When people embark on their startup journey, their prime focus is always developing their product/service and they tend to get completely consumed by that. One major reason we’ve noticed due to which most startups shut shop is they have no idea where their money is going. The crux of this problem is a lack of accounting and finance systems in place. As glamourous as marketing does sound, if you don’t have your finances and accounts in place, you won’t have a product to market.
This post is an introduction to some basic concepts and things entrepreneurs need to keep in mind when trying to steer along the road to success. While we don’t delve too deep into the technicalities, the intention here is to make you (the entrepreneur) conscious of the way to think of and go about your accounting / finance duties. And yes, they ARE duties and don’t you make the mistake of thinking otherwise!
To start off, let’s look at how your company structure affects you with regard to accounting:
Proof of concept stage:
If your idea is still in the ‘proof of concept’ stage and is going to primarily be a one man show, you should opt for a proprietorship. This is mainly because the compliances that need to be met are much less and just a basic excel sheet of all your incoming and outgoing transactions should suffice. You can always get an expert onboard to look at your accounts once your startup gains some traction as well as do your own homework and research on the same.
After proof of concept stage:
If you’ve crossed the proof of concept stage and you already have a few stakeholders on board, a Pvt. Ltd. Company is the way to go. However, if you opt for a Pvt. Ltd. Company there are multiple compliances that you need to make sure are fulfilled and this list of compliances isn’t known to most people. For example, you’re suppose to make certain payments and deduct certain withholding tax (TDS) from it. Hence, in the case of a Pvt. Ltd. Company it’s advisable to bring on an expert from the beginning itself (unless of course, you’re a financial whiz).
This is an absolute must because the repercussions that come along with not having your finances in place are no joking matter. The major challenge startups face is that they aren’t informed about everything that’s to be done and the only way to solve this is by having a proactive approach. The professional who’s assisting you will probably not be familiar with the startup ecosystem and hence will not know about certain things unless he’s told about them and who better placed than you to tell him about those things? Basically, do not get overtly dependant on the professional who’s assisting you and be aware of basic things like:
- What are your quarterly, half yearly and annual compliances?
- What is the regulation of paying out those compliances?
- Is there a deadline to it?
- Are you equipped enough to follow that timeline?
- What is going to be the penal provision, in case you don’t have the funds to do the compliances and how severe will the fine be?
You should also keep in mind is that all registrations aren’t needed on day one. For example, if you register as a proprietorship you don’t need a TDS registration which is mandatory in the case of a Pvt. Ltd. Company.
How does your turnover factor into things?
In the case of turnover, there is service tax registration that you must do. However, you’re only required to do this once your turnover crosses 10 lacs. The best way to keep this in check is to constantly monitor your turnover and know exactly when you’re going to reach that number so that you’re prepared for it. The question in an entrepreneur’s mind shouldn’t be ‘how am I going to mitigate it’ but rather ‘how am I going to be compliant with it’. Often, you could find yourself in a situation where you know what finances you need but don’t know all the compliances that go hand in hand with getting those finances. For example, you know you need Rs.100 at a two month time frame but you then realise at the end of the two months that you got only 80 as you ended up paying 20 as a fine for non compliance.
What we need is a change in mindset…
Coming back to where we started off, we strongly believe that there needs to be a major shift in thinking in the mindset of entrepreneurs. They need to stop thinking of setting up accounting and finance systems as an expense but in fact look at it as a long term investment which will serve to be the backbone of your company for years to come. So even if you put aside 10% of all your time to just sort out your finance and accounting systems, don’t look at it as 10% of your time lost but instead look at it as 10% of your time being invested into something that will only aid the smooth functioning of your organisation for years ahead.
Now that you’ve got a whiff of the basics to keep in mind when thinking about your accounts and finance efforts, watch this space for some more interesting tips and tricks to making your accounting life a little easier and you, a little wiser!
Thoughts and words by Sambhav Mehrotra, CFO, 91springboard