Understanding Finance 101 is Key to a Start-up’s Success
Founders wear many hats. Financial accountability trumps the others but often is not one that they feel comfortable donning. Bringing in an expert enables them to focus on other company building tasks, without jeopardizing the firm’s future.
Entrepreneurs were hardware or software engineers, maybe a top salesperson, or a marketing guru. Most of them don't have accounting or finance backgrounds, which is understandable. But they need to get one – or find outside help. Ultimately, how well they handle their money will determine their firm’s success or failure.
Initially, entrepreneurs need to focus on clarifying their market niche, designing a product that customers want, engaging with investors, and building their brands. As the company takes shape, their roles evolve, and they are pulled in more and more different directions. The enterprise needs office space, a Human Resources department, a supply chain, partners, and a support department.
Finances’ Role is Key
All of these chores are important, but the most vital one is accounting. CEOs need to know how to manage the corporate finances because more money is going out than coming in.
Oftentimes, start-up companies take a superficial approach to fill this void. They outsource the accounting service or hire a bookkeeper to handle the billing matters. Founders watch the cash burn rate but little else.
The problem is finances are the business’ epicenter, and managing them is as much art as it is science. Done well, the process enables a company to last long enough to secure the next round of funding. Done poorly, the business suffers and maybe even fails.
Fine Tune Your Financial Processes
Many start-ups do, and often, they could have done better -- in some cases much, much better. I have seen many misclassifications on financial statements, such as an investor infusion recognized as sales revenue, a purchase refund was also classified as revenue, sales taxes were incorrectly recorded, and assets and expenses were misclassified. Such slipshod practices put the company at risk – unnecessarily.
Instead, financial statements should be a powerful tool, so management quickly understands how the corporation is faring. If the founders do not understand financial statement implications and options, they cannot make sound business decisions because they lack the full picture.
Finances’ Input is Key to All Business Decisions
A basic financial understanding provides context to every core business decision. Here are some decisions that a start-up company commonly encounters where deep financial planning and understanding impact the decision:
Should we take the development project at this sales price?
How much inventory should we purchase?
Should we buy or lease the equipment?
Is now a good time to implement a new system?
Should we automate the process or continue working manually?
Do we have enough manpower to accept 2 projects? If doing these 2 projects at the same time is crucial, how can we find additional resources?
Should we hire for this position?
Do we sign a leasing agreement?
Should we outsource or build in-house?
What employee benefits can we offer?
Is there a way to lower our logistical costs?
When will the company be out of cash?
Why is the actual spending higher than budgeted, what happened?
In sum, finances touch upon every aspect of the business. The owner may not know all of the ramifications by themselves. Hiring a financial expert helps them sift through such issues, so they use the money they have as wisely and beneficially as possible.
About PeiChun Chiang
PeiChun Chiang has more than 15 years of experience in the start-up ecosystem. She worked with companies, like XGI/ATI (acquired by AMD), Lucid Motors, and Parade Technologies, to deploy strong financial systems and create robust financial business processes. As the founder of Start-Up Way, she ensures that new companies maximize their available financial resources.