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Is finance an afterthought? The rookie mistake that can doom a startup

During the initial months and years of a startup, CEOs are faced with the daunting task of building a company from the ground up. There are many issues to address, including product development, sales and go-to-market strategy, staffing, legal and finance. All of these are important areas to launch in order to get the company off to a great start.

But how much attention should each one get? All too often, in the push and pull when time is tight and so are funds, CEOs make the mistake of giving the finance side of the business short shrift compared to everything else. Understandably this happens when the biggest motivation at the moment is to get the business up and running. Survival is job one. Getting the finances in order rates as a low priority while other areas of the company receive the bulk of funding and care. “I’ll deal with that later,” the thinking goes, “and build it up in a few years when we’re really up and running.”

In the meantime, the company hires an office manager who takes on purely administrative duties, like handling payroll, processing stock administration, meeting the minimum compliance requirements, signing up for insurance, securing facilities, and creating and handling the initial accounting books of the company. While these are all necessary tasks and someone needs to do them, unfortunately, this person usually does not have the required skills and experience to handle them at a high level.

Is the cash burn rate being managed properly? Are the financials accurate? Is the company making the decisions about equity comp with the future in mind? Are inefficiencies building up and slowing down decisions that need to get made? Can one person pay attention to the changing tides of rules and regs?

Inevitably, problems will pop up if there is not someone or more than one person paying careful attention to the big-picture questions. Some of the potential problems are incorrect financial statements, serious delays in financial reporting, lack of expense control, payroll errors, inability to pass compliance audits, issues with stock administration, and numerous other tasks not being completed on time and up to par. The company could run into problems with lenders, banks, investors and see its growth potential falter—if inaccurate financial information is preventing smart decision-making.

Sounds messy and time consuming, and it is. It can also get expensive. Work will have to get re-done numerous times and the company could see increased expenses. And the CEO may have to run around fixing problems rather than building the business.

It’s completely understandable why finance does not get the full attention of the CEO in the “start” stage of the business lifecycle. It could be much too early to add a full-time CFO to the payroll. What is usually needed at this point is a part-time controller who can bring order to the mayhem and ensure all the yearly, monthly and daily requirements are done correctly. The role will help the company fend off potential issues and mishaps and keep the back-office running smoothly (and relieve some of the stress that is surely weighing down the office manager). So many startups get themselves in trouble when there’s a lack of order and discipline.

Another smart move around this time is bringing on an outsourced accounting team that can help the overloaded office manager by introducing efficiencies and new processes that will lead to reliable financials and a smooth operation. Over time, the company can work its way up to adding on a part-time CFO, who can provide critical strategic perspective for moving the business forward.

Put another way, the list of risky, rookie mistakes that are distracting to the CEO can shrink dramatically and the leadership can focus more on growth. The goal becomes how to get to the next level rather than “how are we going to get ourselves out of this mess?”

Need more input on the start stage and all the stages that follow? Download our intelligence report, Navigating the business lifecycle, which explores the four stages that companies typically experience, the finance challenges of each, plus real-life examples of organizations that have overcome typical obstacles.

Ron Siporen, a consultant on the RoseRyan dream team, has over 30 years of experience working with startup businesses, and he has been a successful business owner himself. He loves to help companies clean up problems and scale up for growth.

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On the road to IPO? 6 obstacles to avoid at all costs

All eyes are on you when your company goes IPO. Everyone, it seems, wants to know the company’s every move—its past results, its risks, its future projections. Working at a newly public company can make employees feel like they’re in a giant fish bowl with everyone swimming around and crashing into each other. Unless, that is, the company planned ahead for a bit of mayhem.

A new intelligence report written by RoseRyan CEO Kathy Ryan warns top executives of pre-IPO companies about six potential pitfalls that await them on the multi-year journey they’re about to undertake. These are obstacles along the IPO path that can easily sink a deal.

By being more aware of the potential problem areas, companies have a better chance at a better ride (it’ll be bumpy no matter what—as anyone who has suffered through the aftershocks of an IPO can tell you). They’re also likelier to achieve a tighter corporate culture on the other side, a reduced risk of public mistakes (like a messy restatement), and a realistic, satisfactory share price.

Kathy emphasizes in the new report, The IPO journey: 6 potential obstacles to avoid for a smooth trip, that going public is much different that actually being a public company. To do it right, companies should view the entire deal as having three phases—the IPO prep, the IPO process itself, and the IPO hangover of suddenly being public. Along the way they should stay away from the following missteps:

Avoiding the tough questions: Kathy reveals the hard questions that need to be asked, including whether the company is moving forward with the transaction for the right reasons.

Skipping the prep work: There are years of laying foundations before the journey gets into the S-1 frenzy, from getting the financial house in order to figuring out the key metrics that will be shared and how they will be expressed publicly.

Being unprepared for a big culture shock: Senior executives rarely consider the transformation employees are expected to go through as the company changes from an entrepreneurial mindset to the more disciplined, accountable organization of a publicly traded company beholden to new regulations. The culture can—and should be—managed during the IPO process.

Lacking the right talent at the right time: Just as the culture should be evaluated, so should the skills. To what extent can existing employees be trained to withstand the needs of a public company, and to what extent does the company need to look outside to fill in the skills gap? It’s better to wonder this as the company goes along—rather than risk overloading employees more than they need to be.

Being in denial about the IPO hangover: There is a hard truth about going IPO and it’s what happens on “Day 2,” the day after the IPO, when the company starts operating in a whole new world, and the next few years that follow. It is a tsunami of work. It takes awhile for everyone to adjust, for efficiencies to take hold and new processes to become routine.

Not actively managing the share price: Many executives think they cannot influence how investors perceive and thus value their company. But it is possible, with effective messaging by company leaders, who need to put themselves in investors’ shoes and hone their storytelling skills to speak their language.

Preempt the mishaps. Prepare the troops. And get ready for the exciting trip that lies ahead. Download The IPO journey: 6 potential obstacles to avoid for a smooth trip.

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