As a founder at a seed-stage startup, you have a lot of responsibilities. Your top priority is developing an innovative product or service and getting it to market. That and fundraising. Also sales. Right, you're probably doing sales. That's a priority too. Don't forget about marketing, hiring, admin... it's a lot, and all of it matters.

Oh, and financials... right... did you remember to file your franchise taxes in Delaware? Do you even have to?

I know how you feel. I'm a founder too.

I also know how it feels to hire a firm to do some piece for you—holding up a corner of your startup so you can get higher priority work done with customers or investors—and they ask all the wrong questions, focusing on the wrong things.

It's inefficient, which is the last thing you want when you're trying to run your business.

I get it.

Accounting isn't fun, and while you have to do a lot of things that aren't fun every day, it also isn't your priority. Tax deadlines loom. The IRS is coming... and you just want to focus on more important things like your customers... but investors need those financial statements too.

Daunting, but let's talk about getting your books in order at your startup without sacrificing everything.

Do Startups Need a Full-Time Accountant?

No, not early on, when an in-house accountant represents a considerable cost center. In fact, when you're really small, I don't think you need an accountant at all. You can probably handle the accounting yourself if all you've raised is $250k.

You get a little bigger than that, and you'll want an accountant, but full-time? No way. Hire a firm to handle the books. The cost scales better to your needs.

Don't even think about a full-time accountant until your firm can't get it done for you. And congrats, because you'll be a lot bigger than you are today.

Accounting vs. Bookkeeping

Accounting is the big picture. It involves things like organizing your financial records, preparing your monthly and yearly reports, reconciling your accounts, and analyzing your company’s finances.

Bookkeeping is the day-to-day recording of your financial transactions, like all your purchases and sales. As a seed-stage startup, you're probably using software like Quickbooks or NetSuite to do most of the bookkeeping yourself.

You should know that an accountant can also do bookkeeping, but a bookkeeper can't be an accountant. When things get complex enough to drag on your efficiency as a founder, you're probably looking for an accountant first, especially for year-end or month-end work.

That doesn't mean you can ignore your bookkeeping. During your fundraising rounds, investors need clear insights into your finances. The data has to be there to make accurate projections, so if you're falling down here, get help.

Bookkeeping 101: Financial Records You Need to Track

Here is a list of financial records you need to track. These things are the granular "raw material" of your company's finances and represent a bare minimum:

• Bank statements
• Credit card statements
• Payroll
• Invoices
• Bills
• Proof of payments
• Canceled checks
• Previous tax returns
• W2 and 1099 forms
• Financial statements

The Benefits of Hiring an Accountant 

Accountants Generate Bandwidth

Your most valuable asset as a founder is your time. Where's it going? If accounting tasks take too much of your time, you're not going to grow your company. You know when this is happening, so be honest with yourself about when you need help.

Compliance

Verify that your books are consistent with generally accepted accounting principles (GAAP). You want to make sure your company's financial processes are sound so that you can respond to potential investor or lender concerns.

Tax Liability Reduction

Accountants find tax breaks. Tax law is complex and ever-changing (e.g., the employment retention credit). As you grow, the potential benefits here increase.

Financial Insights

An actual human accountant can do more than running some numbers, which means you should expect some critical thinking leading to some deep insights into your company's finances. As you grow, not having an accountant may represent savings in the short term, but there's a considerable opportunity cost that outweighs the short-term cash benefit. The point at which you feel you're starting to miss some strategic opportunities is the moment when you should be looking at hiring an accounting firm.

Financial Planning

An accountant can interpret your company's finances and forecast fiscal outcomes. That helps you make better decisions by giving you a clear understanding of your burn, revenue, runway, and when you need to fundraise again.

Important Financial Metrics

You're measuring your teams (and yourself) with Key Performance Indicators (KPIs). You need data to do that. Same with your financial performance: you need to frame your data in useful ways so that you can understand the trajectory of your business. Accountants help with that.

Let's look at four key financial metrics that represent your company:

1. Accounts Receivable (AR)

This is the money your customers owe you for goods or services. It's revenue, but not yet cash flow because they haven't paid you (yet). It's effectively a line of credit you've extended, which means it's a liability.

You made the sale. Everything is awesome. The money isn't in your account though, which means that everything is still awesome, but you can't pay your office rent yet.

Accountants help you figure out how to account for the delay between revenue and cash flow in the rhythm of your business dealings.

2. Accounts Payable (AP)

This is the inverse of AR: it's how much you owe vendors on the line of credit they've extended to you. You haven't paid the bills yet, which can be an advantage, but it will mess with your books by making your operating loss and your cash burn not match up.

Who cares? You do because you want to make valid projections moving forward. That can be difficult when burn and loss disagree. An accountant can unpack this for you so you can understand the true financial state of your business.

3. Burn Rate and Cash-Out Date

Your burn rate is the amount of cash you're going through every month. Projecting that spend forward against your total funding level will give you your cash-out date, which is the day you run out of funding and cease business ops.

4. Deferred Revenue

This is upfront payment from a client for a product yet to be delivered or a service yet to be rendered: yearly subscription fees, pre-orders... that sort of thing.

Deferred revenue is great for cash flow, (you can pay rent with it), but it creates a cash bubble on your books, so it is considered a liability.

Take-Home Message

Accounting software can crutch you along for a bit, especially when you're small and just getting going with a pre-seed startup. Once you hit seed stage, your finances will get increasingly complicated, the picture murkier.

To see through the murk will require an ever-increasing drag on your time. You'll feel your bandwidth disappearing. That's when it's time to hire a fractional accountant.

All the hard work you've done to that point, especially with keeping an accurate set of books, will pay dividends as a professional accountant leverages that data into useful insights, predictive models, and accurate forecasting.

When you hit that point, Fondo has the resources, experience, and expertise to lend a hand. We specialize in startup accounting, so we know the specific roadblocks you're facing and the opportunities that will push you to the next level.