Startups are able to leverage their small sizes, lack of red-tape, and faster decision-making to get ahead of their larger competitors in a range of areas, especially innovation.
With a competitive edge comes growth, and with growth, typically comes a stream (or in some cases, a waterfall) of capital. Be it the revenue from sales, venture capital (VC) funding, or new lines-of-credit, the intake of money is both welcome and worrisome.
No matter the source, money comes with accountability.
It could be to investors who are looking for a return-on-investment (ROI), to the banks asking for their loan payments, or to yourself and your team wanting to a positive balance sheet.
In any case, each one of these ties back to one (or several) of the following accounting issues that a lot of startups face, especially in their early growth stages.
Top 5 Reasons Startups Fail According to CBInsights
1. Avoiding Cash Flow Problems
According to the US Bureau of Labor Statistics, 20% of new businesses do not survive beyond the first year of starting. A major reason for failure is inadequate cash flow to sustain their daily operations, find new ways to innovate and compete, and invest in growth.
These cash flow problems typically come from the following issues:
Difficulty Controlling Expenses
The simplest — and arguably, the most common — cause is the inability to control expenses.
This can occur in a variety of ways, such as leasing expensive office space, licensing software and tools that exceed your requirements, or having too many employees.
You might also have debt obligations to banks and other lenders, which adds to your strain and makes getting enough cash to sustain operations and invest in the future difficult.
The first step to solving these issues is to get an accounting team to conduct an audit and offer visibility of where your money is going. Once you identify inefficient spending, you can address cash flow issues by cutting spending, restructuring repayment, and other measures.
Payments & Costs Out-of-Sync
One significant reason for cash flow issues is your cash inflow — i.e., payments from customers or clients — being out-of-sync with your expenses, such as debt repayments.
Unfortunately, this is often a result of how some industries and businesses work. For example, some businesses will expect services, such as the asset tracking management and maintenance of software assets, for 30, 60, or 90 days before paying. On the other hand, you may need to begin paying your own suppliers right away.
This puts you at risk of negative cash flow, which you then need to fill with your own money or a loan from a bank, which you have to repay later.
Your accounting team could help prevent — or quickly close — those gaps by sending out your invoices as soon as possible, so as to ensure you’re able to meet your obligations immediately and start freeing up capital for growing your company.
2. Not Getting Enough Visibility of Your Financial Information
With many, and continuously growing, streams of money coming in and out of your startup, you will get flooded with lots of financial information.
If you fail to track and organize that information, you could be at risk of falling behind on your payments, running into negative cash flow, and other problems. However, that lack of visibility could also lead to larger problems for your business.
Not Getting Enough Margin
The first of these problems is not getting visibility into the actual cost of producing and delivering your product or service. This could cause you to under price your offerings such that you will not get healthy margins from your sales (or in some cases, no margin at all).
If not the risk of selling your offerings at a loss, you’re certainly at risk of not bringing in enough revenue to independently grow your business. Though VC funding isn’t inherently bad, banking on that alone would mean losing your equity (and potentially, control) in your company.
Insufficient Documentation of Financial Activity
In addition to capturing visibility of costs, a good accounting team will also help you document your financial information for regulatory, compliance, and other liability purposes.
Be it banks looking to see the viability of your business in order to issue a loan or VC investors wanting to see where things stand, you need to provide what they want on a moment’s notice.
Not only would failure put at risk of losing funding sources, but it could also result in unfavorable outcomes during legal disputes and audits.
3. Difficulty Managing Payroll
You need employees to drive your operations, so payroll is unavoidable — but it’s also a massive time-sink. You’re already busy enough trying to direct your company towards growth, so dealing with payroll issues isn’t a good use of your time and energy.
Unfortunately, someone has to administer payroll. Not only is it an issue of ensuring that you’re spending efficiently, but a tax compliance issue as well.
4. Managing Tax Issues
No business is spared from having to file and pay tax. Worse, tax law is very complicated.
Unfortunately, tax-related questions start right from the beginning: everything from how you incorporate your business, to who gets equity, to the state or province you operate in, and to industry or type of business you have is a tax issue.
From there, you’re accountable for federal tax, state/provincial tax, and a host of others based on where you’re operating and other factors that only good startup-focused accountants could understand.
Conversely, to gain access to tax breaks and tax credits, you require accountants who know the specific regulations and have experience securing those gains.
Getting an accounting team in place might seem like a needless expense. After all, you can just set-up a few tools, and you can for a start.
However, as you grow, so will the complexity of your financial issues. In the best case scenario, you might avoid financial problems, but without real accountants at the helm, you will lose out on financial opportunities.