In this Mucker Growth Session, Debbie Rosler from Burkland dives into the fundamental financial best practices and infrastructure early -stage startups need to put in place.
Finance 101: Why Should You Care?
It's important for early stage startups to focus on finance from the very beginning. At the very earliest stages, startups are focused on extending their runway as long as possible. They may have a little bit of funding, a limited amount of cash, and they are very focused on stretching that as far as they can. Often that means trying to do things in the least expensive way possible and that means doing finance accounting on their own. But more often than not, founders don't have that expertise or background in finance AND they are focused on starting a business, developing products, getting out and selling, etc. They are not wholly focused on the financials. They end up making a lot of mistakes and what ends up happening is that the cost of going back and cleaning up those financial mistakes is significantly more expensive than getting finance and accounting right from the very beginning.
Finance & Accounting Lifecycle and Support
Financial Systems
HR and Payroll Partners
Banking Partners
There has been a recent shift in banking strategies for startups, influenced significantly by the Silicon Valley Bank (SVB) crisis.
Historical Practices
Traditionally, startups were advised to bank with startup-focused banks known for providing tailored services and attention. Following the SVB crisis, however, the risks of banking solely with startup-centric banks like SVB were revealed. Many startups found their funds inaccessible, jeopardizing operations such as payroll, during the crisis.
New Recommendation
The recommendation has evolved to suggest that startups maintain banking relationships with two different banks—one startup-focused and one major bank. This approach aims to provide both specialized services from a startup-focused institution and the stability of a larger institution. Having accounts at two different banks allows startups to manage risks more effectively, ensuring that they have alternatives and can access funds if one bank faces issues.
Overall, the revised banking strategy for startups emphasizes the need for diversification and preparedness to safeguard against future banking disruptions and ensure continuous access to necessary financial resources.
Treasury Management
Financial Controls
Having sound financial controls from the beginning is critical. Startups need rigorous checks within the company's financial operations to safeguard against errors and fraud. Key measures include:
Segregation of Duties
Ensuring that at least two people review every transaction (one to log the invoice or bill and another to approve payment) to mitigate the risk of fraudulent activities.
Approval Processes
Implementing system-based tools to facilitate the segregation of duties, ensuring appropriate levels of oversight and approvals are maintained.
Bank and System Integrations
Utilizing financial systems and banks that support these control processes, such as accounts payable management systems that incorporate built-in approval workflows.
Regular Review of Financial Statements
Monthly closing and review of books to monitor financial performance and identify any discrepancies or unusual trends in expenses.
These controls are essential for maintaining financial integrity and transparency, crucial for both management and compliance purposes.
Financial Reporting
Effective financial reporting for startups involves routinely closing books monthly and reviewing them to maintain control and gain insight into financial health. This practice is crucial from the beginning, not only for internal management but also to meet investor expectations. Establishing a standard chart of accounts is recommended to properly classify expenses and understand spending on different business areas like sales, marketing, and research and development.
Regular financial reporting packages, including income statements and balance sheets, should be shared with the board and investors, ideally reflecting the startup's financial strategy and performance against projections. This approach facilitates seamless communication of financial health and key performance indicators (KPIs) such as annual recurring revenue (ARR) and churn, making it easier to respond to investor inquiries efficiently.
Corporate Tax
Non-compliance with corporate taxes can come with a very high penalty. It's particularly important to have timely and accurate tax filings, even if a startup is not yet profitable. Startups need to handle payroll taxes correctly, take advantage of potential R&D payroll tax credits which can offer refunds, and make sure sales tax is compliant to avoid severe penalties. Given the intricacy of these components, Debbie recommends having a tax professional to navigate these complexities, especially for startups with foreign activities or investments, where reporting requirements are stringent and penalties for non-compliance can be significant.
Due Diligence Prep
- Hire experienced financial personnel from the start
- Utilize cost-effective and easy-to-use financial systems and payroll
- Automate processes
- Maintain dual bank accounts
- Implement rigorous financial controls
- Ensure tax compliance to prevent future complications.
Thanks to Debbie Rosler for sharing this information.
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