If your finance operation doesn’t have a clean chart of accounts in place and you’re having trouble getting taxes paid or maintaining crucial documents, focus first on the chart of accounts, says a consultant who helps startups get their accounting processes in order.
Although your company could face fees and penalties for missed or incorrect tax filings or other compliance issues, you can’t solve your problem if your chart of accounts isn’t in good shape, Lisa Slater, founder of Three Butterflies Consulting, said in an Airbase webcast.
“If you don’t set that up correctly, it’s actually really hard to see the wood for the trees and even file any regulatory reporting,” Slater said. “You really do start with looking at the accounting and getting that on track first. And then you can get caught up with all of the regulatory stuff.”
Slater recommends taking the penalty hit to improve your foundation, otherwise you face playing catch-up.
“It could be you might have some sort of late fees and penalties if you haven’t been [correctly filing] for a couple of years, but you can work that out,” she said. “Those fees and penalties at an early stage are not all that high.”
As a rule of thumb, startups, at least in the booming software-as-a-service (SaaS) sector, need to get serious about accounting by the time they hit $3 million in annual recurring revenue (ARR), says Ben Murray, founder of the SaaS CFO and former CFO of Mobile Solutions and Cartegraph.
In an analysis he published in SaaS Brief, Murray defines a well-functioning accounting team as one that can close the company books in five days, or at least have a soft close in the time frame, and have all major balance sheet accounts, including sub-ledgers for relevant accounts, especially for deferred revenue, reconciled and documented. There shouldn’t be any waiting until year-end to reconcile accounts or true-up accruals for expenses like bonuses, commissions and rent.
The team should also be able to pass a financial statement audit, and be in good standing with state and tax authorities.
“Accounting … is not sexy, but it’s the foundation for good decision-making,” he says.
By the time a startup is making money and is ready for, say, a Series B capital raise, its accounting systems should be rock solid and have a good cadence in place for processing invoices, paying vendors, and so on, otherwise the function becomes an impediment to company growth, said Slater.
“From the beginning, have this regular weekly, monthly cadence that enables you to stay on top of everything,” she said. “When you keep going with it, it’s so much easier to grow from that foundation.”
Having a clean chart of accounts and a good cadence are especially crucial during audits, she said.
“That’s where having a clean start from the beginning really pays for itself,” she said.
Even for companies with an established accounting function, it makes sense to bring in outside specialists when leadership is looking at later-stage capital raises, even if an IPO isn’t in the cards for a while.
“So you’re ready for that scrutiny of going public,” she said, “and your company’s systems and processes and financials are ready.”
Small companies, well before they’re ready for a CFO, likely manage their accounting using QuickBooks, but even in these cases it makes sense to get other applications in place — for the cap table, payroll, accounts payable — to get the clean system and regular cadence that defines good accounting, she said.
As the company grows, the finance and accounting function becomes more important operationally, including on the planning side, which makes it important for team members to get outside their jobs to understand the business.
“We’re not engineers or marketers,” she said. “We haven’t come up with these amazing ideas. But we need to show an interest in the product or service a company is delivering so we can do our job correctly.”
Equally important, it’s the role of the finance leader to get the company leadership to develop an interest in the finance and accounting side, if only because knowing those internal processes and systems can lead to faster and more efficient growth.
Leadership that “shows an interest in finance and operations from a high level and that understand it’s important to establish good practices are enabling their company to grow more easily,” she said. “They really need to be a champion of that. That will help set the company up for success for years to come.”