Early-stage businesses, from start-up through to a few $000s turnover, are a journey of discovery.
Three phases of establishment and growth can typically be identified; The Experiment, Lessons Learnt and Doubling-Down.
Knowledge and business approach build in maturity through these phases, as does the founders’ skillset and mindset.
Financial management is a core discipline of any business, and founders will develop greater financial smarts as they grow through these phases.
Your book-keeper and accountant can certainly support you on your journey. It is important that you know where they can add value and where you should drive the agenda.
From it’s inception, any business has both an obligation (the tax man is watching) and a safety/due diligence need to ‘look after its money’.
Even before any sales have been made, a business will be spending money – on establishing its business entity, on research and development, on communications, on branding and marketing, maybe on purchasing product. Many costs. Many of them ‘sunk costs’; never to be recouped if the business doesn’t go ahead.
Even at this early stage it is important to have the right advice on hand, if you are not yet au-fait with business finances.
Many early-stage business founders take the view that there is plenty of support available – book-keepers and accountants – that they don’t need to worry too much about it themselves. After all, their job is to build the business and get the sales in.
I’d just like to say….. Wrong, wrong, wrong!
Even if you are only thinking of setting up a business, the first advisor you will need will be an accountant. We’ll look at the details below, but for the moment think of them as your strategic advisor.
As you progress on your journey, your knowledge will grow and your transactional requirements will evolve and become more complex. At this point you might consider the services of a book-keeper – to help you with day-to-day data collection and transactions. Think of them as your financial administration support.
In the middle is yourself… the owner of the business, with the responsibility and absolute need to understand how the money flows into and out of your business.
I have encountered many business owners who have been only too happy to either a) not pay too much attention to their finances until the end of year tax returns are due, or b) have been content to hand over all responsibility to a book-keeper.
The conversations with them generally follow the themes of:
“I never seem to have enough cash in the bank”
“No matter how hard I work, there doesn’t seem to be enough profit to pay myself a decent wage“.
Accountants and book-keepers are paid advisors. They have skills and experience to support you, but it is sometimes difficult for business founders to know the right questions to ask and get the most value out of their relationships.
Below, I’ll lay out the three phases of your young business – The Experiment, Lessons Learnt and Doubling-Down – and how the financial needs of your business will evolve with these phases. I’ll set out what support you SHOULD seek from your book-keeper and Accountant through these phases…. and what you should be doing YOURSELF to ensure you remain fully informed and in control of your business.
This phase sees you trying to establish if you have a product or service that anyone will buy, and what price you might charge for it. It is characterised by:
- Little or no CONSISTENT revenue
- Costs exceeding income
- Activity is mostly hustle, with minimal process or systematic way of going about building your business
Your key partner in this phase. Look for an accountant that can look after your overall financial and tax efficient health. They can be the equivalent to your General Practitioner for your financial wellbeing.
Your Accountant should guide you on the most appropriate way to set up your business for your particular circumstances. They should help you to decide how much RUNWAY you should set aside for your business building experiment, and where those funds might come from.
Your accountant will submit your tax returns and ensure that you meet tax and financial regulations at both a personal and business level.
It is important to spend the time and effort in finding an accountant that is a good fit for you, at both a personal and business level. WARNING: Although it is useful to get personal recommendations of good accountants, be careful because what is a good fit for your friend or colleague may not necessarily be a good fit for you. For instance, if your colleague has an eCommerce business and has a gun accountant, that may not work out for you and your craft brewery. Look for an accountant that has plenty of experience in your particular industry.
You probably don’t need one in this phase. Yes you might be raising sales invoices, and you will definitely be spending money and making payments out of your bank account – but you can keep a track of all that with a spreadsheet and your bank statements. You don’t need a book-keeper to do that for you, at $50/Hr.
Just be sure that you keep all receipts and invoices safe so that your accountant can correctly optimise your tax return.
Your business. Your money. Keep a track of how you are burning through the runway you agreed with your accountant, on a spreadsheet (comment below if you’d like my excel runway-tracker spreadsheet forwarded to you).
The benefit of logging your expenses yourself is that you gain an insight into where the money goes and what return you’ll be getting from it. For instance, it is too easy to lose sight of how much you are spending on advertising if you leave it to someone else to keep a record of it.
This is a good discipline to get into as your business grows and gets more complex.
Don’t get caught up in the trap of thinking you need an accounting system at this point. They cost you a chunk of your runway and setting them up and running them gets you thinking you need the paid services of a book-keeper. Not Yet! They are more of a distraction in The Experiment phase, than they provide real value.
This phase sees you taking what you are learning in The Experiment; what works and what doesn’t, and trying to build a consistent way of delivering your product or service offering to create reliable and scalable income. It is characterised by:
- Increasingly CONSISTENT revenue
- Overall costs may still exceed income, but you are starting to see good Gross Profit margins.
- Still a lot of hustle and some new experiments, but a growing pattern of activity and consistency of results allows you to predict some expenditure and income.
- Increasing volume of activity may need some systemisation of your operations and/or admin support.
Touch base with your Accountant. Are you reaching any sales tax or personal tax thresholds that he can advise you on. You may need to register for GST/VAT/State taxes if you haven’t already.
Is your accountant aware of any sources of funding that might help to extend your runway or to help your business move to the next step?
A good book-keeper will be able to help you set up systems to collect and analyse your financial data, if the volume of transactions are getting too much for your excel spreadsheet.
From the growing pattern of your expenses, as shown on your spreadsheet, you should be able to create a suitable chart of accounts for a new accounting system, and to define meaningful reports that you can run out of the system.
Points to look for in your book-keeper:
- Like your accountant, they have experience in your industry.
- They don’t insist on using the system that they are most comfortable with, if it doesn’t meet your needs
- They can set up a chart of accounts that will clearly show you a breakdown of profit between gross and net. (This will be crucial as your business grows and you should start to collect this data early).
- They can set things up for you to run yourself and don’t insist on a weekly or monthly retainer to run a report (your choice , of course).
Your business. Your money. As you are growing and getting more consistency it is ESSENTIAL that you keep on top of your numbers. Your business success is dependent on you seeing how the business is performing on a weekly basis – your cash position and profits – and being able to spot and adjust things that aren’t working straight away.
Getting a weekly routine in place; to run reports, look over your bank position, bills to be paid, and to make some planned changes is a great discipline to get into in this phase.
When I work with clients going through this phase we talk about the last hour of the week. Maybe 4:00 or 5:00 on a Friday… when the phone has stopped ringing and all your deliveries have gone. A great time to sit quietly, run some reports or print off your bank statement and excel spreadsheet, and reflect on where your business has headed during the week and where you want it to head next week.
I say weekly rather than monthly. Why? Because if something has started to go wrong at the beginning of the month – like poor engagement with an ad campaign – it could prove to be a very costly mistake by the end of the month. Looking at your numbers on a weekly basis allows you to make changes before too much damage has been done.
This phase sees you taking the data from the Lessons Learnt phase and literally doing more of what works and cutting out what doesn’t. You will be building a scalable business, with systems and the confidence to grow, including staff.
It is characterised by:
- A revenue model that is designed to give consistent results
- A full understanding of where your profits come from
- Increasingly consistent processes that can be documented and systemised
- A growing complexity of financial transactions and financial decisions
- Increasing pressure on cashflow from higher overheads and extended cash cycles
The right accountant can add enormous value to your growing business. Provide tactical and strategic advice, help improve cash flow, forecast financial performance, give visibility over the levers you can pull in your business to improve profitability….leading to improved business value.
Many tax accountants won’t have the capacity, capability or industry knowledge (of your business) to deliver these high value-adding services. They are focussed on serving clients’ tax needs; helping with business structure and ensuring compliance with tax and regulatory authorities.
This is why it is so important to spend time to find the right accountant for you, your business and your overall financial circumstances.
If you haven’t done so already you should be looking to put repeatable and value-adding processes and systems into your business during this stage.
Your book-keeper will be a key consultant to help you in implementing these. The focus will be on the financial processes and systems that act as the repository for all activities in the business. [Note: very few activities or functions of a business can be undertaken without a financial transaction being recorded].
Getting a detailed chart of accounts implemented that allows you to run meaningful and action-oriented reports is a key. Focus on what reports you need to help you grow the business; working back from this will help you design the chart of accounts.
Implementing systems that record all transactions with as little manual input as possible will both save time and the risk of mistakes being made.
Helping you choose the right system for you will be a key role of the book-keeper. Again, if they have experience in your industry they will know the relative benefits of different systems for your business.
Book-keepers are key resources for helping you process payroll for your growing staff, and keeping your payroll and other tax payments correct and made on time.
I would suggest that book-keepers are not there to provide advice, but to provide transactional support for your business.
Your business. Your money.
I can’t stress strongly enough that both accountants and book-keepers are paid advisors. They are there to give you valuable advice and guidance, but are not accountable or beneficiaries for the success of your business.
As a founder it is both in your interest, but also your accountability, to know your numbers and to learn how to interpret them and use them to make decisions for the success of your business.
And also to choose and use your paid advisors as valuably as possible.
It is important for business founders to gain an appreciation of the questions to ask of both accountants and book-keepers and the value that they should expect from each.
Beyond the Doubling Down phase a growing business may go on to employ their first Finance Director or CFO. As a founder, you will want to feel comfortable about interviewing them and knowing how to spot the right candidate.
Dean Craven qualified as a Fellow Chartered Management Accountant in the 1990s! He has spent his career using the skills and experience to help large businesses around the World get organised and grow.
Now he is focused on helping startups and early-stage businesses to grow-in-control; to scale to be sustainable businesses to provide personal and economic growth for their founders.
He doesn’t advise on tax. He doesn’t want to be your accountant. He wants you to have the knowledge and confidence to have better “Conversations with your accountant“, to keep a handle on your cash and know where your profit comes from.