Why do many successful founders still fail financially? In 2017, I joined Propel, a startup cloud accounting practice within Deloitte, as their advisory lead to service the needs of high-growth businesses.
The companies we worked with were predominantly started by inspiring individuals who wanted to get off the corporate ladder and find meaning and purpose in their work by taking custody of their futures and bringing talented people on the journey with them.
I learned that entrepreneurs are often excellent at executing a high-level strategic vision but take a less active interest in their businesses' finances.
Many of the mistakes made by founders were missed opportunities, and with a bit of foresight they were easily avoidable and avoiding them would have bolstered their success over the longer term.
1. Be responsive
Many founders don't prioritize responding to data requests from their accountants. They view it as admin, and it tends to slip down their to-do lists.
"Providing timely responses to requests for missing invoices, bank statements, HR data, and clarification of transactions will ensure that financial data is accurate and complete."
While this will minimize the risk of fines, being responsive goes beyond compliance. Your financial advisors will be able to give forward-looking advice, such as scenario planning, and foresee any potential issues related to cash flow. Aim to respond to requests within 48 hours to aid real-time data efforts.
2. Avoid share issue woes
In the UK, setting up a company is pretty straightforward and cheap. However, it's common for founders to initially form their companies with either a couple of founder shares or a larger number (i.e. several thousand) with an issue price of £1 GBP per share.
Both of these options are suboptimal. Issuing just one or two founder shares will create the need to fill in multiple forms for future allocations, with Companies House subdividing those already in issue. This takes time for changes to be reflected and can be expensive.
"Initially issuing a large number of shares with a value of £1 GBP can lead to an unnecessary build-up of share capital on balance sheets (e.g. £10,000 GBP for 10,000 shares)."
Both of these issues can be avoided by issuing a high volume of shares with a nominal value of 1p. For example, 10,000 shares would only represent a value of £100 GBP on the balance sheet.
3. Stay on top of the bookkeeping
I found that companies that maintain their own daily records often fell behind on their bookkeeping responsibilities and would only attempt to bring entries up to date for quarterly VAT filings and annual accounts responsibilities.
This led to many founders being unable to make informed commercial decisions because they relied on out-of-date data and could not drill down into business performance and KPIs.
"A simple way to keep on top of bookkeeping is to dedicate a specific day to it each week. This will allow founders to manage their cash flow and optimize business performance."
4. Keep your accountant abreast of funding plans
It's surprisingly common for accountants to discover that their clients have received debt funding by seeing large cash balances in their bank accounts.
Founders not seeking the advice of their accountants for debt funding risk potentially picking a financial product inappropriate for their business type, overpaying and potentially damaging their credit scores from rejected applications.
The alternative debt funding market has exploded over the last 10 years, and accountants are becoming increasingly skilled in helping their clients access the most suitable debt types. This can lead to cheaper fees and/or greater flexibility with repayments.
"Keeping your accountant informed of your debt funding needs by updating them on growth plans during catch ups will help you select the best product, get applications approved faster, and access funds sooner."
The benefits of this go beyond compliance, as it will enable your financial advisors to give forward-looking advice based on the cash injection.
5. Separate personal and business spend
Many directors incur personal expenditures within their businesses. This isn't good practice as it leads to significant clean-up work, with transactions needing to be recoded to directors' loan accounts.
This impairs the visibility of business performance and can be a time-consuming, non-value-adding exercise for accountants to rectify. Additionally, overdrawn loan accounts can create additional compliance and tax issues, with individuals and companies needing to pay additional taxes and interest on amounts outstanding.
The only action required to avoid this potential issue is for directors to use their own debit and credit cards to make personal transactions that are not directly relevant to their companies.
If your accountant manages your personal affairs too you may choose to open up a personal account with your business banking provider to make data access easier.
6. Invest in your professional relationships
Founders of high-growth companies are often mindful of being prudent when spending money associated with professionals, such as accountants or solicitors. However, cutting corners by attempting to complete associated work in-house means that founders are pulled away from their core competencies, such as winning new business or setting the strategy.
A good professional relationship should save you significantly more than the cost of the engagement itself, whether through tax planning, your organizational structure or avoiding fines for non-compliance.
"Paying for professional advice upfront will keep your company on the straight and narrow and potentially help optimize its performance too."
Engage with your accountant for forward-looking advice once per year, in line with the submission of your annual accounts.
7. Be realistic with your forecasting
Founders tend to be naturally optimistic, and this behavior should be celebrated as they are the risk-takers who create prosperity through new companies and job creation. However, their overoptimism with their forecasts can work against them. Unrealistic targets can be missed, causing cash flow problems, a loss of investor confidence and in worst cases business failure.
"82% of SMB businesses fail due to running out of cash so it is critical to get this right."
This can be rectified by founders working with their financial advisors to understand their unit economics and the fundamental growth drivers of their businesses. Additionally, re-forecasting regularly (monthly or quarterly) will help forecasts be more realistic overall.
Foresight and organizational skills can turbocharge growth
Despite these common mistakes most of the founders and companies I worked with ran profitable companies.
However, building a strong and responsive relationship with your accountant, alongside regular bookkeeping, an optimized share structure, and clear separation of personal and business expenditure leads to higher quality financial reporting. This, in turn, helps you understand the key drivers of your business and ensures it is sustainable and positioned for long-term success.
"Getting the finance right early won’t just keep you compliant, it can act as a key enabler of growth. "
Author profile
Nick Levine is a chartered accountant and fintech consultant. He was formerly Advisory Lead at Propel by Deloitte and Head of Enterprise for ICAEW. His writing portfolio includes The Times, Wired, and AccountingWeb.