Finance and Accounting Errors that Sink Startups
A lot of us shy away when it's time to talk about numbers.
Of course! You care about your business and want it to scale, but money matters can be tricky, and you probably don't know how to properly handle numbers well enough, even though it has so much effect on your startup growth.
We had a mind-blowing conversation with four industry experts about finance and accounting errors that sink startups fast on our April Twitter Spaces.
In this blog post, I'll be walking you through the details of our value-packed conversation.
Meet The Speakers
About Peter Olasunkanmi of Nikuncept
Peter Olasunkanmi has been a small business advisor and an accounting/bookkeeping specialist for the past 12 years.
He is a certified business consultant and a pro advisor with QuickBooks accounting.
Peter is currently in the banking field, working with small businesses somewhere in North America. He is also a founder at Nikuncept, where he sits on the board as an advisor.
Nikuncept is a small business consulting firm that deals with the bookkeeping aspect, taxes, and advisory, taking your business from start to succession.
Peter is happy to be a part of this conversation.
About Kingsley Madu of Expedier
Kingsley has spent the last 15 years working in the Oil and Gas industry as a programs manager, managing projects across 21 nations.
He considers entrepreneurship to be one of his key strengths, and so he is a serial entrepreneur.
Kingsley is currently managing Expedier, which has been gaining impressive traction in the last few years. They recently crossed a massive milestone in billions of Naira.
He has a dual MBA and a knack for finances because he believes it's the lifeblood of any business.
Kinglsey is happy to be on the Twitter Spaces and to support founders in the way that he can.
Tolu Duro-Bello of Koboaccountant
Tolu is a co-founder at Koboaccountant, a firm that helps SMEs put their books in place. They handle finances, financial advisory, taxes, and rebudgeting for small businesses.
Tolu loves accounting and specializes in taxes for the Nigerian sector because, according to him, Nigerian tax is dynamic.
He and his team started Koboaccountant because they realized that the difference between bigger firms and small businesses is access to valuable and affordable finance and accounting services.
Tolu is passionate about SMEs, and he is glad to be a part of this conversation.
Highlights of The Conversation
Cashflow is the Lifeblood of Any Business
Imagine you have a car with a fantastic engine. Now assume the car is your business and the engine is profit. You'll need fuel to run the car, right? - That fuel is cash
You can have an excellent business plan, but it dies if there is no day-to-day cash to carry it out.
Cash is King on every level because it helps you meet your day-to-day expenditures.
If you have good cash, and poor profit, the business will die, not now, but one day in the future. However, if you have good profit and poor cash, the business will die soon - Peter Olasunkanmi
The ultimate truth is that input is cash, output is cash. Input is the cash you need to run the business, output is the profit. - Kingsley Madu
We've had this age or age-long debate about choosing between profitability or liquidity. It's difficult to pay your employees with profitability. It's also difficult to pay your vendors with profitability. I tend towards cash because with cash, even though eventually you might feel in the interim, you can meet your day-to-day expenses. You can pay your employees who will bring about the eventual profitability. - Tolu Duro-Bello
Blitzscaling or Not
Blitzscaling means trying to grow at all costs, most likely when you are trying to have a monopolistic hold on the terrain. An example is when a brand expands quickly from city to city.
With the rise of VCs and investments, a lot of startups now focus on blitzscaling instead of actual profitability.
Now the question is - is blitzscaling sustainable? Is it something founders should be involved in, hoping that profits will come in the future?
A lot of brands depend on funding to blitzscale and funding isn't something you want to go for when you are not sure your business is going to be profitable.
I believe it's best to understand your business model and test it first to determine if it's viable and will eventually be profitable. - Tolu Duro-Bello.
Most founders have products that they can sell but are they viable? - It's necessary to be sure about this before you start seeking funding to blitzscale.
You don't want to keep growing a business based on the assumption that It will become profitable in the future.
A lot of things can change in the future!
Some startups seek huge funding and once they get it, they relax and become a bit reckless.
They start to invest in celebrity adverts and huge marketing costs without investing in the product. It's like a bubble that would soon burst. It won't last.
Some questions you need to ask yourself before you attempt blitzscaling include;
Can this business generate enough profit to sustain itself?
Can it break even?
When can it break even?
How do I innovate to ensure that this business brings in profit at some point?
You need to be able to answer all of these because investors will ask you how you intend to make money.
Blitzscaling is not an assurance of success. It can help you initially because you have funding, but at the end of the day, the funding will go and leave you with a giant mammoth in the room.
Blitzscaling does not guarantee success because, ultimately, that business will need to get to the point where it's supposed to lift off by itself and begin to generate profitability. - Kingsley Madu
If you don't get the foundation right before blitzscaling you are accelerating the downfall of your business.
Importance of Having a Business Plan
One mistake founders make is not having an excellent financial framework at the beginning - This starts with having a good business plan.
Having a business plan is like having a concept. It helps you know what to expect.
In this case, we are not talking about an unofficial or poorly drafted business plan. We are talking about a business plan built in conjunction with a consultant.
Only a business plan backed by proper research will let you know where you stand in the industry life cycle.
It will also let you know how many players there are in the industry and if you can compete with the high players.
Moreso, it informs you about the risks involved.
If you know the level of risk involved, you will be able to tell once it's above your risk appetite so you can back off.
Most founders do not measure risk. They just feel they can take on any risk. No! Risk has to be measured. - Peter Olasunkanmi
Without a business plan, it becomes difficult to measure your performance.
Usually, you should measure your first year of business against the business plan and measure your second year of business against the first year, and so on.
Founders that start a business without a plan tend just to keep pushing that business so that it will survive one day, but from ground takeoff, that business was destined to fail. - Peter Olasunkanmi.
Handling The Numbers Section of Your Business Plan
When it comes to business plans, there's one aspect that most people dread, which is the financial section.
However, it's an important section because, as we highlighted earlier, cash flow is the lifeblood of any business.
A lot of founders are visionaries and dreamers and so the finance section is not their key strength. They need to have someone on their team who understands numbers.
When I see a startup team, I often ask "who in this team is a numbers person? Who is the number cruncher?" Especially when the team is mostly tech-driven and they don't have those numbers in place - Kingsley Madu
It's important to have someone that keeps his/her eyes on the finances because finance is not something you review every six months or one year. It's something that should be in your face every day.
However, if you cannot hire a finance person, at least ensure that the finance section of your business plan is done right. This will be like a map for you.
If you cannot get a team member who knows finances, at least start with a sound business plan developed thoroughly based on research and has got very great financials. - Kingsley Madu
Also, there are very simple and intuitive solutions that help startups manage their finances from the beginning.
Have a bank account for your finances that's separate and distinct from your personal account so that everything is recordable and traceable.
As a start-up, the number one thing you want to do is make sure you've got good financial records and make sure that they are distinct and separate from your personal record. - Kingsley Madu
Invest in Research
As a founder, it is very important that you invest heavily in research before you commence your business.
You should research your numbers, the business terrain, the tax implications, your business employees, and the legal status of your business.
From experience, I've seen a number of businesses who had no reason to register as a limited liability company because of certain implications. But, you know, without proper research and without seeking help, they just went headlong. - Kingsley Madu
Before you start your business, seek help from a legal professional, an HR professional, and also from a finance professional. It will go a long way to help you start on the right foot.
Outsourcing Your Finance Department
When you have an idea as a founder, it's not enough to believe that it's wonderful and it'll be profitable, there is much more to it.
Accounting is one of the areas you need to be aware of.
If you are not skilled at accounting, then it is necessary you outsource and get someone to come and look at your business idea and numbers and then draw a business model around it.
Another thing you can do as a startup is to leverage tools like Zero, Quickbooks, etc.
However, choosing a tool for your startup isn't a one-size-fits-all thing. It depends on your type of business or industry.
This is because using tools for your accounting is like a garbage in, garbage out situation. Whatever you input is what you get as output, so you want to find a tool that suits your business type.
I've had instances where clients would pay for a QuickBook premium subscription when all they need is an invoicing software for their type of business. - Tolu Duro-Bello
Don't just use a tool because your friend is using it. It could work for their type of business and not work for yours, instead, get professional advice on which tool to use.
Speak with somebody who is a finance person who can advise you on which software fits your industry or your business.- Tolu Duro-Bello
How Raising Money Affects your Accounting
The issue of raising funds has become the buzz within the ecosystem. But as great as raising money sounds, it can crash your business when it is not done right.
It is important that you know when it's right to raise money and if you should be raising money at all.
The whole idea that you need to raise money to be successful is a facade, it's a pure marketing stunt. - Kingsley Madu
There are some startups that cannot exist beyond the idea stage because they need huge sums of money even to implement the idea.
If your startup cannot exist beyond the idea stage, you need to raise money early.
There are some startups that can be prototyped and tested, so little money is needed to build them.
There are some startups that you can actually run for two to three years by bootstrapping until you get to a point where it cannot grow without being funded.
It all depends on the kind of startup you are building.
When you have concluded that your startup will need funding to grow, you can prepare to start raising funds.
It's quite important to try raising funds before you actually really need it.
The best time to raise funds is when you don't need it. If you wait until you need it, then it becomes problematic. - Kingsley Madu
You might be wondering, how do you now know it's time to raise funds?
It's when you have enough runway, your burn rate is manageable, and you have enough bootstrapping funds to manage your runway to the point where you know you cannot but raise funds.
It's better to validate your idea, get your metrics high up, and know that you really need funding before raising funds.
Raising funds is great, but be sure that you're raising it because it is absolutely needed and it is what will drive you to your next level of growth, not because it's the reigning thing. - Kingsley Madu
It is also essential to understand the various funding stages, what investors are looking out for, and know who to approach at every step.
What you Should Look Out For in a Financial Statement
The business owner who tries to do accounting or bookkeeping themselves will just say - "hey, I spent this, and I made this, that equals two." - That's wrong!
You cannot analyze without accurate data.
You will have to break down your profit and loss to answer the following questions.
How much did I allocate to the indirect cost?
How much goes down in operating costs
What did I spend in the office, transportation, rent, etc.?
It's great to have all of these in percentages as it gives you a better understanding. The figures might not be so meaningful in plain numbers but would be more meaningful in percentages.
Your report should show your net worth. Which typically means what you OWN vs. what you OWE.
You also need to have a cash flow report that shows you where the money comes from and where the money goes.
With all of these, you will be able to make concrete financial decisions.
Paying Attention to Tax
Imagine working hard for five years and then just when you are stable, they hit you with a liability of 20 million. That'll be bad!
You need a professional to help you with your taxes early.
I'll give you a scary example. If you do not file taxes in a year as a Nigerian startup, you might be owing about 1.9 million Naira. - Tolu Duro-Bello
There are many tax myths around that you cannot afford to fall for, e.g., some people say you don't need to pay tax if you are not making a profit or you don't need to register in a tax office until your business is viable.
Don't just take these myths in. You need to speak to a professional so you can handle your taxes following the tax laws in your country.
Even if you cannot afford professional consultation in the beginning, it is helpful to have a friend who is an accountant who can help you.
Remember to try to keep records as much as possible using google sheets, bank statements, and even writing them down in a note.
Taxes do not start when the government asks you to file them. It starts from invoice - Peter Olasunkanmi.
This is Where We Draw the Curtain
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