Finance and accounting considerations for start-ups (Part 1)
Before you begin
Introduction
In analogy, operations is the body of your business, strategy is the brain behind the business and finance is the lifeblood sustaining the business. Start-up entrepreneurs are usually great in operations and strategy — which is what we expect from an entrepreneur— but what differentiates the successful venture from those who fail is the knowledge of finance and accounting.
For many entrepreneurs, finance and accounting takes a backseat in business decisions, most decisions are made judgementally rather than holistically considering the financial implications. While short-term rewards are usually seen in this agile decision making, long-term performance suffers from poor judgement and incomplete considerations.
Drawing from experience in advising start-ups and large corporations in finance and accounting strategies, growing big means taking multifaceted consideration from the very onset on business planning. While many of my clients have either a finance professional or an accountant as member of the founder’s team, prompt consideration is more important than recruiting one before the ball gets rolling.
Financial forecast
Probably the most important thing that most start-up entrepreneurs don’t do. This is a totally frustrating process of assuming information from conservative case to base case to best case.
While many are happily completing their templated business modelling and planning tools, narrative and idea based assumptions are weak. Seeing the financial impact on at least the first-five years of the business would give you a better idea of go or let go.
The basic spreads that you ought to consider are your assumptions, profit and loss, cash flows, balance sheets and key performance indicators.
At the end of the day, you need to sign post your targets for each year and check if you’re doing well within your expectations. And remember, goals needs to be SMART — don’t shoot for the moon but stretch your goals.
Cash budgeting
Many confuse this as the same as a financial forecast, but many times this can be the case. What’s important here is that the initial cash in- and outflow are determined to avoid immediate insolvency.
A financial forecast done well can serve as a great budgeting tool, but as most start-up entrepreneurs are not too financially-savvy, doing a cash budget for the expected cash in- and outflows would make things easier. Planning the right amount of paid-up capital can save you monies rather than paying in additional cash in the future.
Remember, each time cash is injected in your business, taxes and filing fees are waiting for you to settle within a fixed number of days.
Business planning
Ok, say you want to ignore the previous two, say you don’t think you need to go that far. Well, am not sure how big your dream is, but of course it is your decision.
Ignore the above considerations, but don’t ignore this one. Great if you have a finance professional or accountant within your founder’s team, but grieve not if you don’t.
Call your friend who is an accountant or a lawyer, talk to them about your business plan, and get their inputs on your business plan, structure and what else you need to consider. Better, if you have excess cash, hire an early-stage business advisor who can help you with the kinks and winks.
Conclusion
The importance of accounting and finance at the onset of the business can be discounted if you have a good friend with good knowledge. With the massive availability of advisors, it is a matter of finding the needle in the haystack; with some help from a good advisor, you can have assurance that you’re off with a good start.
Filbert Tsai is an accounting advisor based in the United Kingdom. Professionally, his sector specialisation is power and utilities and provides technical advice to companies and governments. Personally, he is an advocate of start-ups and small businesses, his Facebook page — Ask the Accounting Advisor — provides free business advice to budding entrepreneurs specifically those located in the Philippines.
