One Techcrunch article caught my attention recently. Fisker, the EV startup is struggling to keep track of its payments (both receivable and payable) as it embraces accelerated growth. In some cases, it delivered vehicles without collecting payments. What a way to win initial customers!
As a startup builder who is building a digital product myself, I fully understand the laser focus on product and sales at an early stage. But the boring stuff such as internal financial control is not something to take lightly.
While it may not be the most exciting aspect of starting a business, taking care of financial matters from the beginning can save you from major headaches and setbacks down the road. From obtaining necessary licenses and permits to setting up control procedures and installing suitable finance softwares, these tasks may not be as flashy as the development of your product, but they set the foundation for long-term success. Neglecting these areas could put your entire operation at risk, as we can see from this fiasco.
Get the basics right, the rest will follow.
My favorite basketball players are Michael Jordan and Kobe Bryant. The commonality between the two of them is the emphasis on the fundamentals. Starting from a young age, they spent countless hours perfecting the basic techniques, consistently. They understood that mastering the basics was crucial in becoming elite players.
It is the same in business. The foundation of a strong finance function is control. Without it, you won’t have a functioning business. Here, we will discuss what strong financial control looks like.
Good bookkeeping
Bookkeeping is the process of recording financial transactions and activities of a business. It involves systematically documenting all financial transactions, such as sales, purchases, payments, and receipts, in a structured manner.
Accounting software can be sufficient for basic bookkeeping tasks, but it depends on the size and complexity of the business operations. For small businesses with relatively simple transactions, accounting software like Xero or QuickBooks can handle most bookkeeping requirements. These programs allow you to record income, expenses, and invoices, track inventory, and generate financial reports.
While accounting software can automate many bookkeeping tasks, it’s still important to have a bookkeeper or a junior accountant with bookkeeping knowledge to ensure accurate data entry, reconciliations, and compliance with accounting standards and tax regulations.
Segregation of duties
Along with establishing a strong sense of financial control, segregation of duties also helps to prevent conflicts of interest within an organization. By dividing financial responsibilities among different employees, no single person has too much control over the entire financial process. This creates a system of checks and balances that can detect and prevent any fraudulent activity from occurring. Furthermore, separation of duties also leads to greater transparency and accountability, as each employee is responsible for their own specific tasks and can be held accountable for any discrepancies or errors that may arise. This is essential for maintaining the integrity of an organization’s finances and ensuring the trust of stakeholders. So not only does segregation of duties lead to better financial control, but it also helps to promote fairness and ethical conduct within a company.
Defined financial policies and procedures
You need to establish the rules of the game so that players know how to play.
Financial policies outline the guidelines and processes for managing the organization’s finances, from budgeting and spending to reporting and auditing. Without clear financial policies in place, an organization runs the risk of financial mismanagement and potential legal issues. By implementing robust financial policies, an organization can ensure transparency, accountability, and long-term sustainability.
Creating a strong foundation of financial policies also helps to protect the organization’s assets and reputation, as well as maintain trust with donors, stakeholders, and the general public. These policies should be regularly reviewed and updated to adapt to any changes in the organization or external factors. It is important for all employees to be familiar with these policies and procedures to ensure consistency in financial management throughout the organization. By adhering to these guidelines, an organization can make informed decisions that align with their goals and mission, ultimately contributing to their overall success.
Regular employee training and education
Different from a mature organisation, a fast-growing startup may experience doubles or even triples in headcount in a very short period of time. This makes regular employee training on financial policies, procedures and systems even more critical. Learning about financial policies, procedures, and systems may seem daunting, but it is necessary for employees to be informed and knowledgeable in order to effectively manage company finances.
Contingency Planning
Correcting mistakes after they happen is the most expensive. That is why it is vital to have strong control in place to prevent expensive mistakes from happening in the first place. However, even with the best control measures installed, mistakes may still happen. It’s important to have a plan for how to handle these mistakes quickly and effectively. This could involve implementing backup procedures or creating a system for documenting and reviewing any mistakes that do occur. It’s also crucial to have open lines of communication within the organization, so that issues can be identified and addressed promptly. By being prepared and proactive, businesses can minimize the impact of costly mistakes and maintain a healthy rhythm of business operations.