It's hard to dive into the current business landscape without having a proper plan. In fact, going headfirst into establishing a new and successful company can take a lot of teamwork, resources, and skill. Tech startups have it the worst as they often tend to fail to match accounting services to their need.
As of 2022, $10.1 billion has been invested in the Fintech sector. This followed the 8,000 startups funded through a whopping $210 billion in 2021. It is no wonder that not every tech startup makes it to the top. Investors have become increasingly weary of listening to pitches that are not backed by data. They are hoping to witness the tech startups they have funded reach new heights.
However, some traps can hinder that growth.
The following list depicts common traps relating to company finances that are best avoided:
1. Not Prioritizing Accounting and Cash Flow Management
The daily expenditure of a startup can amount to quite a lot of money. For a tech startup that is in the early stages of development (ideation stage with no funding), keeping track of expenses on an excel sheet might suffice.
Suppose you are a startup that has just stepped into the market. Your idea immediately gains the attention of valuable investors, and you manage to secure those funds. However, this is soon followed by the capital required for the setup and further operating expenses.
When your business begins to incur expenses, it is necessary to streamline cash flow in a direction that is best for future growth. This can only be obtained through a sound understanding of your books and business goals.
Some of the intricacies of your cash flow include dividing expenses between those your startup will need in the future and those that are supposed to be spent daily. Failing to keep track of the money leaving company accounts can quickly deprive you of funds you could have reinvested.
A finance expert doesn't just see numbers when they look at your books. They see opportunities and resources that can be redirected to more efficient allocations. This can prevent cash issues and tax liabilities in the future.
2. Unplanned and Impulsive Expenditure
As your new business grows and you continue to close rounds, the temptation to spend money on unnecessary things increases. We've seen it all, trips to Ibiza, fancy dinners, expenses on online ads with no preliminary research to back them, and more and more impulsive spending.
As a tech startup that has received funding, you must have a plan for each type of expenditure down the line. You must know your goals and milestones and spend according to your budget and forecasts.
Every startup should have a financial model with clear revenue drivers and KPIs in order to know how and where to spend money. You must then keep track of the money spent through accurate bookkeeping. Poor cash management and not keeping track of your numbers may lead to cash surprises and unhappy investors.
The right finance team can help you keep down your costs, plan better and stick to a long-term investment and reinvestment plan that maintains a steady income and allows you to invest in your company the way you want.
3. Ineffective Payroll Management
Ineffective payroll management can destroy startups in one of two ways;
First, it eats away at the business from within. As you don't have the expertise to track how much you are paying employees for a specific time, it is impossible to measure productivity.
Understanding your payroll and what the figures mean can provide useful insight. This includes how much an employee will work, their subsequent output, their pay, and whether they are a worthwhile investment.
Improper payroll management can leave some employees undervalued or invest too much money in unproductive resources. This takes away from your startup's profitability. It also leads us to the second disadvantage.
This trap can demotivate employees and lead to excessive turnover. Remember that the average startup attrition rates are as high as 50%. The less monetary value an employee gets for their skill, the lesser their job satisfaction which may cause them to quit.
Having the right pay strategy and a clear hiring plan will help you avoid this. You can discuss this with your finance expert when building your startup financial model.
4. Lack of Ongoing Investment
If you are a tech startup, chances are you have received adequate investment to build your company for the first five years. However, it may be hard to continue closing rounds without having a dedicated finance team.
Do you really have the time and expertise to keep up with all your data and cash flow dynamics while also keeping up with your business plan? The right finance team can help you put together financial reports that will reassure your current investors and financial models and will help you close more rounds.
5. Misalignment of Pricing with the Figures
Accounting and CFO services can only go so far; you must meet your finance experts halfway and take the necessary steps to align your funded startup with their recommendations.
An accountant can provide you with the figures throughout the year and help you understand why you aren't making those numbers. But it is your responsibility as the CEO to take the right action to reach your goals.
Pricing your services is an art that involves a balance. This balance is between how you value your product and how your customers value it. The price tag you are looking for might not meet the customer's valuation of your product. If you price it lower than your customers' expectations, they may not value your service. However, if you go higher, they may move to a competitor.
Tech startups often misprice their product, which can easily be corrected with the adequate research required to estimate the average price and one that will suit your product.
A good finance expert can help you determine the right pricing to ensure you have the right margins to reach profitability. The better your pricing strategy, the easier it is to market your product and make it stand out.
Tech-Based Accounting Services are the Key to Success
Tech startups require a lot to stand out in the crowd. With the ever-changing technological landscape, you need an equally efficient accounting and finance service that understands technical demands.
Cypher provides everything your startup will need, from advice to help you better your spending strategy to building a financial strategy that integrates the latest accounting software. With cloud-based tools, your tech-based startup's accounting can match its product.
The best way to avoid accounting traps is to find accounting services that can meet your requirements and understand your needs. Try not to base all your accounting decisions on your limited accounting knowledge. Hand over the books and focus on aligning your strategy with the accounting analysis provided by professionals.
The right accounting and financial strategy can help you take your business to new heights. Contact us to kickstart that journey toward growth.
