5 Accounting Challenges Startups Face and How to Help Them Thrive

Startups tend to operate on shaky ground. Look at the facts: 82% of small businesses fail due to poor cash flow. 90% of startups will fail - period.

From the moment a CEO starts pouring time and money into an idea, a rock-solid financial foundation is key to increasing the odds of success. If company owners don’t have a realistic view of their financials and are not set up for capital raising, reports, and tax prep, their dream may fade away before they ever get a chance to open their doors.

As an accountant or bookkeeper, you can help prevent startups from going under or losing profitability. The key is understanding a startup's challenges and providing solutions to facilitate company growth.

You may hear some accounting professionals talk about horror stories related to startups. Maybe startups couldn’t pay them or could only pay in equity once the company was up and running.

The truth is... startups need you. Desperately. If you know the processes and tools to help them, you and the startup can have a win-win experience. You’ll be the expert guide they need and they will have a greater chance at making it. 

To get started, we look at the five main challenges startups face and how you can offer solutions.

Startup Struggles That Keep Them Up at Night

Cash Flow Woes -- Startups require brutal honesty about their financials. That includes cash flow.

Cash flow reports indicate how much cash can be expected, and when. This is usually based on contracts or recurring revenue, or for the farm projecting production times pricing, minus ongoing expected expenses.

Help your startup clients stay cash flow positive with good budgeting and planning services. Minimize expenses and reduce debt payments or lower the cost of inventory. If the startup is already operating, have your clients invoice customers as soon as possible. You also want to establish a clear process for accounts receivable. 

Strong cash controls also help keep your startup capitalized, including daily counts for your dispensary clients. Make sure you provide them with a monthly cash flow statement to help them prevent spending more than they make. Using a rolling cash forecast is a value-add service you can provide to assist in cash forecasting. A rolling cash forecast will normally look forward 6 or 9 months, and each month the oldest month is removed and a new month added. The rolling cash forecast is one of many CFO-level skills we teach in our program.

Struggling to Find Committed Investors and Sufficient Capital -- Not having enough capital is a huge problem. Startups either need coffers of funds saved or access to an investor or friend/family willing to help fund the venture. If they have to rely on capital raising, it’s hard for companies to attract private or institutional investors in competitive markets without a great accountant and strong financial model.

Helping your startup attract an investor begins with understanding an investor’s challenges. Investors want to see a number of worthy components before they sink money into a company. They look for strong and experienced leadership, a good track record, a product that solves a problem and fills a high demand, and intellectual property that has a ton of value and is disruptive. And of course, investors want to see impeccable accounting from the very beginning. 

You see, a good idea just isn’t enough for raising capital. Convincing investors to fund your client also requires you to prove solid numbers and components. This data includes a capital plan, proper entity structure, pre-revenue valuation, and raise structure (convertible note or direct equity).

Another high-value service you can offer your clients is helping them develop and present a pitch deck. A pitch deck is a prepared set of documents you must have in place to pitch to investors. The deck includes:

• Bullet-proof financial model
• Management team that shows prior proven success
• A good story that answers the why, where, how, and the key problem and solution the product tackles
• Market analysis that looks at TAM (total addressable market) and what shares will be from year three to five
• Competitive analysis that allows your client to determine why their service or product is superior
• And much more

Tracking Financial Data --  Reporting, recording, and storing all financial data for a startup can be overwhelming, if not a total mess. You will almost always need to do cleanup with a startup, especially if they have been operating for a while. If the company is still just an "idea," cleanup may be more simple. Even then, you’ll have to track operation costs, building and lease costs, and license fees. Other data you’ll need to track include accounts receivable and inventory.

Without properly tracking data, a startup would quickly find themselves way in over their heads. They may run out of money because weren't watching every transaction. Plus, they will likely run into tax or legal trouble down the road if their tax returns are incorrect.

As an accounting professional, you need to set up many processes for efficient data tracking, including:

• Month-end tie-out system to close out balance sheets, reconcile general ledger accounts, with full tick marks 
• Perpetual data room that gives all applicable parties access to reports, transactions, and tax information at any time

• Permanent audit trail that creates a comprehensive audit-ready history that CEOs, investors, operators, board members, and shareholders can access now and for many years in the future (even if you’re no longer in the picture)
• Chart of Accounts (COA) that shows an index of all financial accounts in a general ledger so you can easily show a breakdown of all transactions during a specific period

These four tools are just a few of the key components you’ll need to properly track financial data. For more information on skills and tools you need to organize financial data, check out our CFO Bookkeeper program.

Managing Taxes and Sales Tax -- Almost every business must file and pay taxes. Tax law is highly complicated. Different requirements are based on factors such as the business’s entity type, income, and more. Businesses also have to deal with sales, income, and local/state/federal taxes.

For startups, tackling taxes can be particularly overwhelming. Start by looking at state and local tax requirements for your startup client. Even if you don’t prepare tax returns, you can help them prepare for taxes by determining sales tax. For instance, when your client sells tangible personal property (TPP), they must collect and remit sales tax.

Depending on your startup’s industry, you’ll also want to get familiar with specific tax codes and local, state, and federal regulations to ensure your client is staying in compliance with all tiers of tax law and minimizing their tax liability.

Payroll Software and Processing -- Many startups beyond the “idea” stage have employees, which means that payroll is an unavoidable task. Making sure that payroll is accurate is essential to avoid unexpected expenses, tax complications, and possible legal issues.

However, establishing effective payroll procedures is often a challenge. Startups usually don't have the ability to handle this task in-house. Without payroll properly set up, the company may grind to a halt. 

Payroll is yet another opportunity for you to step up and provide invaluable services. Begin by understanding payroll regulations and how to set your clients up with a system like Gusto. Using these automated outsource options ensures that everyone gets paid properly and makes your job a little easier. Developing a payroll process and relying on a platform like Gusto also helps you keep the company from shorting itself (or paying too little) on employment taxes.

Accountants and bookkeepers may need to work beyond their comfort zone sometimes with startups. Often, you may need to adopt new roles as strategist and capital raise advisor. Yet, offering solutions to a startup's problems gives them a stronger chance at success,  and helps you rise quickly as a trusted leader.

If you want to get an edge on the competition and effectively serve startups, check out CFO Bookkeeper today.