Why Do Start Ups Wait to Set Up Accounting Systems?

Dear David

Welcome to the first issue of Six Degrees – the monthly newsletter from The CMC Partnership. We’ve sent it to you because we thought you’d find it useful – either for your own business or for others you know. Each month we’ll look at a different aspect of business, from start up, through growth and funding, to exit opportunities. If you’d rather not receive monthly business ideas and advice please click on the link in the footer of this issue.

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The CMC Partnership

Smart Start Ups Don't Wait to Set Up Accounting Systems

Think back to when you started your business. What was the primary thing on your mind? You had a great idea for a product or service you thought would be a success and probably also some initial ideas for how to market it. You might have known you needed start up cash. You will have put some thought into how to finance the early stages of your venture, whether from your own resources, or from outside finance, like your bank or other investors.

With all this going on, did you take the time to think about the critical importance of financial controls and how they can affect a business, especially in the early years? This is a pitfall for many new business start ups, especially those who finance themselves.

Many entrepreneurs with a good idea and a growing business neglect the day-to-day running and control of finances through lack of time and interest, lack of the relevant skills, or because it just seems more important to focus on business development. The trouble is they can end up with serious financial liabilities – problems that could easily have been avoided if they had had the right knowledge and proper financial reporting in place from the start.

Many new start-ups also fail to fulfil their real potential through poor financial planning and expertise. In every success story, the business leaders have at an early stage recognised the importance of financial control and legal compliance. In most disasters, business leaders have treated these as an unnecessary expense and viewed external consultants as a surrender of control rather than as a means of gaining it.

Research at Stanford University in 2005 studied companies in a variety of technical and non-technical industries, each less than 10 years old. They found young companies begin with few management systems, and typically start to put them in place after a year or so. Organisations that acted quickly to put in mechanisms such as operation and cash budgets, and financial monitoring systems (tools that measure profitability, customer acquisition costs, variance from actual budget and so on) had measurably higher growth rates in terms of revenue and head count. They also had greater and more rapid increases in valuation at successive rounds of venture capital funding.

So clearly 'management by personality' only works up to a certain point. After that, you need to put systems in place, and get help if you need it. Business leaders who are provided with accurate and reliable data they can use for their managerial decision making, then have the freedom to focus on developing and realising the full potential of their business.

Fighting Back after the Dragon’s Den

Marneta Viegas of RelaxKids, which runs classes for children in movement, breathing and relaxation, took her business to the experts on BBC’s Dragon’s Den to ask for finance. She didn’t get her finance, partly because the experts never invest in ‘lifestyle’ businesses, but also because she made one critical mistake: when asked what her projected turnover was, she replied that she wasn’t interested in turnover!

However, Marneta has a great business idea which is actually making money. She quickly realised that it would be a good idea to actually be able to count it – which is when she came to CMC.

We worked with Marneta to set up basic financial controls: effectively maintained company books, and cash and profit forecasts. We now meet with her monthly to work through a simple agenda which ensures that keeping her business in good financial shape is top of her priorities. The help we provide her gives her the confidence and freedom to engage in what got her into the business in the first place: the vision which inspired her, and the fun of doing it!

Just for Fun – The Five Stages of Innovation

1. People deny that the innovation is required
2. People deny that the innovation is effective
3. People deny that the innovation is important
4. People deny that the innovation will justify the effort required to adopt it
5. People accept and adopt the innovation, enjoy its benefits, attribute it to people other than the innovator, and deny the existence of stages 1 to 4.

With thanks to Alexander von Humboldt's 'Three Stages Of Scientific Discovery', as referenced by Bill Bryson in his book, 'A Short History Of Nearly Everything'.

Not applicable to courageous early adopters of innovation everywhere! Early adoption of innovation might not be natural to everyone, but it is an option worth considering, especially if you have a feeling that the present situation can be improved.

And for those who can’t count …

There are 10 types of people in this world – those who understand binary and those who don't. (ack J Kincaid and P Lewis)

There are three sorts of people in the world, those who can count and those who can't. (ack P Lewis)

And five out of four people can't do fractions.