Penny wise and pound foolish. That’s a term you hear tossed around regularly. For those unfamiliar with it, we are referring to those who cautiously save a little money on one thing while wasting a lot of money on something else, like opening a credit card just to get the discount, and then paying the balance over time, thus spending more on interest than the original discount obtained. Or the guy who drives 25 extra miles to save $.02 on his gasoline. Not only has he used more fuel; he’s put more wear and tear on his engine.
Unfortunately, we see it way too often when it comes to spending money on Finance and HR (G&A) in the world of Silicon Valley start-ups and early stage companies. Instead of spending valuable highly-compensated time working on promoting their technology or managing the myriad of interesting personalities that constitutes their development team, many first-time CEO’s spend their time married to Microsoft Excel spreadsheets where they believe tracking ownership and capitalization of their companies is critical. Little do they realize that if they don’t achieve their milestones, who owns what will be a moot point.
Or they spend many hours putting together a financial plan without benefit of multiple-company experience (trends), an understanding of generally accepted financial statement presentation, or knowing what the investment community is looking for. We always tell our CEO’s that THEY raise their investment money, and that’s accomplished by their ability to articulate their understanding of the market and the technology. The financial plan is part of the package, but their time investment needs to be spent on what’s going to make the deal happen.
I think the saddest for me is the CEO who wants to be a bookkeeper. After all, anybody can use Quickbooks, right? Yes, and children can jump into a car, put it into gear, and take down the garage. In truth, Quickbooks is a low-cost accounting solution, but STILL an accounting package that should be used by trained accountants. Sure, anyone can enter data. But only trained accountants or very expensive auditors can clean up that data to reflect generally accepted accounting principles. And if you think you’ll wait for the fixed fee audit to take care of it, think again. Auditors will pull off of an engagement when they are unable to readily obtain the information necessary to perform their procedures.
Angel and Venture Capital funds always encourage prudent and careful spending of their investment dollars. This does not mean saving money to the detriment of a successful business or exit opportunity, however. We see many companies spend major money recruiting the best team, housing & feeding them, providing excellent benefits, and then scrimping on their basic accounting work. Then, that amazing team creates a hot product and the company ultimately fails because it has not invested appropriately in basic infrastructure to position it for growth. Worse yet, I know a CEO who told me that his failure to adequately implement basic accounting and tracking procedures early in his company’s life resulted in an M&A opportunity turning sour. Ouch.
And then there is the other side to this coin: the overly-enthusiastic CFO who insists on investing $500,000 of a company’s $5 million Series B investment in an ERP system when the company hasn’t even released the product for testing. I’ve seen that disaster a number of times also, and it contributed to the ultimate demise of the company every single time because the focus was on how many billions the owners & officers were going to make instead of getting a stable reliable WORKING product out to customers that really wanted them. No wonder CEO’s and investors are wary.
Financial planning, accounting system implementation and capitalization tracking are all very important activities, but they should be “right-sized” to fit a company’s current requirements and future plans, and handled by the best qualified people for the job. Right-sizing your company’s general & administrative investment means doing what is necessary today, and always keeping an eye on the future.
Saving a buck by implementing Quickbooks without technical guidance will result in a 10X - 30X investment later to implement it correctly.
Creating financial plans that consist of a list of expenditures does not result in a cash flow projection that you or your investors can rely on. And Cash is King (or Queen) in this valley.
Having your Office Manager handle HR issues and payroll, blissfully unaware of legal implications and tax laws related to certain decisions, could result in personal liability for the CEO.
Some CEO’s say they will wait to spend money on G&A until absolutely necessary. Sure, you can do that. And then you can explain to your investors why the audit and tax preparation fees are ten times the norm. Or why you can’t attract the best employees because the company has uncompetitive benefit plans. Or why you cannot tell them how much your product costs because of the lack of appropriate systems planning and cost accounting implementation.
As in all things, balance is the key. Depending on the stage of your company, you need some things now and other things can wait. I would suggest the following basic MINIMUM general & administrative functions for companies in Product Development and working through Seed, Series A, B or even C. These functions should be handled by experts and can normally be handled on a part-time basis, requiring minimal investment.
CFO/Controller – generate financial plan or review/revise existing so that it is in standard financial statement format and easy for a reader to comprehend; review & advise on all fundraising documents; setup basic systems (Quickbooks) & procedures
HR – source resumes & handle recruiting if hiring > 3 employees
Ongoing Finance, Accounting & HR
Accountant- Vendor invoice processing & payments (sometimes can train internal staff to handle this)
Controller/Bookkeeper – review posting of vendor invoices, close books monthly, generate monthly financial statements
CFO/Controller – actual/plan variance analysis; update CASH forecasts regularly; maintain capitalization records & reconcile with attorneys
HR- setup/maintain benefit plans; process payroll
Annual Finance, Accounting & HR
Controller – annual closing & financial statement preparation; audit workpaper preparation; legal compliance (1099, W-2, property tax, income tax, etc.)
CFO – annual plan preparation
HR – annual ERISA filings; benefits renewals
I once opened a fortune cookie, which read “If you don’t know where you’re going, you won’t know when you get there.” Right-sizing the G & A investment so that you get the information and infrastructure you need to help you achieve your goals at the most efficient cost is an essential decision toward the future success of your company.