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:
- 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).
- 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.
- 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.
- 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.
- 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/
- 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.
- 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 email@example.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