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.
Here’s an example: you open a credit card just to get the discount, and then pay the balance over time, thus spending more on interest than the original discount obtained. Or the person who drives 25 extra miles to save $.02 per gallon on gasoline. Not only have they used more fuel; they’ve put more wear and tear on their engine.
Ravix Group offers outsourced accounting and bookkeeping services to free up your internal resources to focus on the big picture — and keep your CEO out of the accounting software so they can mind the business.
Rightsizing Doesn’t Mean Skimping on Accounting Resources
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 CEOs spend their time married to Microsoft Excel spreadsheets where they believe tracking ownership and capitalization of their companies is critical. However, 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 CEOs 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.
By utilizing outsourced accounting for startups, you can take the burden of number crunching off the plates of C-suite leadership. This frees up your executive team to grow the business and look for a profitable exit strategy.
CEOs Are Not Meant to Be Bookkeepers!
The saddest example 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 out 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 and 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, we’ve come across at least one CEO who failed to adequately implement basic accounting and tracking procedures early in his company’s life, resulting in a missed M&A opportunity. Ouch!
CFO Accountability: Select the Right Person for the Job
Here’s another startup-killing trend, the overly enthusiastic CFO who insists on investing $500,000 of a company’s $5 million Series B investment in an ERP system before having a viable product for testing. That disaster can contribute to the ultimate demise of the company because the focus was on how many billions the owners and officers were going to make. In the meantime, nobody was paying enough attention to getting a stable, reliable, working product out to customers that really wanted them. No wonder CEOs and investors are wary.
Financial planning, accounting system implementation and capitalization tracking are all very important activities, but they should be “rightsized” to fit a company’s current requirements and future plans — and handled by the best qualified people for the job. Rightsizing your company’s general and administrative investment means doing what is necessary today, and always keeping an eye on the future.
Choosing the Right Person for Every Other Job, Too!
Resources assigned to financial and HR roles need the right skillset and experience to do the jobs properly.
Consider the following:
- Saving a buck by implementing QuickBooks without technical guidance will result in a 10X to 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.
Avoid these costly mistakes by considering which jobs to keep in-house and which ones to delegate to your outsourced accounting and HR consultants.
Some CEOs 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.
G&A Expenses That Can’t Wait
Follow basic MINIMUM general and administrative functions for companies in Product Development and working through Seed, Series A, B or even C. The following functions should be handled by experts and can normally be handled on a part-time basis, requiring minimal investment:
- Raising money: The CFO or Controller generates a financial plan or reviews the existing one so that it is in standard financial statement format and easy for a reader to comprehend. These roles also need to oversee all fundraising documents. You can hire cheaper resources to setup basic systems and procedures in the early-stage phase. However, you may want to hire an outsourced controller or fractional CFO to oversee the process. This gives you flexibility to pay for these services only when you need them.
- Recruiting: if you plan to hire more than three people, you need someone to source resumes and handle the recruiting and onboarding process. This person needs to understand state and federal laws regarding employment, such as anti-discrimination laws, and when it’s OK to hire a contractor versus a full-time employee.
- Ongoing Finance, Accounting and HR:
- Accountant: Vendor invoice processing & payments (you can sometimes can train internal staff to handle this)
- Controller/Bookkeeper: Review posting of vendor invoices, close books monthly, and generate monthly financial statements
- CFO/Controller: Actual versus plan variance analysis; update CASH forecasts regularly; maintain capitalization records & reconcile with attorneys
- HR: Setup and maintain benefit plans; process payroll
- Annual Financial Accounting & HR:
- Controller: Annual closing and 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
“If you don’t know where you’re going, you won’t know when you get there.” This wisdom comes courtesy of an insightful fortune cookie.
Rightsize 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. This is an essential decision toward the future success of your company. Because you can’t blame or credit your failure or success on a fortune cookie. And, you won’t have to if you set up your GA spend strategically.
Ravix Group offers the best outsourced accounting services for early-stage companies in San Francisco. You’ll also need reliable HR consulting for startups to support the ongoing and periodic essential tasks discussed above. Contact us online or call (408) 216-0656 today to set up an appointment to discuss how to get your startup to the growth and acquisition stages with judicious GA investment.