Financial discipline—A must for all start ups

Having a finance professional on board also provides reassurance to investors and makes the due diligence process a lot easier

February 21, 2013 9:01 IST | India Infoline News Service
Most startup founding teams usually comprise product designers, engineers and marketers—people who understand what buyers want, and can come up with the right products or services. Now, you’d also assume that startups would succeed easily for this very reason. However, in their attempt to grow fast and evolve into a big organisation, many startups end up ignoring one very vital aspect of business success—sound financial planning and discipline.

With their attention exclusively focused on the product itself, finance-related functions—long-term strategy, bookkeeping, accounting, reporting, statutory compliance, and other back-office tasks get relegated to the backburner.

This neglect of finance / accounting by startups can have serious repercussions when it comes to scaling up—investors want to see excellent financial discipline before putting their money into a business. For this reason, startups should focus on achieving ‘financial hygiene’ and on setting up reliable financial systems from the start itself—it’s vital that your business grow using the stability and assurance proper financial discipline provides. In fact, not doing so can even endanger your startup, putting your dreams at risk!

Here are a few keys steps that’ll help any startup achieve good financial discipline:

Define your Chart of Accounts: These are categories and sub categories under which each business transaction is accounted for. Doing so will help set the financial tone and tenor of the organisation and give the management an overview of the nature and function of each financial transaction.

Define your cost centers: Doing so will enable each business unit to own its P&L (profit & loss) statement. This not only helps during budgeting and planning but makes business units responsible for their performance.

Defining internal controls / self-governing check & balances: Implementing an internal monitoring system is critical for achieving financial discipline and ensures that any error committed is identified and rectified as soon as possible.

Statutory compliances: Many startups trip up here due to the absence of expert professional help. However, this is a very important aspect of financial management. Non-compliance with statutory requirements can become a bottleneck during due diligence and can even put your fund-raising attempts at risk.

To achieve all these, it is imperative to have an experienced finance professional on board. If the cost of hiring is a constraint (a common issue for startups), a good option is to hire a consultant CFO who can work part-time. Besides bringing in operational efficiency and introducing industry-specific best practices, a part-time CFO can also help in financial planning, budgeting and analysis, financial reporting and dashboards, valuation strategy, board meetings, fundraising, etc. Having a finance professional on board also provides reassurance to investors and makes the due diligence process a lot easier.

The writer is a chartered accountant and company secretary with over 17 years of experience in accounting, finance, internal controls, due diligence, etc. She currently is associated with cloud telephony company Knowlarity Communications as Head–Finance.

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