In the early days of scaling a startup, it’s common to handle everything in-house. When you’re first starting out, financial resources are tight, administrative needs are relatively simple, and the DIY spirit is strong.
As your startup scales, however, you’ll inevitably reach points where it makes good business sense to outsource certain functions. Trying to “do it all” in-house becomes a big distraction for the founder and management team, especially as systems become increasingly complex and stakes grow higher. Accounting is a critical function at any size company, and while there is no magic formula to know when your startup is ready to outsource accounting, there are some good key indicators to look out for.
7 Signs Your Startup Might Be Ready to Outsource Accounting
- You’re preparing to raise Seed or Series A. By the time most startups reach Seed stage, their finances are complex enough that it’s time to outsource accounting. Professional accounting also provides an enormous benefit in preparation for any raise by delivering clean and accurate financial statements to prospective investors and avoiding pitfalls during due diligence. Plus, investors typically want to know that a startup’s finance and accounting functions are professionally managed before investing.
- Your team is growing beyond the founders and first few contractors. Many startups are ready to outsource accounting when they start to hire full-time employees, hire out-of-state contractors, and run payroll.
- You’re filing your first year’s corporate taxes. For some startups, the need for outsourced accounting hits home when filing the first year’s corporate tax returns. Companies that maintain accurate and up-to-date financials based on generally accepted accounting practices can expect to have a much more efficient tax filing process and avoid unpleasant tax surprises. Plus, the earlier you start tracking and claiming your R&D tax credit, the more you’ll save in payroll taxes to help with cash flow.
- You’re preparing for a tax audit. Bringing on professional outsourced accounting expertise is a smart move for any startup that finds itself in the position of a federal or state tax audit. Your accountant can prepare clean and accurate documentation before the audit and support you during the process. Afterward, your accountant can help with any follow-up action items and work with you to maintain proper accounting practices and clean financial statements going forward. This can reduce your chance of another audit in the near future, or, if you are audited again, increase the likelihood that it will be a quick and painless “No Change” audit.
- Your accounting systems are ready for an upgrade. Many startups begin with very basic accounting and finance systems—sometimes as simple as a few spreadsheets. Simple is good, and these systems can work well enough in the earliest stages, but most startups quickly outgrow them and soon need more sophisticated financial tools. When your startup is getting serious about upgrading financial systems like accounting software, ERP, payroll, and cap table management, it pays to work with experienced finance professionals. Your outsource accounting partner can help you select, configure, and maintain the best accounting tools as you scale.
- You’ve started finding mistakes or sloppy practices in your books. Accounting is complicated and only becomes more complex as a company grows. Most startup founders aren’t professional accountants and can’t be expected to keep up with accounting regulations and practices and get everything right as the business scales. Just like “technical debt” compounds and snowballs on software projects, “accounting debt” is likely to compound and snowball in your books.
- Your founding team’s time and focus are getting consumed in finance. Early on, it’s natural for a member of the founding team to manage accounting. As the company grows, however, accounting can become a big distraction, pulling the team’s time away from organizational development, product innovation, and other valuable leadership activities. If your CEO or other management team members are spending more than a few hours a week on accounting, it’s time to think seriously about bringing on an outsourced accounting partner.
For most venture-backed startups, outsourced accounting makes a lot more sense than a full-time hire. The base cost is much lower than a full-time employee, benefits aren’t required, and time lost to onboarding and turnover is greatly minimized. Plus, by outsourcing, you can easily scale your service level up or down, and tap into specialized resources as needed.
Outsourcing your startup’s accounting doesn’t need to be intimidating or expensive. With as few as six hours per month you can benefit from professional accounting services by Burkland’s seasoned team of startup accountants. Learn more about our accounting for startups, and contact us to request additional information.
Also see these related resources from Burkland’s blog:
- Is My Startup Ready for a Fractional CFO?
- How Does FP&A Help Startups Scale?
- HR Checklist for Startups
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~Khalid Meniri, Founder & CEO, Selfbook
“Using Burkland for financial guidance and tactical operations support allows us to focus on our customer offerings and growing our business.”
~Adam DeVito, CEO, Monj