Accounting is an area that can quite often get neglected in a startup. But what a lot of founders don’t realise is just how important seeking the right financial advice can be to the success of your business, especially if you are just getting started.
This blog will be focused on the importance of accounting and knowing your numbers in a startup, and will explain why the accountant should be seen as an integral part of any tech startup’s team.
Take a proactive approach to financial advice
The founder of a tech startup has so many areas to focus on. For example, the first thing that they are probably going to be concentrating on is building the product and getting an MVP out to market. This means that the accounting tends to get left to one side which can cause a lot of problems.
There are always going to be financial challenges that a founder will have to manage, such as cash-flow, pricing, day-to-day transactions and raising capital for growth.
Along with that, you’ve got all the compliance side of things to deal with too, like tax and employment-related laws. These are complicated things and it would be unreasonable to expect a tech entrepreneur to have experience in all these different areas.
So, it’s crucial that the founder of a startup seeks good advice on these matters. Regarding finance, I would always tend to take a more proactive approach rather than a reactive one, so if you can get good advice and have your accounts set up from the start, you will be far less likely to encounter costly issues in the long-run.
Behind every good startup there is a good accountant
When you stop to think about it, finance and accounting is actually the language of business. We are all aware of this and talk about revenue, cost and cash, but a lot of entrepreneurs don’t actually fully embrace it.
That’s why I always say that behind every good startup there is a great accountant.
The problem is accountants tend to be seen as that boring person stuck in the corner saying NO all the time when, in reality, they should be looked at as one of the key people in the team.
There’s far more to the role of a good accountant than just putting numbers into a spreadsheet. They can spot things in the business that no one else can see that could potentially cause some very big problems.
A more balanced perspective
Entrepreneurs are intrinsically positive and optimistic people but aren’t always the most pragmatic when it comes to accounting. In terms of revenue and cash-flow, there needs to be someone to provide a more balanced perspective to set budgets and provide realistic forecasts.
You’d be shocked at how many entrepreneurs don’t even know what their break-even is! A lot of them just think “well, we’ve got cash in the bank, we’ll be okay”, but a successful business needs to have their finger on the pulse with these things so they can make the right decisions.
I’m not necessarily saying entrepreneurs should know absolutely everything, but in the world of business, you’ve got to have some form of understanding about your finances in order to succeed.
An accountant is an invaluable member of the team
For example, when you understand your finances, you can make informed decisions on things like pricing which a lot of startups don’t ever look at. Pricing sits at the heart of a startup venture in terms of the competitive positioning it has and the value of your proposition.
As a startup, you should be bringing something new to market that is innovative and bold. It’s either solving a problem that isn’t being solved or it’s better than an existing solution, so premium pricing is always my mantra. However, a lot of startups just want to get out to market quickly and so price their product cheaply.
This can have disastrous effects on your cash-flow, especially if you aren’t aware of your costs! But an accountant will be able to spot potential issues like this and stop them from ever happening.
In this way, an accountant’s experience should be seen as an invaluable addition to the team. I would encourage anyone who is looking to start their first business to seek out professional advice even if that means outsourcing it initially.
Act, count, think
These days, thanks to technology, it’s become a lot easier for small businesses to keep track of their finances and outsource a lot of the basic account needs; but where an accountant can add real value is in the business insight they can provide.
A good takeaway for any business owner is to adopt the act, count, think approach.
This is where your finance person can look at the numbers and provide key information which can determine your strategy. Once you’ve been around numbers long enough, you can spot trends and you develop an awareness and business acumen around them. This acumen allows the accountant to ask the really important questions in business.
I would always tell any startup that the quality of your questioning determines the quality of your thinking, and the finance person can bring those quality questions to the table.
Every good entrepreneur needs a foil. They need the balance in the team and they need to challenge their thinking because, inevitably, the challenge will actually make them stop, think, rewind, sense and respond.
It’s not just about numbers, it’s about overall rationale and logic too.
Accounts determine how your business is run
I think the sooner you engage with a finance person who understands your business model and your strategy, the sooner they’ll be able to translate that into a set of forecasts and projections which ultimately will determine how you run the business and raise capital.
But aside from the investors, who might require a three-to-five-year forecast (which is totally wrong in my opinion), your business model should really only be based on the next 12–18 months. Anything beyond that is far too unpredictable and you will struggle to get any degree of realism out of your projections.
So, whether you outsource it or bring it in-house, make sure that you are getting some professional advice on your finances. Technology is fantastic, and there are a lot of tools out there that can help you, but you should never use that as a substitute for bringing in an accountant.
And if you do bring a financial person in-house, make sure you go out and have a beer with them first. They’ve got to be someone whom you can trust, so it’s important that you get to know them on a personal level.
Ultimately they are going to be the one asking the awkward questions that will end up saving you a lot of money.
I hope you have found this useful. If you have any questions or would like to hear more about the importance of accounting, check out episode 15 of our podcast “From the Factory Floor”, where myself and finance expert Elliot Smith go into more detail. Alternatively, feel free to email me at firstname.lastname@example.org.