Until recently, tech startups traditionally enjoyed relative freedom from financial oversight from the venture capitalists who funded them.
As long as these firms could report progress in developing their products and generating some level of earnings from sales and software subscriptions, they could burn through their millions without having to endure close scrutiny of their expenses.
But this laissez-faire era is coming to a close. With inflation, rising interest rates and lower earnings expectations battering technology stocks this year, we may be in the midst of another tech bubble burst similar to the one at the beginning of the century.
In this environment, many of the “pie-in-the-sky” companies that angel investors were flocking to are now struggling to survive. Many VC funds are refocusing their investments on more well-grounded technology companies focused on solving real-world problems.
Passing yearly audits will no longer be enough. Investors now expect these startups to demonstrate greater financial transparency all the time. CEOs who once got away with marketing themselves as visionaries will also need to think and act like accountants.
You don’t want to run your business by your bank balance, but if you’re a tech firm that isn’t yet profitable, you need to keep tabs on your balances.
This means they’ll no longer be able to get away with manually filling in spreadsheets on an ad hoc basis whenever they have a spare moment. They’ll need to have robust bookkeeping processes and tools to track and report expenses and revenue in a more accurate and timely manner. And they need to maintain accurate records of revenue and earnings coming in each month, if not every day.
While most startup CEOs have a basic understanding of accounting principles, many don’t have the training needed to serve in this role, or simply don’t have the time or desire to do so. But with more VC funds wanting to see where every dollar is spent, it is essential CEOs understand how to accurately track and report monthly expenses and revenue.
Step 1: Simplify all non-card payments to one provider
Use one tool to sync your accounting platform with any wire transfers, checks or ACH payments your business needs to make. Online banking services like Relay Bank or Bill.com are useful.
You don’t need multiple ways to pay and want to prevent using anything that prevents payments from instantly showing up in your books. I’ll explain why this is critical further on.
Step 2: Use services that control spending of credit card charges
Many SaaS companies will hold a significant amount of credit card charges. You’ll want to start using a Divvy or Brex card that allows you to segment and issue cards by department and apply spending limits to help enforce monthly or department budgets.
Amex cards are enticing because of the rewards and points, but they make it hard to track employee spending in real time.