As a founder and a co-founder, you’re creative, in charge of executive tasks, business development, and fund raising. Accounting is a function that gets overlooked and put on the back burner as the rest of the business develops. Not addressing accounting will end up costing the company a lot of money in the long run, and not a favorable outcome.
Your company raised funds, you have few millions in the bank account, debit cards, credit cards, but no internal control system. Moved to a nice fancy office, hired employees, purchased pretty furniture, created a game room, stocked the kitchen with drinks and snacks, treat employees to lunches, subscribe to all kinds of applications and systems, take first class business trips, stay in high end hotels, and eat from high end restaurants. In the meanwhile, the bank and credit card balances keep adding on, sure the minimum payments are made, but who’s monitoring all those transactions? There is no accounting process, and no internal controls in place. On the bright side, an accounting software, QuickBooks or Xero are set up and all the bank and credit cards transactions flow through, however, who’s monitoring this?
Startups tend to overlook the important of an accounting function and internal controls. What is the cause of this careless act? Fraud and inaccurate financial reporting among few others.
Fraud – With no one monitoring the financial activity, extra charges made on debit and credit cards, duplicate payments, personal spending, paying for unnecessary items, writing checks to unnecessary vendors. Founders not aware of each other’s over spending, most for personal gains. All these expenditures add up to a material amount.
Financial Reporting – Since the accounting is not monitored it is impossible to know the health of the company. There is no confidence in the financial statements, if any exist. Looking at the numbers won’t make any sense because you don’t know if the categories and the amounts reports are accurate.
Having a sound accounting process and internal controls, will catch all the issues, mitigate risk and provide assurance of the financial data and business operations. Investors have the right to know how their money is used.