We’ll break this topic down into 5 parts:
1. Selecting a bank. And then another.
2. The Board’s Finance Committee.
3. Choosing accounting software and building your ledger.
4. Creating a financial plan so you can report on it.
5. Your bookkeeper and auditor are not the same.
This is by no means an exclusive list of financial management or control. But these are a few key topics that all founders will need to address in building a new business.
If you are investing your own capital, raising outside money, or generating revenue (lucky you!), then you will need to ensure the company has a bank account in its name and no one else.
Select a bank that will provide great online services and reasonable fees, especially around minimum balances and ACH transactions. Physical banking locations can be helpful, too. Make sure you have at least two signers on the account so that financial matters can be addressed even if one person is away or not available.
Then, select another bank. It is useful to have a second bank because it provides an additional layer of security – whether it be from theft or those pesky bank runs. Ideally, if your first bank is more digitally focused, your second bank should be bigger and more established (re: a bank the U.S. government will always bail out).
Get debit cards and checks and keep them under lock and key. Have ACH / Wiring Instructions prepared in PDF format to share with folks as needed – especially new investors. It may seem silly, but you want as many forms of transactions available to you as possible.
Manage cash across the two banks. Use one as an operating account where you manage receivables and payables, including payroll. Use the other to generate some interest income for your cash and transfer between accounts as needed.
Reminder: when you open bank accounts, the bank will need verifiable address information, corporate information (including your EIN) and a board resolution.
Second reminder: if the bank offers you a bank credit card, do not under any circumstances sign a personal guaranty on the card.
As you build your Board of Directors, one of the first committees you’ll want to form will be the Finance Committee. Even if you have a three-person board (with a founder being one of the board members), a two person finance committee can provide a lot of help in establishing strong financial management.
First, the finance committee can be board members who aren’t you (i.e., the founder). They can be there to determine what specific treasury function controls should be in place, such as limits on check-writing authority, approval of expenditures over certain amounts, and designation of check signers.
Second, the committee can help in selection of the auditor and can work with the auditor to ensure completion of the audit and implementation of auditor recommendations.
Third, the finance committee can – and will – be reviewing and approving your annual budget. They can be a sounding board, a sage and help in making sure your financial plan is great shape.
Fourth, they can be there in emergencies. And in the name of SVB, emergencies do happen.
Finance committees should meet separately from the full board, ideally quarterly before each board meeting to review financial results. and resolve any financial matters before the full board meeting.
Now that you have capital, you have to track it. In choosing the right accounting software, you should get functionality that allows you to build your ledger within the software, issue invoices, track all receivables and payables, and integrate with other key software tools, such as you payroll management and bill pay.
Don’t delay on this. You need this in place as soon as you start accruing expenses. An orderly system from the start will prevent clean up later and result in better financial reporting.
And that financial reporting is key, you ultimately want to make sure that your accounting software is maintaining your accounting ledger and producing accurate income statements and balance sheets.
Accounting software related tools like payroll and bill pay – should all be reasonably priced such that you can go on monthly payment plans. Just think, you’ve become someone else’s ARR!
Financial plans may start with a forecast. Often, that forecast stretches out over 3-5 years, includes a hockey stick for revenue, and makes its way into investor presentations.
But very quickly, and often in diligence before you close on investment, investors will want to see an financial plan: a quarter by quarter or month by month pro forma income statement on how you will spend the capital you raise and what revenue, if any, you will generate.
This financial plan is critical. It will provide your board members comfort that you’ve thought through the use of funds for this round. And it will give you a roadmap for how to spend money, including the timing of onboarding new employees, which is often one, if not, the biggest expenses in the early days.
Most importantly, you should craft your financial plan and align it with your accounting ledger in a way that allows you to report on it, such that without an incredible amount of effort, you can produce accurate financial statements for your leadership team and your board on a quarterly basis.
The financial plan is a big step. But the budget to actuals is what ultimately going to be needed to give everyone the information they need to make informed decisions.
Don’t worry, you’re not doing all of this alone. A strong bookkeeper can be a valuable part time employee or contractor. There’s no shortage of experienced individuals or firms that offer part time bookkeeping services, more often as a 1099 contractor so you’re not bringing someone on payroll.
A great bookkeeper makes sure bank statements are reconciled, invoices are issues, bills are paid, and the books are well maintained and closed each month in a timely manner.
But, your bookkeeper is not your auditor. There are firms out there that offer both services. Remember, a firm can only offer one! Your auditor will maintain independence from your routine accounting and will evaluate your financial records for accuracy on an annual basis.
Pick a good audit firm given your stage and reevaluate as you grow. Be sure to include the board in the selection of the auditor and take the recommendations the auditor makes to heart. And be sure to budget accordingly. Audits can quickly become $25k+ expenses that are due in lump sum!
Your audit firm can file your taxes, too. Be mindful you’ll need to file a tax return even if you aren’t making money – and be prepared to budget for that, too. You could easily be spending $5k - $10k to start, and much more as you grow!