Top accounting mistakes to avoid in startup financial planning
Every founder knows that capital is the most valuable resource while scaling a startup.
However, most founders don't have the accounting background to dive into the weeds of the numbers and interpret their financial landscape for investors.
That's why we sat down with Sasha Orloff, Founder & CEO of Puzzle, the new standard in startup accounting software and real-time financial statements, metrics, and burn analysis for startups.
Below, we’ll cover topics including:
"Intentionality in how you spend your company’s money is what drives confidence to everybody in your organization and your investors." - Sasha Orloff, Founder & CEO of Puzzle
Founders Need To Be Equipped with Essential Accounting Skills
If you understand the numbers that make up your business, you understand how your business functions. This enables you to make sharper decisions at every turn.
That’s why Sasha recommends that every new entrepreneur learn to apply this concept — especially if you don’t come from an accounting or finance background.
Understanding your business in real-time benefits every aspect of it, from your employees to your shareholders to your investors.
That’s where Puzzle becomes an instrumental tool for founders.
Accounting & finances are opaque. Puzzle makes them intuitive.
The Puzzle platform is built to bring clarity to the financial activity of your startup. Puzzle brings the ability to trace every metric to the individual transaction, making accounting understandable—even to those without an accounting background.
When equipped with that knowledge, founders gain that much more confidence to make high-impact financial decisions. This value-add is crucial and unfortunately rare.
Accounting is considered the language of your business, but it’s also opaque and complex. It takes six years to become a CPA, so it stands to reason that founders struggle to learn the nuances of the role and space efficiently.
As your startup scales, so does your financial responsibility
If (or when) your startup scales successfully, this roadblock is inevitable.
While early-stage founders start by solving a market problem, once they transition into CEO roles, they hold a new fiduciary responsibility to the success of the company. That comes in several forms, including:
Hiring — You’re responsible for paychecks and salaries.
Investors — You become responsible for consistently increasing shareholder value.
When Sasha’s career started 20 years ago, it was typical for VCs to replace founders with professional CEOs and CFOs. This rarely happens these days.
So, he launched Puzzle to assist founders who lack this integral financial skill set.
"The numbers are the truth of a business. If you can understand the numbers, you understand how your company functions." - Sasha Orloff, Founder & CEO of Puzzle
3 Common Mistakes to Avoid in Early-Stage Financial Planning
In Sasha’s experience, first-time founders struggle the most with three questions.
Today, he’s bridging those common knowledge gaps.
1. Why are financial statements so time-consuming to get right?
There is a fundamental misunderstanding about how complicated and labor-intensive financial processes are — for any type of business. This almost always leads to a frustrated founder.
It takes weeks to generate compliant financial statements because there are complicated sets of guidelines called the Generally Accepted Accounting Principles. Before financial statements are "released," every last penny needs to be accounted for, along with multiple checks and reviews. There is a necessary balance of speed and accuracy—as a CPA will tell you, 95% accurate books are 100% useless.
2. Why doesn’t accounting give me the info I need to build my company?
Simply put, that's not the actual purpose of accounting.
When founders receive reports from their accountants, they receive financial and P&L statements, balance sheets, and occasionally cash flow info.
These reports are static, representing only one moment in time for your startup. They’re designed for investors to check up on their interests.
They are not crucial to running your business.
3. Why do accounting platforms fail to help me understand my business?
Present-day startups are wildly different from businesses of 20 years ago. Most businesses today (especially software and service vendors) aren’t understood in terms of how much inventory you have on hand.
On top of that, widely accepted accounting practices evolve very slowly. As a result, your accounting software is likely still built for tax compliance, not teaching you how to improve your business.
Unfortunately, founders still feel pressured to look at their revenue and answer investor questions — based on documents that aren’t designed for their business.
"Trying to make informed decisions about your business can feel nerve-wracking. Investors ask you questions, and they aren't part of the financial statements you're paying all of this money to receive." - Sasha Orloff, Founder & CEO of Puzzle
Capital Allocation: How to Effectively Manage Your Spend
For the coming months, Sasha advises every founder to focus on intentional capital allocation. He sees intentional capital allocation as akin to building a piece of Ikea furniture; you could theoretically build it with intuition, but ensuring you have all of the right pieces, tools and instructions increases your chance of success and confidence.
Knowing your numbers means knowing how you can improve your business.
Startups allocate two vital resources: employee time and money on the balance sheet.
Handling these assets reliably is the biggest responsibility of upper management. That’s why understanding your company’s numbers down to the digit is so vital.
When you’re scaling quickly, making high-level changes, or even about to run out of money, knowing your fundamentals and operating accordingly and intentionally will be the difference between folding and staying afloat.
Tips to avoid thoughtless early-stage spending
In working with hundreds of founders, Sasha unfortunately hasn’t seen a lot of intentional financial management. Rather, early-stage spending and hiring has become an afterthought.
To avoid this, he advises playing out all of your decisions in terms of the numbers. If you keep spending capital as you are right now, what will this mean for your startup in a few months?
After all, it’s common (and brutal) to run out of cash before hitting early-stage milestones.
That’ll lead to even more problems downstream. It’s harder to attract investor capital if you’ve never been profitable or if you didn’t handle your finances well during earlier rounds.
Intentional capital allocation is beneficial — now more than ever
Capital was cheap throughout the previous decade. Handling it wasn’t a life-or-death task.
Today, spending money is literally an expensive proposition. There’s a higher bar to consider.
Ultimately, Sasha views this as a positive for founders. Startups that spend intentionally:
Have more robust fundamentals and accountability
Drive confidence throughout the company
More easily attract investors
"Now more than ever, how you leverage employee time and money is the most important responsibility of the CEO, the board, and the executive team." - Sasha Orloff, Founder & CEO of Puzzle
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