If you are starting up a new company, you are probably hard at work on developing your product or service, sizing up the market, and finding potential customers. Finance and accounting are probably far down your list of priorities, but that doesn’t mean they should be ignored. In this article I explain why finance and accounting are important right from the outset.
To be clear about what I mean by finance and accounting, I’m not talking about tracking expenses or doing the bookkeeping. What I’m referring to are broader concepts that relate to how you project and measure financial performance and use such data for decision-making and evaluation.
Before we get there though, let’s back up to the reason you’re starting a company. You have a great idea for a product or service, and you need to create a company around it to assemble the people, money, and resources to help you reach your objectives. If you’re lucky, your company might be instantly profitable, but it’s more likely that you’ll need to either borrow or raise some money from venture capital or other investors.
Now put yourself in the shoes of the lenders or borrowers: they’re thinking about what kind of return they can get from investing in you. To do that, they need financial and other information to make their assessment.
A business plan is an essential document if you are going to be talking to outside investors. (Whether or not business plans get read is a topic for another day.) A solid business plan includes not only a description of your product or service and its market, but also the financial projections to show how you expect the business to perform and to justify how much money you are asking the investors to invest.
Instead of being an afterthought, a well-executed financial projection brings discipline to the business plan by forcing you to think about issues like pricing, profitability, and future cash needs. The projections will reflect your plans for hiring, how much you need to spend on equipment, and how much you think it will cost you to win your customers, all of which drive your cash needs and dictate how much money you are looking to raise. Being able to address these items shows you’ve thought things through and have an understanding of what’s involved in building the product and business.
You might be thinking, is it necessary to have all the financial details fully ironed out in your projections? Absolutely not. In reality, you are constantly adjusting as you learn new information and modify your plans, so your projections will also be in constant flux. The idea here isn’t to set down a financial roadmap you can’t deviate from, but to be able to go through the thought process and translate the ideas around your product’s development into business reality.
You might be thinking that as a small startup you don’t know or don’t want to tackle the spreadsheets and financial statements, and that you can’t afford to hire an accountant, VP Finance, or CFO. For any company that hasn’t raised any money yet, it would be hard to recommend a full-time finance expert. Ideally, someone on your founding team has some financial experience in addition to their other skills. Check with your friends and colleagues to see if they know anyone who can help, or ask your investors and fellow startups to see if they can recommend anyone that can help you review your financial statements and projections. Some individuals will happily consult or work with you part-time to help you prepare a business plan and financial projection, but be aware they might cost you. However, finding someone who can help you prepare financial projections and business plans can go a long ways to helping you understand your business and secure that coveted round of funding.
