Is Negligence Costing Startups? Here are some steps to keep your finances in order.
(This is the 1st part of a 4 part series. Please also refer to the other three parts linked below this blog for comprehensive details of record keeping in three different areas as noted based on the input from our consultant, Ark Consulting.)
The end of Asar is the season for rushed jobs. It triggers laying of tarred roads overnight, renovation of infrastructures, maintenance of pipelines and series of other development activities, which could not have been done, in the last 11 and half months. However, this is not limited to government activities. A lot of businesses try to update their accounts in a similar manner. They leave a lot of recordkeeping activities for the year-end. Their effort goes into correcting mistakes in their bookkeeping, consolidating older bills of past purchases and making last minute runs to the tax office due to failure in building a regular system to monitor their financial activities. Such jobs will trigger a lot of after thoughts of improvement, which gets slowly brushed under the carpet over time until the next deadline is around the corner. A lot of us fall into this category.
We recently had a discussion with our consultant to find out some of the common fails in recordkeeping commonly seen in start-ups and growth stage companies.
Whenever an individual starts a company they are bound to buy some assets, be it in form of technological equipment or furniture. They proceed with their business overlooking some critical financial and accounting measures they should have taken. When the time calls for a valuation, whether to make sell out decisions or to acquire further investment for growth and the auditor ask for bills of purchases or sale of some assets, most companies do not have such records. Some assets are still seen in their books but the company no longer owns it. There is little way of figuring out how much the assets have depreciated without having purchase bills and records.
A lot of times founders or co-founders make payments or purchases out of their pockets and do not keep track of it. This leads to incomplete investment records and the co-founders not being able to justify their spendings for the business.
Even while handling cash for small projects like events, administrative expenses or advance for expenses, when not recorded properly will show gaps in the accounting system and can lead to a situation of mistrust in the employee. Similarly, salaries are given to employees in the form of cash or cheque but no acknowledgment records or receipts are maintained. The person making the payments will be left sleepless trying to remember the payments they made at the year end when the books are getting closed.
Due to lack of expense monitoring system, entrepreneurs fail to gain insights related to regular expenses and margin of safety required to keep the business running. An often heard complaint about a trading company at its growth stage is that their sales are going up but they do not have sufficient fund to meet expenses. Only with up-to-date and complete accounting record, it would be possible to identify how much of additional funds of the company are getting tied up in credit sales or in holding of greater inventory in anticipation of growing sales. Similar examples are seen in startups in all sectors.
It may be hard to believe but at times entrepreneurs fail to follow up for collecting payments on timely basis. Payments, which are ready at the customer end, are not received because the business does not follow up for the payments. Funds in the form of working capital, which could be useful elsewhere, get blocked for an unnecessary period of time.
The government especially the tax department is becoming more efficient in collecting taxes and it is a bonus for them, when they can collect additional penalty for failure to pay tax within due date. Even failure to submit tax and statutory compliance information in time attracts penalty, which gets accumulated and grows each year. A couple of years ago, it was made mandatory for all schools to be registered as companies. Though they got registered as companies, a lot of the owners of the schools did not know about the annual returns to be filed by a company. There were cases where the records were submitted after 5-6 years, leading them having to pay penalties in 6 figures.
Often times, entrepreneurs and business owners are so focused on growing their business, getting more clients, increasing sales, generating more revenue, etc., managerial tasks such as keeping good records get overlooked which might be costlier than anticipated at a later stage when the company is looking to scale up.
Based on our experience working with startups and growth stage businesses, we have identified problems and areas of improvement for those who want to avoid last minute panic attack. We have listed three core areas that cover almost all the transactions that startups need to record for different purposes from the very beginning, in order to avoid future hassles, complications and extra expenses to correct mistakes.