Building a successful startup is never an easy, trouble-free endeavor. It requires true grit and determination, and even then, success isn’t promised. Many fledgling companies don’t make it for various reasons, but according to CBInsight’s 2021 research, the number one reason is that the business simply runs out of cash.
This can be accelerated by not investing in a strong accounting infrastructure that shines a spotlight on the true liquidity situation of the business. Establishing and maintaining a proper month-end closing process at the very beginning of a startup is integral in this process.
When I joined Capchase in January 2021, the company was barely one year old and had only recently raised our first financing round. Capchase had already established a sizable customer base and showed an ability to generate consistent revenue. At the time, we were closing monthly books by working with an external accounting firm. They were a great accounting partner who helped us not be held down by accounting while we were building the company quickly.
The flip side to using outsourced accounting is that, as the business started to scale and complexity increased, the less involved approach of outsourced accounting was becoming increasingly insufficient for the needs of the business. We needed a team who could think through the many challenges and opportunities regarding our accounting infrastructure and processes full-time.
Whether it be the speed of reporting or the depth and replicability of more established processes, it was clear that the business was at a place where it needed more hours in the week focused on up-leveling the accounting function. Because of this, one of my early projects was to put in place an effective accounting process and procedure which catered to Capchase’s unique business model.
The following tips revolve around areas that we focused on to make the FinOp process go a bit smoother. I’m sharing them because they may be useful to peers who are looking for guidance or advice in building an effective closing process for startups.
1. Save time with rule-based bank reconciliations
In the most simple definition possible, an accounting book is made up of a collection of numbers—thousands of data points that all have to be extremely accurate. If the numbers are not accurate, then the financial statements cannot be trusted.
Therefore, it’s critical to ensure all transactions have been properly entered into the relevant accounting software. For startups, most of the transactions originate from banks. So, the first step in closing the books each month is to always ensure that all bank accounts are reconciled correctly. This means verifying that all transactions from the past month; including payroll, vendor payments, interest income or expenses, and tax payments, have been recorded properly. Reconciling accounts is critical in catching any errors or discrepancies before they become an issue further down the line.
Most early-stage companies’ accounting teams will have up to three or four bank accounts created for managing cash movements including:
- Inflows: customers receivable (lockbox or deposit).
- Outflows: payroll, operating expenses, and equity-based compensation.
However, at Capchase, given we are in the “money movement” business, the flow of funds has been fairly complicated since inception. Before hiring junior staff to help, we had to deal with approximately 20 bank accounts during the month-end close. And that’s not even mentioning the other accounting schedules (prepaid, accrual, fixed assets, equity rollover, consolidation) that needed to be prepared and reconciled as well.
So how did we save ourselves from this endless reconciliation nightmare?
We connected our banks to our accounting system (NetSuite) and utilized the “Bank Fee Match” feature to create reconciliation rules for recurring transactions. With this feature, the system auto-creates journal entries based on a predetermined system of rules.
It is inevitable that not every transaction can be indexed automatically by this system, however; it did significantly reduce the manual work of this tedious bank reconciliation process. By adopting rule-based bank reconciliations, we were able to tackle 20 bank reconciliations within 2 business days.
2. Create a scalable internal process for revenue recognition
It’s no secret that revenue is critical to business success, especially for startups, as startup investors typically show a heavy focus on top-line growth. Bringing in revenue is already difficult enough, but tracking it presents its own unique challenges.
Calculating revenue and knowing where your business stands financially requires a good understanding of one of the most important GAAP principles: revenue recognition.
At Capchase, our revenue recognition model is relatively simple. We were able to set up formulas in Excel to run the top-line recognition. However, with the rapid growth of our company’s portfolio, the Excel file soon became too cumbersome to handle the lengthy data sets. We had to find a way to automate the process.
The immediate solution that we explored was finding a ready-to-use tool from the market. However, for many startups, this isn’t an ideal option, as these tools are often expensive and require training to master. In addition, for the ever-evolving business models of startups, utilizing external tools can increase the complexity of revenue recognition as they are not always as flexible as you may need.
So, instead of going this route, we at Capchase used our data team to mimic the Excel formulas and build a query in our BI tool to account for revenue recognition. And guess what—it actually worked!
After many many iterations of testing and solving edge cases, we were able to streamline revenue recognition without incurring any additional costs and with added accuracy given the link to the core data source. We also continued to maintain the automated and manual revenue recognition processes for at least the first 6 months following the implementation of the automated tool to ensure accuracy.
This approach might not work for every business as the revenue recognition guidance may vary based on your product line and sales contract structure.
However, the lesson here is that it may be helpful to turn to your internal resources first before reaching out for external help, as internal resources can often understand the business-specific nuances that may trip up external software. You might be surprised by what your internal team is capable of creating without having to spend a dime.
3. Get a more accurate view of your finances by going beyond GAAP
As a startup, you have to get creative about how you present data, internally and externally. One place this may come up is how you structure your financial reports so that your team can view the business holistically.
While GAAP is the prescribed standard for financial reporting, companies often argue that this rule-based accounting method is too rigid to reflect their business’s true performance. In fact, sometimes non-GAAP figures are more appropriate to assess a business's underlying profitability.
For instance, companies typically incur many one-time expenses related to registration fees, taxes, severance, restructuring, or acquisition. These one-time costs aren’t really relevant to the normal course of business, but they could drive financial results and have a significant impact on net income.
Therefore, when presenting the financials to both internal teams and external users, it may be helpful to show the adjusted earnings excluding the extraordinary expense items, this will ensure that the audience won’t be distracted by these outliers and will maintain an objective view of the business.
In addition, startups, especially SaaS startups, may provide a variety of services and solutions to clients. If a business only relies on consolidated financial statements which aggregate all of a business’s financial data points collectively, it will lose the ability to see which business units are thriving or failing.
Capchase is no different – we have incurred many one-time costs, and we also have several different revenue streams.
To better measure and report on the pulse of our business, we’ve gone beyond the standard set of GAAP financials and have developed a set of non-GAAP reports with key metrics that can be reviewed and analyzed during our monthly financial recap.
4. Create a roadmap for long-term success with an accounting wishlist
One interesting aspect of working on the accounting team at an early-stage company is that you are not only involved in the day-to day-transactional work, but you also have the chance to shape and design the accounting infrastructure to achieve operational excellence.
At Capchase, we always maintain a “wishlist” that helps us set long-term goals for our accounting. This wishlist includes a summary of where we are in terms of key accounting practices, as well as an outline of several accounting best practices we hope to implement as our business and accounting matures.
Basically, the wishlist is our north star roadmap that directs the team to set out quarterly OKR goals. We then use it as a checklist to see how well we are performing against those goals.
The accounting team at Capchase is still very early in its maturity lifecycle, and we will require many more iterations of our “accounting wishlist” as we continue on our path toward operational excellence. The north star we are always chasing is ensuring that we execute on initiatives and scale up in a productive, cost-efficient manner.
Gathering intel from other companies that are ahead of us in the maturity cycle always keeps us on our toes, allows us to add new items to our ever-growing wishlist, and ensures that there is never a dull day at Capchase!