Startup Accounting: Eight Areas a Part-Time CFO Focuses On
CEOs of startup businesses have a million different things to think about. Whether it’s keeping the sales pipeline full, hiring and retaining talented employees, maintaining a healthy cash flow or keeping costs in line to ensure profitability, there’s no shortage of items on the startup CEO’s to-do list.
Given all of these priorities, it’s not uncommon for accounting to drop to the bottom of the startup CEO’s priority list. But this can be a huge mistake. Establishing a functioning startup accounting system is one of the most critical success factors for new businesses.
Driving Better Decision Making
A startup accounting system should provide management accounting and reporting that will drive better decision making by CEOs and other startup executives. This system usually includes several different areas, including the following:
Accounting system design
The initial design of the startup accounting system is crucial. If the system is poorly designed from the start, your business will struggle financially and operationally until the design is revamped.
A well-designed startup accounting system will help you manage financial risk across the organization, not just in the finance department.
Policies & procedures
The startup accounting system should establish proper accounting policies and procedures that will serve the business well not only during the startup phase but for years to come.
Cash management & capital allocation
Smart cash management is essential to the survival of any startup business. A good startup accounting system will ensure that you don’t spend capital that isn’t in the bank account yet while also helping establish financial discipline for the new business right from the start.
Budgeting & forecasting
These are also essential financial tasks for any startup business. Your startup accounting system should establish procedures for regular budgeting and forecasting to build a financial blueprint for the business. This includes rolling budgeting and forecasting, which many businesses find to be more flexible than traditional annual budgeting and forecasting.
These are the crux of financial reporting for any business, including startups. A startup accounting system should be designed to produce a balance sheet, income statement (or profit and loss statement) and cash flow statement that shows how your business is using funds and your current financial position.
Financial statements should be prepared in accordance with generally accepted accounting principles, or GAAP. Your startup accounting system should ensure that your financial statements are GAAP-compliant.
It’s important to gauge the performance of your startup business by measuring and monitoring key performance indicators, or KPIs. A startup accounting system should make it easy to identify and calculate certain KPIs like gross profit, cost of goods sold and days sales outstanding and track them via a business dashboard.
Sections to Include
You should include several distinct sections in your startup accounting system, including the following:
1. Ongoing business expenses
In this section, you’ll track expenditures made in the course of operating your business. These include things like rent or mortgage payments, employee payroll, and office supplies. You can divide this section further into sub-accounts so you can more easily track different types of expenses.
2. Startup business expenses
These are expenses that are directly related to the launch of your startup business, such as research and development and product testing. You can write off some of your startup costs to offset earned business income during your first year of operations.
3. Depreciable expenses
These are expenses that must be written off over a certain number of years, instead of immediately. For example, some types of equipment must be depreciated, which can impact startups disproportionately since they tend to buy lots of equipment to get operations up and running.
4. Earned business income
This is revenue that your startup business collects in the course of normal operations. It’s usually a good idea to create accounts that correspond to different types of income. Moreover, if you offer payment terms to customers, you should create a report for tracking the status of customer payments and your accounts receivable balance.
CEOs of startup businesses have a million different things to think about, so it’s not uncommon for accounting to drop to the bottom of the priority list. However, this can be a huge mistake — establishing a functioning accounting system is one of the most critical success factors for new startup businesses. A startup accounting system should provide management accounting and reporting that will drive better decision making by CEOs and other startup executives. Acting as a startup CFO, a part-time CFO from a CFO services company can help you create an accounting system for your new business.
Arthur F. Rothberg, Managing Director, CFO Edge, LLC
Startup CFO series – 1 of 4: The Value in Bringing in a Part-Time Startup CFO
Startup CFO series – 2 of 4 (this post): Startup Accounting: Eight Areas a Part-Time CFO Focuses On
Startup CFO series – 3 of 4: Startup Funding: Developing a Strategy with a Part-Time CFO
Startup CFO series – 4 of 4: Startup Business Plan & Strategy: How CFO Services Can Help