Step: Get a handle on your Sales Tax exposure. Start with a risk assessment to get an understanding of which states have the most significant exposure.

It’s always best to engage your tax professional to help guide you through the process. Sales tax is not a situation where a startup should ask for forgiveness later. The penalties for non-compliance are high, and some states are very aggressive in audits.

The key is to be prepared in advance. State tax requirements sneak up on early-stage companies much faster than most are expecting.

Related Information:

3. I do not know my true COGS.

Many founders freely admit on a first call that they do not have a handle around their cost of goods (COGS), let alone the profitability of products sold in different channels (retail vs. eCommerce vs. wholesale) or to different types of customers.

I get it; when I was a founder, my focus was on growth, not bookkeeping. But not knowing your accurate COGS can make decision-making extremely difficult and suspect.

Next Step: Improving your COGS tracking is more straightforward to execute than the other four pain points in this article.

Have your management team (or one founder) and a financial advisor go line-item-by-line-item through your existing Chart of Accounts and recent invoices to determine what should be included in your cost of goods.

Then, create a new Chart of Accounts that aligns with your increased understanding of COGS and a spreadsheet of what cost should go into each Chart of Accounts line. Your accountant can implement these changes seamlessly in the future, but it will take some accounting effort to go back historically to ensure that you have an accurate baseline COGS.

4. I do not believe the Inventory number on my balance sheet.

Over and over again, we start work with fast-growing companies that have no idea what their actual inventory is. They have an accountant doing their bookkeeping but their inventory is tracked in excel spreadsheets that do not correspond with their accounting information.

We often encounter situations where companies cannot even confirm if an order was received, let alone what is in stock. And, if inventory is received by a third-party warehouse, the complexity grows.

“Cash is tied directly to controlling inventory levels. Having a strong inventory system and accounting in place will streamline your purchasing and minimize cash used in inventory holdings. Inventory management also gives founders and their executive team the information needed to improve decision-making around suppliers, product development, market expansion, and financial planning.”
—Michel Storken, Inventory Team Lead, Burkland

Tracking inventory is critical to success. Too little stock will cost you sales, too much means you are using a scarce resource (working capital) inefficiently.

Next Step: Early-stage companies that are not ready for the cost and complexity of a complete ERP system like NetSuite still need an inventory management module to build a process around inventory management. One cost-effective system we have used at numerous companies is called SOS Inventory.

Inventory management depends on accurate accounting solutions, and this is an area where Burkland excels. We’ve designed our recommended accounting processes to utilize existing staff, reducing the need for training and management of internal finance staff.

Related Information:

Other Consumer startup pain points and issues that did not make the top 5 include:

  • Finding best-fit 3PL (Third Party Logistics).
  • My contract manufacturer does not extend me credit.
  • How do I reduce my cash cycle?
  • Finding the right KPI’s / Metrics to track.
  • How can I make logistics and supply chain work to my advantage?
  • Can I build a recurring revenue stream on top of my core business?
  • Direct (my sales team) vs. indirect sales (brokers).
  • How to craft a winning pitch?
  • Smart money vs. Dumb Money.
  • How do I get more out of my board?

Burkland has built a team of consumer startup experts to address directly these pain points and more.