Finance 101 for Startups

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Finance 101 for Startups – key finance and accounting considerations for startups that are Pre-Seed or Seed – the formula for getting bookkeeping and accounting right from the start.

I will be sharing a series of blogs over the next few months which will provide guidance on the best practices for finance, accounting and tax for venture-backed startups from seed to scale.  This four-part series will cover the following topics:

  • Finance 101:  Best practices in setting up bookkeeping, accounting and tax for Pre-Seed and Seed companies
  • Finance 102:  Overview of strategic finance requirements for companies approaching their Series A raise
  • Finance 103:  Establishing a disciplined approach to financial planning, analysis and reporting post-Series A
  • Finance 104:  Overview of strategic finance requirements for companies approaching their Series B raise

In this Finance 101 blog, I dive into the key finance and accounting considerations for startups that are Pre-Seed or Seed.  At this stage, the focus is primarily on properly setting up bookkeeping, accounting and tax, with a limited focus on strategic finance topics.  As Jeff Burkland highlighted in a recent blog, many startups don’t need a financial model until they get closer to a Series A fundraise: https://burklandassociates.com/financial-model-seed-stage/

The formula for getting bookkeeping and accounting right from the start is straight-forward and not terribly expensive, and I have outlined the key steps below.  However, in my experience, it is very common for start-ups to get it wrong, either because they are cutting corners or not dedicating enough time/resources to establishing a good accounting foundation.  Here’s some of the common pitfalls I have seen from startups with poorly setup accounting systems and processes:

  • Significant time and money investment required to clean up incorrect accounting.  I have seen several startups have to completely re-do their historical accounting records, a huge distraction that can easily cost 10x what it would have cost to do it right the first time
  • Manual and error prone processes that waste time and money and create a huge distractions to the business
  • Large tax penalties due to missed or incorrect filings
  • Risk of fraud and embezzlement
  • Loss of credibility with investors 

To avoid these risks, there’s a few key steps you can take to ensure that you establish a good accounting foundation for your start-up:

  1. Hire experienced accounting support.  While CEOs and other co-founders may be savvy with numbers, this doesn’t make them good accountants.  Bring in a professional that has experience implementing accounting systems and processes with start-ups.  There are many firms and individuals that offer part-time as-needed bookkeeping support at reasonable rates (including Burkland).
  2. Choose the right financial systems.  We recommend cloud-based financial systems that interconnect, automate and have a range of add-ons with a robust approval workflow.  QuickBooks Online is a fantastic base accounting system for startups. There are many add-on applications that sync well with QuickBooks and automate processes such as employee expense reimbursement and accounts payable.  Paper files are a thing of the past for accounting — everything should be managed online.
  3. Find the right payroll partner.  Choose a full-service payroll provider that is able to support payroll and compliance reporting requirements as well as offer a full suite of healthcare and other benefits (e.g. 401K, FSA).  Professional Employer Organizations (PEOs) such as Trinet offer a one-stop shop all payroll and benefits. While PEO fees are higher than regular payroll providers, the lower insurance rates PEOs can offer from a larger employee pool can offset some/all of these higher fees.  Alternatively, many of the newer cloud-based payroll companies offer a similar one-stop solution for payroll and benefit needs.
  4. Choose a bank that specializes in start-ups.  Open a bank account for your startup early on that is supportive of the start-up community, such as Silicon Valley Bank.  These banks often offer special services/discounts for startups, facilitate networking in the startup community, and eventually can be a good source of venture debt.  
  5. Establish financial controls.  Financial controls help to mitigate the risk of fraud and embezzlement.  See my previous blog on this topic for more details on how to implement a solid controls protocol:  https://burklandassociates.com/how-start-ups-can-mitigate-the-risk-of-fraud/
  6. Hire a tax professional.  A tax professional can make sure you submit tax filings accurately and on-time.  They can also help you to take advantage of the recently instituted R&D payroll tax credit which can be a great benefit to startups.
  7. Organize your due diligence materials.  Build a file organization structure and be disciplined about savings files to streamline future diligence requirements.  Searching for files that are buried in emails can be a nightmare and cause fundraising delays.

If you are interested in learning more about any of these topics, please reach out to me at drosler@burklandassociates.com.  I have a more detailed presentation that I can share that dives into each of the above recommendations.  For more information you can also visit https://burklandassociates.com

 

Follow Debbie Rosler:
Debbie Rosler has over 20 years of finance and strategy experience working with both start-ups and later-stage companies in a variety of industries. She has worked in FP&A, corporate strategy, operations, investment banking and venture capital. Her areas of expertise include business plan development, financial modeling, management reporting, cash flow management and business process design. Debbie received a BBA with high distinction from the University of Michigan and an MBA from Stanford Graduate School of Business.