We’ve interviewed multiple professionals in the FinTech world that have experience scaling startups. After each chat, we came away with similar takeaways: if you don’t set things up right the first time, it’s going to come back to bite you.
If you’re an accounting god, rock on! You probably know how to do everything on-schedule and are aware of the benefits and consequences of waiting. For the rest of us mere mortals, we’ve provided a deep dive into pitfalls and possible solutions, focusing on questions we frequently get asked by founders and business owners.
You’re smart, business-savvy, passionate about your product, and unstoppable. The idea of spending hours looking at spreadsheets and tracking every penny your new company eats up makes you want to take a hike. Building something cool and useful, and interacting with your first customers, is undoubtedly more exciting. Nonetheless, setting your accounting software up correctly, from the get-go, will save you a lot of time, money, and headaches in the long-run.
Well, if you talk to the same pros we did, it doesn’t sound like you can get started soon enough.
Leslie Harding at Pilot suggests that there’s no need to wait for a certain milestone in order to start properly tracking your cash flow. Dave Emmerman at Emmerman, Boyle, & Associates agrees: new companies create transactions before the entities are legally formed (for example, filing for a business license), so, just as money starts swapping hands on Day 1, you’ll be best served by having your accounting software set up on Day 0. Yes, that means that accounting software should be one of the first pieces of your back-office stack. Before you hire employees, before you worry about human resources or payroll services, and before you sell an item or a service, or onboard vendors. And definitely before you seek funding from investors.
And that brings us right into the consequences of waiting too long. No, your company isn’t going to instantly implode, and no, if you’re reading this and haven’t set up your company’s accounting software yet, you’re not in trouble. However, it is possible, and even probable, Dave says, that your records won’t be as accurate as they could have been. Information gets missed if it’s not properly documented or hitting software.
Accounting software helps keep your expenses categorized, which affect your tax liabilities at the end of the year. Evelyn Chan at Plaid suggests some of the common side-effects: putting off that record-keeping makes preparing for audits much more time consuming, and may even make getting funding from investors a non-starter, as they usually want insight into your finances.
Having solid financial records helps a founder and/or business owner understand the financial health and progress of the company, have a seamless tax filing at the end of the year, and sets oneself up for organized, calculated growth. Luckily, there are plenty of great options out there for businesses small and large. For early stage companies, two options stand above the rest: Xero and QuickBooks Online.
Both of these tools have a proven track record, with each boasting over a million businesses relying on them for all or some of their accounting needs.
You’ve likely heard of Intuit’s QuickBooks before -- it’s been a juggernaut in the accounting world for the better part of two decades, and at one point captured over 90% of the market. The online version, referred to as QBO, has all of the core functions that the traditional desktop version has, while having the benefits of a cloud connection, seamless backups, and more. Rest assured, this is a player that’s here to stay.
Xero on the other hand, came into the field about a decade ago, looking to disrupt the space. Slava Heretz of Intelli Bookkeeping notes that tighter direct integrations and connections with more banking partners make Xero an excellent choice. Will Lopez at Advisorfi agrees. One of his favorite features is Xero’s app marketplace, which helps you scale your company as needed. Just like the app store on your smartphone, Xero has an app marketplace that allows you to integrate new tools as needed.
If you’re a payouts-heavy business, you really can’t go wrong with either of these two platforms. They’re both solid, and relied upon daily by businesses smaller and larger than yours. However, if invoicing takes up more of your time, take a closer look at Xero. Its ability to assign inline discounts and tax classification, rather than transaction wide ones, like QBO, gives you a level of granularity that you will need for tracking revenues in the long-term.
We’ll go into a breakdown of the best platform per industry and business-type in more depth in a later article. If you have a preference for another accounting software out there, no big deal, just make sure it’s an online platform. Everyone we talked to stressed this repeatedly: the cloud enabled software packages often have better backup and sync management, keeping your data safe and up-to-date in the case of a server failure or an office break-in.
Once you’ve committed to a certain solution, the set-up is the next task. Founders often take on the bulk of the work here, as they are the first ones who need to use it. And managing it, at least at the beginning, often falls in the lap of the founders as well. After all, they are the ones who need the most insight into their cash flow and business expenses. Both Slava and Leslie remind us that QBO and Xero have engaged online communities that help you learn the ropes and master their respective software. They also host online training sessions and exams, allowing users to earn certifications.
However, formal training is often required to understand and comply with accounting principles and tax codes. Evelyn and Will have a great alternative for those of us who aren’t as comfortable with the ins and outs of accounting: hiring an outsourced professional (either a firm or individual). They can recommend the right solution that fits your business model, and more importantly, help with the on-boarding and training process, so that you and your team can keep the back-office neat and organized.
Having that accounting professional on hand can also act as an insurance policy against an IRS audit, or overpayment of taxes due to improperly categorized transactions. This alone can make the decision to work with a professional a no-brainer, suggests Slava.
For these reasons and many more, it’s not uncommon at all to work with an accounting firm, to hire a bookkeeper, or to adopt a hybrid strategy. As businesses grow, they often bring more of their accounting in-house, and their relationship with their vendors and advisors change. According to Will, outsourced accountants often move from a number crunching role into a more consultative one, providing checks and balances on the decision makers, putting spending categories into perspectives, and aligning business strategies with the financial realities of the entity. The more breadth of knowledge your consultant has, the better equipped they are to warn you about potential pitfalls, and help steer your company towards success.
In our next piece, we’ll cover the best practices for choosing an accounting advisor to help you scale your business.
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