Accounting for startups

Not many startup founders are accountants or potential CFOs. And with an already constrained time schedule, it’s easy for tight control over finances to slip away.

But it’s critical that you’re comfortable with the finances supporting your business, if only so you can make strategic operational decisions as time goes on. Learning the basics, and asking for the right kind help when things go sideways, will go a long way toward getting your startup’s finances in order.

As an experienced executive with a stint as CEO of a Richard Branson-backed startup under his belt, Greg Woock understood the importance of making sure the numbers add up.

So when he founded Pinger, a messaging startup, in 2005, one of Woock’s first steps was to work closely with a math whiz with deep knowledge of the telecommunications industry. He needed to figure out how much carrier bandwidth would cost him based on various variables, a calculation that required complex analysis.

"I didn’t want to get into a pitch meeting and end up debating the math."

Soon after, he hired a former colleague as his third employee and director of finance. The investment paid off, as Pinger went on to raise $3 million from Kleiner Perkins Caufield & Byers.

Not every startup business model involves complex math, especially at the outset. But if you’re trying to build a successful, well-managed company, it’s important to have a basic understanding of finance. As you go from coding a prototype to hiring people, gaining traction in the market to pitching investors, what you need to know—and the services and experts you should rely on—will change.

The value of accounting for your startup yourself

When you’re just getting started, say, still working at your full-time job or newly established in shared workspace, it’s good to go the DIY route. After all, most of what you’ll be doing is basic accounting tasks like recording simple transactions.

Focus on good accounting hygiene, like making sure that you keep your personal and business spending separate and accurately categorizing each expense. It might feel like unnecessary busy work, but it could cost a lot of money to clean up later says Nicole Jordan, a business development strategist at Early Growth Financial Services, a firm that provides accounting and finance services to venture-backed startups.

"Besides clean books, there are other real benefits to being hands-on from the beginning."

Aside from the fact that you’re saving money at a point when you don’t have much to spend, managing the books yourself gives you a grounding in basic financial concepts.

“You learn what a debit and credit means, and how cash in the bank isn’t the same as revenue,” says Bec Sankauskas, founder of Bexouce International, which provides finance and operations support to seed and Series A startups.

Know when to outsource accounting

There’s a point when running finance stops being a good use of your time. Sankauskas suggests the following rule: Come up with dollar amount an hour of your time is worth. “If you find yourself spending more than you’re comfortable with, get help,” she says.

Founders, she says, should be focused on building the product, building the team and getting money in the bank. Anything else should be subject to a cost-benefit analysis—including time spent on finance.

At that stage, hiring a bookkeeper to do the work, while taking time to oversee it, makes sense, says Brett Galloway, a former Cisco executive who is now angel investor and CEO of AttackIQ.

I don’t necessarily want the CEO spending time on balancing the checkbook or preparing financial reports

“And as a founder, I always wanted someone independent keeping the books. That way, there’s someone for potential investors to call to know there’s no funny business going on.”

Managing growing revenue and financial complexity

As your business grows in complexity and you start thinking about attracting venture capital, staying on top of your finances will take more effort and more help. Besides basic bookkeeping and accounting, which will have to meet strict regulatory standards, you’ll be dealing with increasingly convoluted tax filings, appraisals of your company’s value, budgeting, forecasting and keeping track of your burn rate. You’ll have to be on top of critical business metrics, such as the cost of customer acquisition, the lifetime value of a customer and your break-even point.

How quickly that complexity grows will depend on your particular business. Are you developing an iPhone game with some friends, or building a hardware product that relies on a global supply chain and that will sell in multiple countries?

there are plenty of “temp-CFO” services

Understanding your startup's finances will boost your pitches

The hands-on work you did early on will go a long ways toward helping you understand how your business works operationally, which in turn will help you understand what your head of finance is up to. “It’s more than just numbers on a page,” Sankauskas says. “It builds the groundwork for understanding the levers you can tweak when it comes time for your Series A.”

For instance, you might use an aggressive forecast when pitching your business to investors, modeling that it will take four engineers six months to build a feature. But you should also understand what your business would look like if it takes five engineers eight months to build the feature.

What the VC is looking for is proof that you understand what a financial model is and how it works

 “They’re not going to take your forecast as gospel.”

If you don’t understand the variables that make up a financial forecast, you might not realize that there are other levers to pull to get the same results over time. That can lead to extra stress or bad decision making when a forecast proves incorrect, which it likely will.

Tips for self-accounting your startup

As you pick a finance professional to work with, expertise and trust are paramount. You can see that a big part of your finance person’s job will be to teach you all these variables.

But there’s something else you shouldn’t overlook: continuity. Your engineers, product managers and salespeople may come and go, says Jordan. But when it comes to finance, having an expert who understands your business intricately and through all its phases is critical.

Even if you’re outsourcing finance you should have someone that’s going to stay with you for two to four years

That longevity was in Woock’s mind when he hired his former colleague as head of finance. “It was important to have someone I trusted, that would provide some continuity,” Woock says. That trusted colleague remains at Pinger, where he is now CFO.

The takeaway

You may choose different approaches to finance at various points—from DIY to hiring experts. But the key is that you stay close enough to understand how to add value at key points without getting too bogged down in the minutiae.

Running a startup is hard. Visit our Startup Insights for more advice for companies that are just getting started.