What startups should know about appointing an accountant
Founders must spin endless plates and wear lots of hats when firing up their entrepreneurial engines, whether that’s managing marketing and recruitment, or tackling development and accounting.
Growing your customer base and building revenue is key when starting a business but also for the long-term. Accountants are usually sought out by leaders in the early stages to keep things on track in the place of an FD, which a company won’t always have the budget or need for early on.
Attempting to get the financials straight without consulting external advisers can create problems further down the line when it comes to raising funding, managing cashflow, or filing tax returns.
Getting the timing right
Early-stage businesses that have bootstrapped or are pre-revenue, are often operating on tight budgets so there’s a natural tendency to avoid spending money on anything without first determining its value. Where accounting is concerned, there’s really no such thing as too early. The topic of 'when' comes up frequently and you can never start having conversations with accountants too soon, even if it’s just to get some advice on what structure or systems to use to get set up properly.
Companies incurring costs and making sales without any formal set-up can stand to benefit from tools such as FreeAgent or Xero, which can be largely well maintained independently, to keep good financial hygiene and accountants can offer guidance here. It will not only help firms track what they’re doing and abreast of outgoings and incomings, but this is also a future-proofing exercise too.
Startups aren’t expected to have a massive, complex system in place crunching the numbers but investors looking to come on board will require assurances that operations are in order. Using industry-recognised software will be beneficial for a coherent view of financials, without needing to backtrack over a few years of spreadsheets and invoices that have been scattered around the (home) office.
Having a forward-looking approach to managing your finances is key to success. The moment growth happens it can do so quickly and rapidly spiral out of control.
Eyes on the size
What are the drivers for a startup bringing an accountant on board? It’s less about turnover and number of employees, but more about the stage of a company's life cycle. Some businesses will have hundreds of thousands in revenue, while others may have investment and no turnover - the key thing is having something tangible and developed, rather than just an idea and business plan. At this point, accountants have the means to support efforts such as R&D credits and other schemes.
The size of business doesn’t necessarily factor into how a startup should approach financial management. The dilemma companies find themselves in is the size of the accountants they turn to. Ultimately, founders need to think about their own growth objectives and align with partners that share that vision. Boutique accountants absolutely have a purpose, but the question to ask is: do they understand your business purpose, and can they go beyond the numbers to offer advice that will support business growth?
Founders should look closely at the expertise when doing their due diligence on prospective accountancy firms. Finding a partner with appreciation for their objectives, rather than someone that’s going to be interested in merely chalking up yet another client, is paramount.
Chopping and changing advisors should be avoided at all costs, even if it takes more time to find the right fit, because time - through proactivity and care - is precisely what leaders should want accountants to spend on their business as growth is sought. It comes down to a value-cost trade-off, but this shouldn’t be rushed.
Ensuring an exit strategy
Many founders already have an exit strategy mapped out. For these founders, it’s about securing a relationship with an accounting partner that “gets it”. They should be able to advise and support in securing investment along the way, or building robust organic financials.
However, there’s a misconception amongst startups and scaleups that having one of the ‘Big Four’ accounting firms on side is required to achieve a big exit. The fact is, unless you’re an extremely large international business, it’s highly unlikely to have any impact at all.
There are a lot of things that can change during an exit transaction, due to the varying complexities that can crop up. More often than not, these can involve problems caused by the ownership structure of the business or a lack of clarity over shares and options that may or may not have been issued. This lack of clarity and information can also set the business up in a manner that causes tax and commercial disadvantages for sellers and investors can often serve to delay or prevent a deal.
Additionally, not being able to provide immediate financial information to investors - such as detailed financial and cash flow projections or up to date management information - can also cause buyers to withdraw from a transaction despite their interest in a fast-growing business.
The key factor in securing a successful outcome for an exit well is the individuals involved, aligning overall personalities of the board and potential buyers, which is achievable with a partner that has a solid understanding of the business. Having a firm alongside a startup’s entire growth cycle will ensure that they’re in it together.