Decoding the finance function for startups

For a startup, the one thing that haunts any CEO or a business owner is the thought of complying with the innumerable regulations in India and simultaneously managing bureaucratic officers. Finance, not being a direct revenue-generating function, is often neglected by the top management initially. However, subsequently it ends up squeezing major chunk off their pockets, in terms of cost of hiring good finance personnel, clearing the past nuisance created due to lack of proper financial planning, penalties for non-compliances, and so forth.

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They fail to decipher that finance being a core business-enabling function forms an indispensable part of every organisation’s growth story. Finance facilitates cost cutting, charting out better investment avenues, understanding strategic roadmaps and structuring deals.

Ideally, once the Series A is closed, the first priority of a CEO should be to get on board a senior qualified finance professional who can steer the wheel of the ship in the right direction along with the management. Many startups that fail to recruit an able finance person end up paying large sums to consultants as they do not possess adequate finance knowledge internally.

The entire finance function can be broadly categorised into three parts – finance controllership, investor relations & business finance, and regular compliance. Here are some of the key areas that require ones’ attention from the very inception:

Study, compliance and process management

1. Laws of various geographies in which the company operates or is planning to operate.

The laws prevalent in various countries are diverse and need to be complied with. For example, social security law may not be that strict in India, whereas it is a nightmare in the US or other western countries when not complied with. On the other hand, the transfer pricing regulations may be a cakewalk in Tokyo when compared with the draconian annual compliance rules in India.

1. MIS, reporting and presentation

The investors who have put in money in your company deserve to be periodically updated about the whereabouts of the company and the target their portfolio is heading to. A good finance professional knows the critical metrics required to be presented to the investors, hand in hand helping the management to keep a close tab on the control points Thus, the MIS preparation, reporting and board presentations are strict and important artefacts that cannot be shunned.

1. System automation, CRM etc.

The company should start automating its process from the initial stages and having the effective CRMs (SAP, Salesforce etc.), accounting software (Tally ERP, SAP B1 etc.) in place. It is always easy to capture and decode the data when the organisation is in the developing phase and further collate it for the next level of growth, whether you want to impress the incumbent investors or pass the due diligence test smoothly.

Financial planning & control:

Listed below are the key areas which any startup should eye for healthy growth and strong internal control:

1. Funds management & investments – Positive cashflows and low working capital. Every CFO strives to operate at zero working capital, but may be a distant dream. The cash should not be kept idle and one must strive to invest and earn the minimum opportunity cost relevant to the funds, keeping in mind its safety and recoverability.
2. Tax planning & company law compliance – Hope the taxmen and the corporate law do not come hounding you. Typically, startups do not run into these issues in the initial years of operations. However, after three to four years, the past shortcomings are brought into the picture by the IT officials. Thus, it is amply important to plan for scrutiny assessments well in advance.
3. IP valuation & TP study finance control – Intellectual Property (IP) is a much-talked-about affair today. It depends on where the IP lies in any business as it becomes the basis for taxation and revenue for the ex-chequer. It is vital to articulate the clear understanding of the business, be aware of the advertisement campaigns and make sure that the propagandas are in sync with the legal requirement.
4. Revenue forecasts, expense monitoring, budgeting and variance analysis – The investors are always interested in looking forward to forecasts, budgets and variances, if any. To present something and deliver it is in itself a big challenge. The idea is to 'promise less and deliver more.'
5. Legal contract review & contract management – Contracts are not the sole responsibility of the legal team. The financials jargon, terms and the negotiation need to be taken care of from the business, finance and taxation point of view.
6. Accounting policies & review, AR and AP; financial statements & audit –Last but not the least, these account for the base of all the above pointers. If the recording and presentation of the transactions are correct from the very inception, the rest will all fall in place.

About the author

Rahul Saria is a chartered accountant. He has advised many startups and helped them set up whole finance function. Presently, he works with a B2B startup Near.co (formerly Adnear.com) and heads the controllership function there. He can be reached at [email protected].

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory)