If your startup is experiencing these 3 things, it’s time to check your finances

Photo credit: Oliver Thomas Klein.

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Many founders think, “Who needs to look at the books when we’ve already hired somebody else to do it?” Almost nobody does that, and founders are only concerned with the month’s bottom line because, at the end of the day, what’s important is that they have money to foot the bill.

If your startup is just developing, it might be alright for you not to care so much about finance. But things get a bit messier when your business starts to have wider operations, as you’ll need to make correct strategic financial decisions.

Your accounting records don’t just tell you about your bottom line, gross margin, or cost to produce; they’re powerful records (if well kept) which can correlate your non-financial information with your financial ones. It can also tell you how your contracts are affecting your bottom line, how your new marketing strategy affects your sales, and a lot more.

Bookkeeping is an easy process, especially for small companies and startups. What’s difficult, other than making sure the numbers make sense, is translating them into actionable points.

Here are a few urgent signs you need to start looking at your books, even if you hate to do so.

Bad gut feeling

I hate to say this, but it’s true: entrepreneurs tend to shrug off the idea that something might be wrong with their financials. They do this either because they don’t understand the financials or they just don’t rely on them. The mere fact that you feel something is wrong means something is wrong. Don’t let your gut feeling slip by.

Check your financials every now and then (even if it’s just to let your bookkeeper know that you get what he’s doing). Here are a few things that you can easily check without an accounting background:

• Cash balance: Check this in the bank and compare it with your accounting records. Even a moron can tell you that both should be equal (except for fintech startups where cash movements can be a bit messier). If there’s a gap, it might be time to dig deeper.
• Inventories and fixed assets: You should be able to roughly estimate the value of these items easily and compare it against your accounting records. It’s not an exact science, but it should be pretty close.
• Revenues and gross profit for the year: You should know these numbers by heart as a founder/entrepreneur. Why aren’t we checking the bottom line? Because it’s a bit more difficult, as you’ve got other costs, expenses, and taxes that you might not be able to estimate.

Easy peasy. But don’t take these numbers too seriously at the end of the day, though. Believe in your gut and understand the story behind your numbers.

You have or are looking for investors

Funding can be quite a messy exercise, and keeping your books in pristine shape is important if you have or are looking for external investors. The last thing you want to tell your investor is, “Hmm… I need to check with my accountant.”

Your existing investors expect to receive quality financial reports that are true and fair. These don’t have to look good, but they do need to reflect the actual state of your business. This is where your open-book clause will kick in, as your investors are likely to require you to undergo external audits to make sure they’re comfortable with your numbers. However, audits don’t help you in explaining your numbers to them. So, having a good knowledge of your books will help a great deal.

When you pitch for funding, it’s much more than a numbers Q&A; it’s about preparing yourself for financial due diligence. Many people think that investors are happy enough to hear about your story, numbers, and multiples. But the pitch is not the end of the discussion, my friend. You need to make your numbers, assumptions, and contracts ready for scrutiny in a data room. You don’t want to be chasing the tail after the handshake is made.

Working capital hiccups

Really, you’re a large corporation