There is one thing that I tell every client and employee I work with.
Bad information can kill you.
Think I’m exaggerating? Ask the guys who blindly followed Apple Maps in Australia and landed in death traps – stranded in the middle of nowhere for up to 24 hours.
And when bad information comes from the person handling the finances in your startup, it can and will kill your company. CEOs are often complacent in the confidence that everything is okay because their CFO says so. They’re on a hiring spree, until they wake up one morning and learn that there’s no money to fund the next paycheck of their 400-something employees, and there’s no recourse but to declare bankruptcy. And fire them via email and quietly delete all their social media accounts. (Zirtual, I’m looking at you).
The accountant says your bank balance is $200,000, which is all good, it’s enough runway for a couple months. But he forgot to account for this big AmEx bill that has been building up, or forgot that the San Francisco payroll tax of 1.162% on 2015 payroll is due on Feb 29th.
As a CEO, how do you make sure this situation does not arise? What are the red flags you need to look out for? It’s vital to make sure your accountant is capable and adroit, but while a QA might work with an engineer, how do you test your accountant?
One, make sure you always ask a few detailed questions when you review with your accountant. He tells you your burn rate is $100,000, you grill him for a high level breakup. What part of it is variable? What is fixed? Any change in spending pattern? While these questions will get you some relevant info, but more importantly, they increase your confidence in your accountant and his / her own diligence with numbers before they present the numbers to you.
Two, look out for unexplained numbers and unusual variations in expense lines. If in a 10 person company, your food amounts to $20,000…pause. Analyze.
Make sure your accountant knows the five big buckets that account for 80% or more of your burn.
If you have a budget, compare it with actuals, and analyze the deviations with your accountant. If he stammers and stutters or says “I will get back to you,”, you’ve been warned.
The conclusion is simple: trust but verify, and be careful with your hiring. A cheap accountant can prove very expensive!
If you have any doubts or questions, feel free to reach out to me via LinkedIn or email at email@example.com. I’ll be happy to provide an audit of your books to warn you about any red flags. Our website is www.mystartupcfo.com if you’re interested in knowing more about what we do.
Looking forward to hearing your thoughts.