Startup CFO Chris Fenster Shares 6 Essential Tips for Bookkeeping and Financial Growth
Even for startups in the earliest stages, bookkeeping is essential for understanding the growth of your startup and allowing you to make important decisions about the future. Labs mentor Chris Fenster, CFO of Propeller Industries and accounting partner to venture-stage companies, held a session to discuss the six key tips to understanding the financial growth of your startup from a bookkeeping perspective.
Tip #1: Understand financial expectations by stage
At the seed stage, companies should think about “minimum viable accounting,” Fenster says, keeping things lean while they can. “Once you hit your Series A, expectations change overnight. You have the capital to invest in building professional systems and scalability. But almost more importantly, you have outside stakeholders who are going to breathe down your neck to make sure that you can deliver the info that they need to be good investors,” he says.
As you grow through various stages and funding rounds, your financial expectations will have to adapt and accounting becomes very important. “In the Series A, we want to build good forecasting and financial reporting,” Fenster says. “We want to have a clear understanding of the future—cash flows, cash burn, all the things that are strategically critical to success.”
Once startups enter their Series B, bookkeeping needs to become more sophisticated. There’s a much larger stream of revenue to account for, regulations to consider, and systems to implement. “And then usually by the time startups do a Series C, they’re thinking about preparing for an audit, and that's a whole different ball game. So it's not just about bookkeeping—it's making sure that your bookkeeping can withstand scrutiny by an outside accounting firm,” Fenster says.
Tip #2: Understand the responsibilities of each financial role
Startups have different needs when it comes to the management of their financial picture. Even if you’re in the pre-launch stage, knowing all of the levels of the accounting ladder can help you plan for the future. These responsibilities are usually broken up into four roles:
“Bookkeeping is just one of four core roles that we see in every company, regardless of size,” Fenster says. “At the earliest stage, it’s the only role that has regular cadence. There's a lot of heavy lifting upfront just to get everything set up. Then the transaction volume increases as the company grows—more employees, more sales, more expense reports. It's a very continuous role.”
Controllers lean more towards compliance issues and oversight. Unlike bookkeepers, a controller’s workload is heaviest once a month as the books are closed. “The Director role is about planning and budgeting. That's where you start to think more about the future and make decisions based on data from the past,” Fenster says. A CFO’s role is focused around strategy as opposed to Excel spreadsheets. “It’s about figuring out business economics, how much capital to raise, who to raise it from, and how much debt versus equity the startup should have,” Fenster says.
“People need to understand that accounting is nuanced,” Fenster says. “Every startup needs some portion of each of these roles and they all evolve in different ways over time. When somebody says, ‘just hire a bookkeeper,’ they’ve got to know that there are different roles and there probably isn't a single person who is a fit for everything..”
Tip #3: Understand common bookkeeping hazards
There’s a lot of risks that come with creating a startup, especially when it comes to finances, so awareness and prevention are key to avoiding big mistakes. One financial tool that often gets overlooked is the balance sheet, which records your assets and liabilities. “A lot of people start companies and they only think about their profit and loss statement. ‘How much money can I get from customers? How much am I going to spend?’ What they don't realize is just how complicated the balance sheet is. Things like inventory and receivables just don't get a lot of attention,” Fenster says.
With bookkeeping, one of the decisions you’ll have to make it whether to use cash or accrual accounting. “With cash accounting, any transactions that are made show up once the cash is received or leaves the bank. With accrual accounting, which is preferred by most larger companies, revenue and expenses are recorded in the period in which they are earned,” Fenster says. “Between the two methods, cash accounting can result in misleading or confusing financial statements.”
Cash accounting tends to create large, unexpected spikes in revenue and spending, while accrual accounting is more level or grows progressively. “It can be really hard to make any decisions based on cash accounting, but it's super cheap and easy to do. It may be beginner-friendly but you're not going to be able to get good data out of it,” Fenster says.
Tip #4: Identify your blind spots and find support
Whether you’ve been an entrepreneur for years or you’re creating a startup for the first time, knowing your weaknesses can make the difference between a successful or failed venture. These blind spots are any areas of your startup that you don’t have a full understanding of, and finances can be a common one for first-time founders. “I think one of the characteristics that define great leadership is self-awareness. It's important to know where your blind spots are, and particularly if they are around fundraising or bookkeeping it’s important to find a good partner who you trust to manage it,” Fenster says.
Tip #5: Establish financial warning systems
As you grow your startup, you also need to know what failure looks like for you financially. During downturns, many startups incrementally lower their bar of success and end up in a position where disaster is unavoidable, so it’s important to have clear warning systems in place. “Setting some boundaries that say, ‘when I get down to six months of cash, I'm going to do something,’ is important. If you get down to two months of cash, and then you make a bunch of cuts, it's not going to be enough to make a difference,” Fenster says.
These warning systems should be set up for all aspects of your startup, not just revenue. “It's about customers. It's about your churn rate. It's about your employee retention. If you keep under-performing people employed it probably signals that something is wrong,” Fenster says. “So figure out what your critical KPIs are, and measure them carefully, and just set some boundaries for yourself.”
Tip #6: Constantly communicate with investors
Whether you have good or bad financial news for an investor, always communicate with consistency. Investors don’t like surprises, so it’s better to be transparent than hide anything that isn’t flattering. “If 75 percent of companies are going to fail, the ones that get support from their investors, even as they enter a challenging period, are the ones that are proactive about communication,” Fenster says.
Investors understand that there are growing pains that come with having a startup, especially financially. Trying to give a false impression that everything is going well won’t help you or the investor. It’s better to over-communicate than to hit a rough patch, keep it to yourself, and hope for a miracle. “Entrepreneurs who are proactive about building transparent relationships with their investors tend to just build a stronger level of trust. That comes in handy during bad periods,” Fenster says. “We've seen plenty of companies hit a rough patch and find that their investors and community are supportive, even when things are not going according to plan.”
This post is based on content from a WeWork Labs programming session.
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