Finest Practices for Setting Up Accounting & Finance Departments at Begin-ups & Privately Held Firms


Over the past a number of years I’ve seen a troubling pattern in the way in which start-ups and privately held corporations are organising their accounting and finance departments. At some corporations it’s being achieved in a poor method which hinders company progress, wastes firm assets and might even causes catastrophic points that forces corporations out of enterprise. Based mostly on my expertise the 5 commonest errors made or issues that happen when organising accounting and finance departments at start-ups and privately held corporations embody the next:

Among the commonest causes for the problems listed are as a result of start-ups founders, house owners, buyers and senior administration don’t perceive the next:

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Accounting and finance departments carry out vital capabilities at start-up and privately held corporations, however too usually they don’t seem to be set-up correctly and this has long-term adverse ramifications or outcomes. Among the adverse outcomes that I’ve seen over time embody the next:

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Please learn this text in case you work at a start-up or privately held firm that’s trying to construct out, increase or enhance its accounting and finance departments. This text will help you perceive greatest practices for setting accounting and finance departments and groups. And hopefully it may possibly assist you keep away from a few of the adverse ramifications listed above.

Outsourcing vs. Bringing It In-Home

Early on within the lifecycle of start-up or privately held agency outsourcing accounting and finance is usually a very sensible an clever transfer. These outsourced accounting corporations can save a start-up cash and assets. Nonetheless, there ultimately reaches some extent the place accounting and finance have to be introduced in home. Many start-ups and privately held corporations wait too lengthy to carry accounting in-house and this will have severe repercussions.

Many of those outsourced accounting corporations declare that they’re US GAAP compliant. Nonetheless, in actuality they don’t seem to be as they make the most of money foundation accounting. To ensure that your agency to be US GAAP compliant accounting should be achieved on an accrual foundation. These outsourced accounting corporations make the most of proprietary black field robotic processes automation (RPA) accounting software program that enables a skeleton crew of accounting clerks to work in your firm’s account. And sometimes there is just one CPA supervising these clerks who work in your firm accounting together with 10-20 different corporations. Many of those outsourced accounting corporations should not diligent, make errors usually and would not have the bandwidth to offer your organization the time it really deserves. Additionally, keep away from utilizing abroad outsourced accounting corporations as usually they don’t seem to be USA GAAP consultants and I’ve seen to many points with the monetary assertion they produce.

Based mostly on my expertise there are 5 vital elements that ought to decide while you carry accounting in home and that require separate Accounting and Finance Departments: 

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The 5 circumstances listed above suggest that your start-up or privately held agency has reached a vital quantity of enterprise exercise. In case your agency has reached any 2 or extra of the 5 milestones listed above then it ought to significantly think about bringing accounting in home and likewise organising separate accounting and finance departments. Having an in-house accounting division and having separate accounting and finance departments is vital to your organization’s long-term success.

Some enterprise capital funding corporations and personal fairness corporations tightly management the spending and working construction of their start-up investments or portfolio personal corporations. In doing so, a few of them strip out the accounting and finance capabilities from their funding and have inner teams on the enterprise capital or personal fairness agency that carry out these capabilities. This isn’t strategic transfer long-term as you usually lose the inner business experience and information that may solely be gained by having an accounting and finance groups on-site on the agency.

Separate Accounting & Finance Departments

One other troubling pattern as of late is just too many start-ups or privately held corporations mix accounting and finance capabilities into one division. That is particularly an issue in tech start-ups and small privately held authorities tech and protection contractors. As talked about within the prior part in case your agency has reached any 2 of the 5 vital elements then it must set-up separate accounting and finance departments.

Some folks use the phrases accounting and finance interchangeably to imply the identical issues, however they don’t seem to be. They don’t perceive the distinction between finance and accounting. There’s a clear distinction between accounting and finance and understanding the distinction between the 2 is criterial to serving to start-ups develop and making certain that the correct assets are in place to deal with this progress. Accounting division and finance departments each deal with a agency’s monetary statements and the whole lot that goes into them. Nonetheless, the important thing distinction is that finance focuses on future occasions or issues that haven’t occurred where-as accounting focuses on previous occasions or issues which have already occurred. (1) Separation of accounting and finance duties is vital for efficient inner management as a result of it reduces the danger of each inaccurate and inappropriate worker actions.

What’s an accounting division?

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The accounting division is answerable for ensuring that each one monetary transactions at an organization are precisely captured, recorded and entered right into a agency’s basic ledger and accounting system. This often consists of processing all accounting receivable, accounts payable, reconciling all money accounts, capturing payroll, coming into expense accruals, monitoring adjustments in steadiness sheet accounts and so on.

All of those accounting capabilities must be carried out in line with the Typically Accepted Accounting Ideas (GAAP), to make sure the consistency and accuracy of inner and exterior reporting. One would possibly query why a start-up or privately held firm must observe GAAP, and the short reply is it doesn’t because it isn’t publicly traded and isn’t topic to SEC scrutiny. Nonetheless, I extremely advocate that each privately held agency and start-up observe GAAP guidelines type day one because it offers a stable basis for the agency’s long-term success.

The final word purpose of GAAP is to make sure that an organization’s monetary statements are full, constant and comparable. This makes it simpler for investor to research and extract helpful info from an organization’s monetary statements. Errors and omissions in accounting brought on by not following GAAP might be pricey and result in incorrect enterprise choices. Following GAAP implies credibility with lenders and potential future buyers. I’ve seen too many instances the place start-ups didn’t observe GAAP early on after which needed to spend tons of of hundreds of {dollars} to re-audit and restate monetary statements to make them GAAP compliant. Based mostly on my expertise, these corporations would solely have needed to pay 30% extra in salaries to be GAAP compliant earlier on which is so much cheaper long-term. (2).

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What’s a finance division?

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The finance and FP&A division offers firm senior administration with info essential to make strategic choices similar to which markets to enter, initiatives to pursue, the payback intervals for big capital outlays and the choice about what % of an organization’s earnings must be paid out as dividends and what must be reinvested internally. The finance division is the a part of an organization that’s answerable for serving to purchase funds for the agency, and managing spending withing the corporate. It’s the a part of a agency  that ensures environment friendly monetary administration and monetary management essential to help all enterprise actions.

The finance division purpose is to know the corporate’s funds and monetary info with long-term progress and strategic planning in thoughts. Company finance reporting and forecasting are largely based mostly on monetary information that’s analyzed to provide key efficiency indicators (KPIs) , monetary metric, and non-financial metrics that may be make the most of do assist make higher future enterprise choices. The finance departments must be in control of the annual budgeting and planning course of  Budgeting and forecasting shouldn’t be achieved by the accounting division as this can be a clear violation of GAAP.

Most finance departments as start-up and privately held corporations carry out fundamental treasury capabilities similar to serving to purchase funds for the agency, money move administration, and managing spending inside the firm. One other key finance division treasury operate is managing the agency’s relationship with exterior banks and tax suppliers. Word, these relationships shouldn’t be managed by the principle accounting division to make sure GAAP compliance. As soon as an organization get massive sufficient then separating out the treasury capabilities from the finance division so that there’s a stand-along treasury division.

Composition of Accounting & Finance Departments

Most start-up must set-up an accounting workforce lengthy earlier than a finance workforce is in place. Early on the accounting workforce does carry out some basic finance capabilities however there comes some extent in a start-up  or privately held agency’s progress cycle the place the unique accounting workforce can not deal with the increasing wants of the corporate.  

Accounting Division Construction

The preliminary present accounting workforce (usually often 2 or 3 folks) simply doesn’t have the bandwidth or time to deal with the entire agency’s accounting and finance wants concurrently and in the most effective method. Many senior leaders grow to be annoyed that the accounting workforce just isn’t getting all of their requests achieved, and the easy truth is usually there simply isn’t sufficient workers. Usually a lonely controller has to guide on all accounting and finance capabilities, which isn’t humanly attainable. This results in inner strife, excessive turnover charges at some corporations and inaccurate accounting and monetary reporting as nicely.

An accounting division at a start-up or privately held agency ought to often consists of a least 3-4 people at a minimal. This can guarantee that there’s sufficient headcount to fulfill the assorted accounting challenges and to offer a minimal segregation of accounting capabilities to attempt to be as GAAP compliant as attainable from day one.   The primary rent for any start-up or privately held agency must be a Controller or Director of Accounting, who ideally is a CPA with each an undergraduate and often a masters in accounting. The second rent at a start-up accounting division must be an entry-level junior accountant  or accounting clerk to assist with the preliminary grunt work. The third rent in an accounting group must be a senior accountant who has a bachelor’s diploma in accounting  and will or might not have a CPA. As the corporate get bigger a extra mature accounting workforce is proven within the chart beneath:

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A mature accounting division ought to comprise anyplace from 5-10 folks relying on the scale of the corporate and quantity of enterprise exercise.

Finance Division Construction

Newer, quickly rising corporations such as start-ups might not want a complete finance division at first and might often get by with 2-3 folks. However as the corporate grows and funds grow to be more and more complicated, they might want to rent a devoted core finance workforce to assist handle processes.

The primary rent for a company finance division must be a director of finance or monetary planning & evaluation (FP&A) director. This particular person ought to have at a minimal an undergraduate enterprise, finance or economics levels, and often has an MBA. Generally this particular person has different credentials similar to a CPA, CFA, CMA, CTP, or FRM. It isn’t mandatory for the director of finance to have a CPA, however solely to have understanding of each monetary and managerial accounting. Many start-ups make the error of getting a director of finance with a CPA however a controller who doesn’t have the credential. This can be a large downside because the controller is the person who has daily duty over key accounting and it’s higher suited to verify issues are achieved proper at first. The second rent in a company finance division is often a monetary analyst or Jr. finances analysts.  The third rent for a finance group must be a finance supervisor. Different hires for a extra mature finance division are proven within the desk beneath:

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A mature finance division might comprise anyplace from 5-10 folks relying on the scale of the corporate and quantity of enterprise exercise.

Managing Accounting & Finance Departments

For many start-ups, very early on the CFO and Controller are sometimes the identical particular person. That is nice when the agency is in its infancy however as soon as the agency grows then these duties must reside in separate positions. As soon as a agency reaches any of the two of the 5 vital elements talked about earlier then the agency will need to have a stable and distinct chain of command with regard to separation of accounting and finance capabilities, duties and duties.

The post-Enron laws Sarbanes Oxley requires CEOs and CFOs to log out on the validity of monetary statements if corporations are publicly traded and topic to SEC and GAAP necessities. Whereas privately held corporations similar to start-ups should not topic to this requirement CFO ought to function with the mindset that she or he continues to be answerable for the financials and to make sure that they’re right, clear and an correct reflection of the agency.

Based mostly on my expertise, if you need to select between a CFO or VP of finance & accounting with a CPA verse a controller who’s a CPA it’s at all times higher to have a controller with the CPA. The first cause is the controller is particular person is the closest to the day-to-day accounting points and can make sure that issues are achieved appropriately from the start. Many know-how and software program start-ups or small authorities know-how or protection contractors usually look to rent CFOs, VPs or administrators of finance and accounting who has a CPA.  Once more, you probably have restricted quantity of funds for salaries you’ll be higher off paying to have the CPA within the precise accounting group in your Controller slot reasonably than in a senior administration place.

Lastly, the finance group mustn’t report back to accounting, and the accounting group mustn’t report back to the finance group. Accounting and finance teams ought to every report independently to a CFO or a VP of Finance and Accounting. This ensures the independence of every group, and the validity of the work they produce and guarantee compliance with GAAP necessities and business greatest practices.

Accounting & Finance Techniques

One other frequent mistake that start-up and privately held corporations make just isn’t investing within the correct accounting and finance methods and platform on the proper time and doing an excessive amount of in Excel. Word, accounting and finance division have separate wants in terms of methods and platforms from a performance perspective however they’re very inter-related.  Firms want to think about the wants of each the accounting and finance departments when making methods and IT choices.

A start-up firm must get an accounting system with basic ledger performance up and operating as quickly as attainable earlier than any finance methods. Many start-ups use easy entry stage accounting packages like QuickBooks or Xero (which does Zero) once they first begin working. These entry stage accounting packages are good for less than 1-3 years in a start-up’s life cycle earlier than they’re now not as much as the duty.  After 2-3 years, these corporations ought to migrate  to extra mature and succesful intermediate accounting platforms similar to Sage or Nice Plains. I extremely advocate that for some start-up expertise explosive progress, that they think about skipping intermediate accounting platforms and bounce on to sturdy cloud-based ERP platforms similar to NetSuite, SAP or Oracle Monetary. This can save them the price of spending funds on intermediate accounting package deal implementation solely to 3-4 years down the highway to wish to implement and firmwide ERP platform with accounting and basic ledger modules.

As soon as, the accounting system is in place then the finance division will want a budgeting, forecasting and planning system for basic FP&A capabilities. Entry stage  and lots of intermediate accounting methods would not have in-built budgeting and forecasting modules, which implies corporations are sometimes left to do budgeting and forecasting in Excel which is a really poor apply long-term. If a agency has invested in a extra sturdy ERP platform, then often, they’ve budgeting and forecasting modules in-built similar to NetSuite and SAP. Another choice for finance departments is to make the most of the brand new breed of cloud-based budgeting and software program packages similar to Adaptive Planning, Planful or Anaplan that permit for the event of complicated company finance mannequin in a extra structured atmosphere then Excel.  (Please see my article on cloud-based budgeting and software program because the hyperlink The Finest Cloud Based mostly Budgeting & Planning Software program for Company Finance & FP&A Teams)


Accounting and finance departments carry out vital capabilities at start-up and privately held corporations. Nonetheless, many start-ups and privately held corporations are organising their accounting and finance departments in improper method and don’t observe greatest practices. This text mentioned a few of the key points associated to the 5 frequent errors and hopefully will offer you some perception in the best way to handle points earlier than they grow to be severe issues with adverse penalties.



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