Posted by Early Growth
March 28, 2013 | 5-minute read (903 words)
Originally featured in Orrick Total Access Resources.
I’ve seen and worked with a lot of companies that have tried to do their own accounting. It’s not pretty. In these situations, we often have to go back to redo their work and re-file taxes, resulting in a greater cost for the company than if they had just outsourced their accounting from the get go.
Even so, many early-stage startups continue to be on the fence about hiring an accountant to provide financial support. In the early stages, startups are busy trying to bootstrap, stretch limited funds, and cut costs wherever necessary. One of the ways you, as an early-stage entrepreneur, may try to save money is by choosing to manage your own accounting and finances. If you’re an experienced accountant, this makes sense. If not, this could be a serious mistake that negatively impacts the potential growth and success of your business.
I’m not recommending that you run out and hire a full-time accountant. The better, more cost-effective plan is to save on staffing costs by outsourcing your accounting services. That way you can pay for only the exact level of day-to-day transactional work and accounting support that your company needs.
When to Hire an Accountant
So when should you hire an accountant? As with so many early-stage company questions, the relatively unhelpful answer is, it depends. There are many good reasons to contract with an accountant very early on, while some companies may decide to wait. But, here are two good rules of thumb... You definitely need to hire an accountant if:
1. You have raised an initial round of funding. A $500K raise is a good benchmark. If you have raised a Series A, a larger SEED round, or a larger convertible debt round, it’s definitely time to engage with an outsourced accounting firm.
2. Your expenses are significantly increasing. If you have increased expenses to keep track of and have taken on some employees, you are in need of greater financial reporting. When your business starts to grow, it’s important that your understanding of your cash flow and burn grows as well.
What Does an Early-Stage Accountant Do?
Any accountant you contract with should be able to provide a wide range of services to support you through the early stages. Here’s an abridged list of services that accountants provide when you’re:
Up and running:
- Business licenses
- Incorporation filings
- System implementations
- Policies and procedures
- Expense tracking
- Financial planning
Growing your business:
- Month-end accounting
- Revenue accounting
- GAAP financial statements
- Contracts administration
- AR/AP (accounts payable/accounts receivable)
- Tax preparation
- W2 and 1099s
- Financial reports
- Fixed assets tracking
Benefits to Outsourcing Your Accounting Function
- Cash flow analysis
- Audit support and preparation
- Financial forecasting
- Budget creation
As you can see from the list of functions above, your accountant does much more than just sit around with a green eye-shade tallying numbers. An outsourced accounting firm will give you much-needed support in many areas of your business while also providing the following benefits:
Focus on your core business.
Perhaps the most important reason to hire an accountant is so that you and your early employees can focus on building your product, developing relationships, creating partnerships, and marketing and sales. In other words, you have core business versus non-core business. In the early stages, especially, you need to learn to separate core from non-core and focus on your core business, without worrying about other elements.
High-quality financial information.
When you’re trying to raise equity funds or obtain debt or reach out to potential investors, you need to have the kind of high-quality financial information that outsourced accountants provide. These kinds of financial statements are also essential for tax reporting purposes and providing updates to your investors. Equally important, the financial information provided by your accountant will give you great insight into the nature of your business which is invaluable in developing effective business strategies.
A valued business partner.
Outsourcing your accounting function also gives you the advantage of having another trusted business partner. Outsource firms have extensive expertise working with early stage start-ups. This sort of expertise and experience can be invaluable for your company when it comes to raising funds, financial planning, negotiating term sheets, structuring deals, financial reporting, etc.
Essentially, if you think your startup may be in need of accounting support, it probably is! Remember, it’s better to get the accounting support you need early on rather than have to clean up your messy finances further down the road. It’s really never too early to put into place the financial systems and processes that will serve as a strong foundation for your startup and support its financial health.
Are you not sure whether your startup is in need of an accountant? Tell us why in comments below or contact Early Growth Financial Services for help assessing your finances and needs.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.