A lot of times, due to the chaotic nature of getting your start-up off the ground, many founders make the critical error of not spending enough time thinking deeply about what kind of financial infrastructure they need to succeed.
Think of your financial infrastructure as a data-gathering system. If set up well, the system will take in the right inputs and code them to the right accounts, and be able to seamlessly generate reports that you don’t need to manually adjust before sending to investors/donors, etc., thus saving you many hours every month.
I. Choosing the Right Accounting System
Your accounting system is at the heart of your financial infrastructure, so this is where we’ll start. It’s not a surprise that I frequently get asked by startup founders: “What system should I go with?”
-> The answer to this question depends on 3 factors:
1) What aspects of your business are you trying to track?
– If it’s just funds transactions, a system such as Quickbooks, should suffice but if you’re looking to track inventory, project manage your staff’s time, manage timesheets for staff members for payroll, etc. – consider getting a more robust system which allows you to cover all your business goals because switching systems can be time consuming in terms of hours spent on training and tweaking processes around system capabilities.
2) Complexity of operations
– How would you define your operations? Does your business follow a simple structure or do you have a complicated, multilayer supply chains feeding into your product development? Does it involve manufacturing, logistics management, tracking customer satisfaction? Do you envision needing to report to 10 donors at once? How many approvals need to be in place for financial decisions to be executed?
– The more complex your operations, the more integrated the system you are choosing needs to be. If you decide to go with a system that partially meets your needs, you will find yourself adding on more silo systems rather than being able to truly integrate. This is why you should take some time to indentify as many of your envisioned needs from the get-go.
– Choose a system which has the components of what you need that you can “build” on. For example, SME ERPs such as Odoo are now entering African markets as well which can be a more viable option in terms of pricing as compared to SAP.
3) How do you think your business is going to evolve over the next 3 years?
– Having a long term view is critical to deciding which system to go with because you’re not building for a year, but for the long-term. A lot of startup founders make an error by thinking that they will adapt to a more robust software in a year or 2, or “when the time is right.” They fail to take into account the hundreds of wasted hours that will go toward building “placeholder processes” that the system does not have the capability to manage. Placeholder processes are often seen in the form of excel sheets or word docs used to fill in the gaps that your system should ideally have. These are not good – and will result in a lot of wasted time.
– Instead, think long-term and adopt a system you think will be able to serve your needs for at least 3-5 years. The cost of switching over is also quite expensive in terms of customizations and trainings, so have a good think before committing.
II. Getting the Set-Up Right
Now that you’ve considered the above 3 factors and decided that System X is the best for your company. How do you set up System X so that it gives you the right information?
Here are some items to consider during set-up:
1) Chart of Accounts
– The chart of accounts is the language of your books; it consists of codes and designations of all your forecasted categories of expenses and revenue types
– Getting the chart of accounts right from the get go is going to save you A LOT of headache going forward as it will give you the information at the level you require
– If you don’t have experience creating a chart of accounts, don’t stress – reach out to us!
2) Location Codes
– If you know you’re going to be based in or delivering to different locations, consider adding location codes to your accounting system as this will parse the data by location
– This could be invaluable in terms of data analytics because you might have higher volumes in one location and if you didn’t set this up as a functionality or required field in your system, your accountant might not capture this information at entry point.
3) Product / Service Codes
– Product and/or service codes will help you differentiate not only revenues by different products and services but also track direct costs that are associated only with these products/services. Ultimately, you will be able to use this information to inform pricing and other key decisions.
4) Department Codes
– Try to visualize how you would like to track financial data at the departmental level.
– First and foremost, you need to decide on your organizational structure based on what you think would best help achieve your business’s goals.
– If your company chooses a functional structure, your system should have departmental codes such as: Finance, Marketing, Product, HR, etc. If your company follows a divisional or multidivisional structure, your departmental codes will be centered around your product/service lines and thus have dedicated teams (Finance, Marketing, HR, etc.) under each product or service line.
– Your accounting system will thus be able to generate data under the department codes, reporting to you how much money each department is using to do their work.
5) Donor / Investor Codes
– Consider using the “Class” or equivalent function in your accounting system to set up your donor/investor codes. For example:
a) If you are a non-profit, you will be able to filter for transactions by Class and be able to complete your donor reporting expediently.
b) If you are a for-profit, where investors are investing on a per project basis and want reports on those specific project activities, this functionality can save you a lot of time.
6) Supplier / Vendor Grouping
– Do you know who your suppliers are or what categories/types of suppliers you will need for your business? Map these out and set up these supplier groups.
– Having different groupings for suppliers is beneficial in terms of understanding where you are spending the most, as well as how you can leverage this information to get into more beneficial contracts (better credit terms, shortening delivery times, etc.) with your suppliers. In the long term, you might decide to vertically integrate, which means to absorb your supplier’s offering into your business model because it makes more business sense.
7) Customer / Clients Grouping
– Whether running a B2B or B2C, you want to think about how to group different categories of customers in terms of data you want to see. You could group them by how much they spend on your products to then be able to offer certain promotions to the most loyal customers or incentives to those who are not so active.
I hope the above 7 items have given you a glimpse into the power of what a well-thought out accounting system can do for you in terms of your business growth. If done well, it can catalyze your business forward and save you hundreds of wasted hours in trying to decipher your own data and business trends.
III. Process Mapping & Roll-Out
After considering the above 7 items and implementing those that make sense for your business model, you are now ready to move on to the next phase of getting your financial infrastructure right: Process Mapping.
Think of your company’s processes and accompanying standard operating procedures (SOPs) as the way to communicate to your staff members how information should flow in the organization and controls required at each step.
– For example: A staff member needs to purchase an item critical for the dissemination of the product you are selling. In order for the payment for this item to the supplier to be set up and to ensure proper use of the item, there are a number of considerations:
1) Was this item in the budget?
2) Who should be approving this purchase in the organization?
3) How are approval(s) documented?
4) How does all of this information get communicated on a timely basis to the accounting team to not delay on paying the supplier?
5) Post-payment, who is managing the delivery and receipt of the item?
6) What is the proof that the item was actually used in the dissemination of the product?
You may be overwhelmed by these questions but these are the questions that any good audit firm will ask and want proof of. To reduce the overwhelm and to be able to provide answers to auditors, well-written policies and SOPs that are rolled out in a clear manner will save your company countless hours and signal to external investors and directors that the company is being run well and transparently.
Every company will have to customize its processes and SOPs based on its operating model and so it is hard to provide this data.
Here is a list of finance policies that are basic and widespread. Having these in place will help strengthen your financial infrastructure:
Accounting – Weekly/Monthly/Quarterly/Annual Processes
Systems Controls – Reporting & Approvals
Financial Reporting – Internal & External
Treasury & Banking
Travel – Domestic & International
Time-keeping
Procurement
Cost Allocation Methodology
Revenue and Expense Accruals
Assets & Liability Management
Budgeting & Forecasting
IV. Calendar Reminders for Critical Submissions
Now that you have mapped out your processes in line with your system’s capabilities, and rolled out the same to staff members, the last thing you may want to do is set up reminders on dates for critical submissions such as: Monthly and annual tax deadlines, Board reports, Donor reports, Audit Filing Deadline, etc.
– This may seem like something obvious, but so many startups fail to have in place this basic infrastructure, thus resulting in delayed reports and penalties.
– Some systems do have alerts and reminders – take advantage of that
– If your system does not have this functionality, take the time to manually input them to your work calendar and share with the people responsible for these submissions
– There is nothing sadder than spending tons of money on procuring a fancy system and writing policies and standard operating procedures, to then miss a critical deadline and be penalized for the same.
Conclusion
To summarize, a robust and well thought out financial infrastructure that is thought of and implemented earlier in your business’s life cycle may save you and your team hundreds of wasted hours. If you need any help in setting this up or even upgrading your current infrastructure, get in touch with our team at info@pro-change.co.
