Building Your Accounting and Finance Teams

When you’re starting up a company, accounting and finance may be the last things on your mind as you concentrate on engineering and sales. Accounting and finance are often spoken of together and combined operationally, but there are distinct differences between them and fundamental reasons why they should be kept separate. This article explains the differences between them, and how you should start building these capabilities.

In a quick nutshell, accounting is more historical-focused and concerned with capturing transactions and ensuring that they are recorded properly for reporting. Finance, on the other hand, is oriented on the future and focused on areas such as strategic planning, forecasting, and budgeting. Both have their place and role in the business.

A company’s accounting function covers a few broad areas: 

1. Ensuring the company’s books and records, including the financial statements, are prepared accurately.
2. Ensuring revenues are billed and collected, and that bills, including payroll and taxes, are paid and other expenses are captured.
3. Instituting policies, procedures, and controls to ensure the integrity of financial transactions and accuracy over financial reporting.

The preparation of the books and records are essential to help you monitor the performance of your business and provide historical information to your investors. The books and records include the financial statements such as the balance sheet, income statement, and statement of cash flows. The financial statements are also important for obtaining loans and may be required by vendors or suppliers for certain contracts, such as leases of office space and major equipment.

The financial statements are also the starting point for taxes – even if you don’t owe taxes because you are early in your startup’s life and don’t have revenues or profits, the losses you incur can be used to offset future taxes, so it’s worth it to start doing your accounting as soon as possible.

Financial statements are prepared according to a set of rules known as generally accepted accounting principles, or GAAP. GAAP is an accrual basis of accounting, which is different from cash. For example, suppose you pay $12,000 for a year’s worth of a software subscription up front. On a cash basis, $12,000 went out at the beginning of the term. However, on an accrual basis, you would match up the expense against the term of the contract; thus, $1,000 of expense would be recognized each month. Similarly, if you sold a year’s worth of a software subscription to a customer for $12,000 up front, you would only be able to recognize $1,000 of revenue each month even though you receive all the cash at the beginning.

The accounting function includes the accounts receivable, accounts payable, and payroll functions. Accounts receivable works to issue invoices to your customers and follow up to ensure that you get paid.

Accounts payable is responsible for managing the invoices received from your suppliers and ensuring they get paid on time, as well as handling any expenses that aren’t invoiced, such as expense reimbursements for employee travel and other small ad hoc payments.

Accounts receivable and accounts payable have operational impact on your business, as they affect cash management depending on how quickly you can collect from your customers and how quickly you decide to pay your suppliers.

Payroll is a regular recurring expense and is handled separately from other accounts payable. Payroll is typically handled through a payroll administrator who will ensure all your employee deductions are correct and handle all your payroll tax filings on your behalf.

Accounting also tracks your equipment, property, and fixed assets and ensures that non-cash items such as depreciation, amortization, and the cost of stock options and equity granted to employees (stock-based compensation) are recorded properly.

A proper accounting function also institutes policies, procedures, and controls into the business to ensure the integrity of financial transactions and accuracy over financial reporting. These include processes to ensure proper approvals are obtained for transactions and proper review of accounting entries to prevent fraud. It also includes managing and configuring systems to enforce these rules.

Finance is also an important part of the company’s operations. Just as you require engineering, marketing, and sales to design and sell a product, so too should finance be involved. Finance typically covers the following broad areas:

1. Strategic planning, via planning and forecasting
2. Capital and expense management
3. Risk management

Strategic planning involves planning and forecasting, which are crucial for setting long-term goals and strategies. These activities are commonly referred to as financial planning and analysis, or FP&A. To do these tasks effectively, finance needs to work closely with the rest of the business to gather the inputs to build the financial models and forecasts. These plans provide a roadmap for the company to execute and to evaluate itself against. These plans are also important to investors, as they demonstrate how the business intends to grow and what kinds of returns it expects to achieve.

If there are multiple products or business lines in the company, then finance gathers inputs from all of these business lines and consolidate them together in a model for the entire company.

Another major function of finance is to manage and allocate funds so that they are spent efficiently. This includes regular day-to-day expenses such as headcount, consultants, and services. It also includes longer-term and more strategic expenses such as outlays for equipment and facilities, that commit the company for a more significant amount of capital and time.

Finance assists in capital and expense management by monitoring spends against budget, helping in contract negotiations, and evaluating various investment alternatives to determine the best options available given the company’s scarce resources. The finance staff are also often tasked with preparing monthly and quarterly internal reporting for actual versus budget along with appropropriate key performance indicators, or KPIs, as well as reporting packages for investors and other parties.

The best finance organizations work as trusted partners of the business, to understand what the business needs and help them solve their challenges while being mindful of budgets and costs.

Finance also helps identify and mitigate financial risks to help the business navigate uncertainties. For example, these can include managing risks relating to the cost of raw material inputs or fluctuations in foreign currency exposures that could change significantly over time.

As companies grow larger and more advanced, risk management can expand into specialized areas like treasury and insurance to help manage specific exposures.

Many startups start off with a part-time, outsourced accounting or bookkeeping function, which is a cost-effective solution for a company in its earliest stages. However, outsourced accounting providers don’t always have the same vested interest as in-house employee and may lack the opportunity to develop an appreciation of the nuances of your business. A full-time employee can bring more insight and familiarity than an outsourced accounting provider and can build a robust accounting system and environment that is set up for your business from the beginning. A full-time employee is advisable once certain milestones are met:

1. You are spending too much time on accounting tasks either yourself or with your part-time bookkeeper.
2. You have received a funding round and now must produce regular financial reports for investors.
3. You need to file taxes or submit financial reports for regulatory purposes.
4. Once there is enough activity that your part-time or outsourced accountant can no longer keep up with your business.

Accounting positions start from a clerk or junior/staff accountant, and move up to a senior accountant and accounting manager, and end with a controller at the top. The first in-house accounting hire should be at least a senior accountant or accounting manager, who can bring sufficient breadth and experience to the role, while continuing to leverage the outsourced provider for simpler tasks. A controller is usually brought on once you need to produce full financial statements regularly for investors and for tracking your business performance.

One common pitfall is waiting too late to build up the accounting function, and letting accounting tasks drag out and remain unfinished. Catching up on these tasks to produce financial statements for prior periods is time-consuming and can detract from the ability for your accounting team to work on current issues. Furthermore, as time passes the documentation and reasoning for past events and transactions could become lost, making it more difficult to create proper and accurate financial statements.

Once the company enters a growth stage, the finance function becomes more important, particularly for budgeting and forecasting. In many startups, budgeting and forecasting are often handled by the controller, but this is not always ideal, especially if the controller is already consumed by other duties At this point the company can proceed in one of two ways:

1. Hire a vice president or head of finance or CFO to oversee all of the accounting and finance functions, along with a financial analyst to help with FP&A functions.
2. Hire a director of finance to handle FP&A functions. This director of finance will typically report directly to someone like the CEO or COO.

In both of the options above, this allows the controller to focus most of their time on their accounting tasks. The determination of whether to hire a director of FP&A or a vice president/head of finance compared to a CFO often comes down to a combination of the company’s budget, salary expectations, experience of the candidate desired, the size of the company, and the scope of responsibility that a company needs.

Fractional or part-time CFOs are an option when the company is at an earlier stage. They can provide guidance on setting up your accounting and finance functions plus business strategy and fundraising. However, they won’t be directly handling bookkeeping functions, and their limited availability and higher price means that you want to smartly rely on them for the value-added expertise they bring.

For accounting positions from the manager on up, you should look for an individual with a CPA designation, preferably with some experience in public accounting and at least 5 years of experience. These individuals have exposure to multiple companies and experience with several different accounting situations and familiarity with the rules governing GAAP accounting.

For finance staff, you should look for individuals with undergraduate business or finance degrees, and possibly an MBA or CFA. Although a CPA is not required, finance staff that do have a CPA from a top public accounting firm and experience with large clients can also bring a great deal of valuable experience from their exposure to different industries and work environments. An added plus is that a finance person with a CPA can be assured of being able to speak the same language with the accounting group.

Hopefully this article has helped to demystify the difference between accounting and finance and provide you with a clear idea of how to use and build these capabilities within your organization.