The Top 5 Accounting Mistakes Startups Make
By Acru Partners, Melissa Ciana and Annie Carlon
Our team has worked with hundreds of startups, and year after year we inevitably come across the same common issues around financial reporting. There are remedies for these accounting mistakes, but it’s crucial to flag them as soon as possible, ideally before a startup begins a seed round or approaches any major growth.
One of the largest knowledge gaps our clients have is within accrual accounting, and unfortunately many professionals, founders and entrepreneurs simply don’t understand proper accounting practices.
Two areas we often encounter inaccurate reporting are within revenue recognition and inventory costing. Once these issues come to light, companies are faced with the difficult decision of how to handle these errors.
Below you’ll find the common missteps we see startups make with their accounting. We share them with the hopes that other new companies can start accurate reporting processes early on, and with the right support team in place to keep their foundation stable and goals on track.
The top 5 accounting mistakes startups make
Inaccurate monthly reporting.
Your monthly financials — revenue recognition, inventory costing and equity management — can hurt or help you. We’ve seen entire boardrooms waste hours dissecting the financials because of accounting errors, or investor deals go sour because the due diligence proved the margins were far from what was expected. So, make sure you understand your financials fully before you show them to anyone else. We recommend Carta for tech-enabled cap table management; the tool not only manages financing rounds but convertible debt issuance along with accrual of interest, and 409(a) valuations.
A lack of understanding around financial tools.
Here’s what you need to have locked down from the get-go:
A simple model to start a business. Think: big picture, back of the napkin. Just start somewhere.
An accurate, consistent monthly close. All your future models and budgets will be based on your historical numbers, so make sure they’re right.
A cash forecast. Don’t use a model to project cash; use a 13-week forecast to map the sources and uses of cash. Depending on the cash cushion, we’re aiming for 85% accuracy. Update this weekly with “good enough until next week” being the goal.
Investor-ready reporting. Your financials should consistently help and guide you. If they aren’t, ask yourself what would be helpful to know at the end of the month. A profit and loss (P&L) and balance sheet from QuickBooks doesn’t cut it for most clients.
A budget. You don’t know if you’re on the right track without a map. Run a grown-up business and build a budget.
What you don’t need: wasted time building forecasts, models and scenario planning. There’s one thing that’s true about every model: They’re wrong. You can only build so much of a business on paper and at some point, you just have to get started. It’s important to understand the specific questions you’re trying to answer: i.e., Is this new product line profitable? How much cash do you need to open another location? Just get the model to a point that you can answer your question and be done with it. At Acru, we also recommend and offer outsourced CFOs who have the expertise to build solid investor models.
Thinking about cash all day instead of cash planning.
So many company leaders will lay in bed at night running through scenarios and mapping out vendor payments, bills due and payroll, when they should just be sleeping. We launch an automated cash tool on Day 1 for our clients that we’ll review weekly or biweekly, make decisions on accounts payable and cash outflows, and generate a six-month cash projection focusing the call mainly on the next 13 weeks. The goal is that the client is only thinking about cash once a week (and sleeping peacefully)!
Ignoring sales tax.
Sales tax is the mosquito of our business: annoying, distracting and ever-present. You can ignore it for a while, but eventually you’ll get bitten. Every state has different requirements and there are economic and physical nexus specific to each state. We partner with sales tax experts to ensure all filings are done properly and exposure is mitigated.
Finding the cheapest accounting firm or tax accountant.
Does anyone do this for attorneys? No. And the same should go for accounting services – making a decision on price alone is simply the wrong call. Accounting is not a commodity and all firms specialize in different areas. First, consider what’s important to you: An early close? Dedicated team? Response time? A boardroom partner? Scalability? You can’t have all of those things at the cheapest price. So decide what’s important and the right partner will be worth every penny. Also, cut bait after 90 days if you’re not getting results.
The bottom line is this: Get accurate reporting in place as soon as you can. It will always be worth the money to pay an outsourced accounting firm to get your financials right for investors, tax purposes and your overall growth potential.
Originally posted on StartUpNation.com
