Like many entrepreneurs, I didn’t have any formal training when I started my business. I came out of school after sixth form and went straight into the world of work. I’d go so far as to say that I almost fell into becoming an entrepreneur. It was the right time and the right moment for my idea and I thought I’d give it a go. But the problem with doing that is that you are incredibly naive on most aspects of business and what I’m going to talk specifically about in this blog is the financial side of business. This was an area that I was definitely naive about. Accounting was something that didn’t come naturally to me.
Accounting at a startup
Much as the vast majority of startups around the world do, we hired an accountant who was cheap as chips. Don’t get me wrong, there’s nothing wrong with that at all because that person did what they were meant to do. At the end of every financial year, they did the accounts and they had very little involvement in between. They certainly didn’t offer any kind of strategic advice or opinion on what we were doing or question why we were doing it. It was just an end-of-year financial service. At this point, we didn’t even have quarterly management accounts.
In the first few years, our transaction levels were quite low and this wasn’t a problem. We used spreadsheets to keep on track of our cash flow and the key indicator was how much money we had coming in and out of the bank. As we grew we started to use Sage as our accounting tool and we hired a bookkeeper. This bookkeeper didn’t have any relationship with the accountants, which is a point I’ll come back to later. We could see what we had in the bank but it was all very haphazard and nowhere near as tight as it needed to be.
In fact, in the first few years there were a couple of points where we were right on the edge and needed to win business quickly to bring things back around. One time we were two weeks away from financial disaster and I’d paid the previous month’s wages on the credit card. Both personally and as a company, this was a difficult period from a financial viewpoint. The way I approached the financial management side of things and the support brought in was part of the reason for that.
In six years, we worked with four accountants and we were never quite happy with any of them because they weren’t doing anything more than the basics. But part of the problem at this stage was that we didn’t know what we wanted. It wasn’t until we were introduced to a company called Ascendis that everything started to fall into place.
Getting ready to grow
When we started working with Ascendis, Elliot Smith became our accountant and Ascendis also provided a bookkeeper, Lizzie. All of a sudden, our bookkeeping was coordinated with the accountancy side in a wholly managed finance function.
We received monthly management accounts, we had weekly cash flow and we became a lot more controlled and specific in our thinking around the financial side of the business. At this point in our journey, we were still a small company but we weren’t a micro-company.
We hadn’t yet entered the high-growth period, but this was when we realised that we wanted to go for high growth. I started to line all the ducks up before hiring a senior team to be able to cope with high growth, as well as getting all the other things you need for high growth in place. I’m not going to list them all here, but you can read about them in my previous blog about preparing a business for high growth.
Obviously, one of the most important aspects is getting your finances in order so you know exactly where you are at any minute of the day. Elliot was instrumental in this.
He introduced an online accounting system, called Liberty Accounts, which was an early frontrunner in the cloud software arena. We later changed to Xero when that came along, which was a real game changer and took online accounting to the next level. This allowed us to look at our finances in real time.
Allowing your accountant to grow with you
As we grew, I think it’s fair to say that Elliot also grew and could see where he could strategically help us in our thinking around the financial developments of the business. He grew with the business, both personally and professionally, as we all did. Along the way we learned that what we had wasn’t just an accountant, but a part-time financial director (FD). We hadn’t planned this, but as we grew that’s what Elliot became.
He attended our board meetings and talked to the board about the finances every month. He attended the quarterly strategic planning meetings where we were looking ahead for the next 12 months, but particularly the next quarter, and setting out exactly what we wanted to achieve and how we were going to do it. Elliot became part of any major decision we made that involved spending any sum of money, whether that was hiring new people or buying new equipment. He had input into any decision that involved money, which is pretty much every aspect of the business.
By sharing his opinion and being involved in those decisions, Elliot became more than just an accountant, he was our part-time FD and an integral part of the management team. This was a really important part in the development of the company. It had a particularly big impact on our ability to sustain high growth over a period of time.
More than just an accountant
In the early years, we grew organically, but in 2016 we’d had five years of sustained growth and were producing a three-year plan for even higher growth with a view at the end of that three years to see if we were in a position where we’d be interesting to other companies as an acquisition. Elliot was absolutely central to putting that plan forward.
Even though we had a reasonable amount of cash in the bank, one of the things we were keen to do was ensure we had money available to do pretty much anything we needed to do to help us achieve that three years of additional sustained growth. Elliot was instrumental in that kind of thinking and embracing the entrepreneurial spirit. He made sure my ambition was matched by our ability to deliver on what we wanted to do.
In this instance, he helped us put an application together for a substantial loan from a funder based in the North West. With his help, we got that loan in place and, as it happened, we didn’t need it, but it was there just in case we did.
This is just representative of the kind of thinking and planning that you need as an entrepreneur.
Organising your financial processes
Someone who is more than an accountant can also help you implement the right processes when it comes to your finances, which also ties back into working with a bookkeeper.
Elliot helped us introduce the systems and processes that our bookkeeper followed. We were selling big-ticket items so we didn’t have thousands of invoices, which meant our bookkeeper only needed to come in once a week. But when she was here, she would make sure that any invoices that were due were sent out and she’d follow up on any invoices that hadn’t been paid. We had a process, which Elliot introduced, and any debtors that were late (hadn’t paid after 30 days) would be presented to me and I would follow that up personally.
Throughout the existence of Cake, we only ever had one bad debt. Most people paid when they should because we had a good relationship. Having a great relationship with your clients and suppliers is another important aspect of building a successful company. You want to be top of the list when it comes to paying bills.
Having someone like a part-time FD, who takes this strategic approach to your company’s finances, is also important in terms of how you price a project. They will help you to see all the things you have to consider when you’re deciding on your day rate. It’s all of your overheads, as well as the wage costs. You need to work out your day rate carefully and also think about how you’ll charge for your services over the course of a project.
At Cake, our projects would usually run for six to 18 months, so we had to consider how we could protect our cash flow while being fair to our clients. One option to consider is taking bi-monthly payments in line with 2 weekly chunks of work called Sprints. We ran a technical demo every two weeks, so that our clients could see where the money was going and we invoiced every two weeks after a successful demo. It worked for our clients and it worked for us.
That’s just one example of the kind of strategic and creative thinking that helps you protect your cash flow and ensures that your finances are in good shape.
The value of a part-time FD
Elliot is now working on his own, working for ambitious, high-growth companies as a part-time financial director. Offering this service to companies that don’t really need a full-time FD, or that can’t afford the expense of a full-time FD, but that would benefit from someone with a lot of experience in this area is great for the company and great for him.
The companies he works with benefit from this expertise and Elliot gets to work across a number of really ambitious companies that makes his work much more interesting than just completing basic accounts without having any input into helping each company achieve their vision.
The value of having a part-time FD is really important for any company to consider, even a startup. In fact, I’d go so far as to say that startups should be engaging with someone who is more than just an accountant, someone who has an opinion on what you’re doing and how you’re doing it. They might only work a few hours a week, or even a month, for you, but they should be there at the end of the phone if you want to bounce some ideas off of them.
With hindsight, I think if I’d had someone like Elliot from the outset, or early on in the first couple of years, it would genuinely have made a big difference to my thinking and would have enabled us to achieve that high growth more quickly. I would have been more confident to take certain decisions, I’d have had a far better handle on the accounts and day-to-day cash flow, as well as a better idea of the strategy and where we wanted to be, supported by the detailed figures that go into that kind of thinking.
Elliot now works in conjunction with a number of entrepreneurs at thestartupfactory.tech, where he advises them about how to achieve high growth in a manageable and sustained way.
Look for a creative accountant
I believe that part of the FD role, whether part-time or full-time, is to put the various options in front of you, including the ones that might be slightly different from the norm. As an example, when we were looking at investment we could have raised money through private equity or through some kind of business angel, or even the management themselves. But it was important to us that we didn’t give our equity away because we would rather use that for the team. That was why we borrowed the money. It made sense and it was a different way of doing it.
Elliot didn’t just help us understand the options we had, he made sure we presented the company in the right way to the organisation we were seeking finance from. It’s important that the person who’s making the decision about whether to give you finance or not sees the company in the way that you want them to see you. How you present the figures is really important. You need to know what figures are relevant, which ones are the most important and how it’s best to present them.
The key with all of this is finding the right person and I would say that one of the most important attributes to look for is someone who is creative with their financial thinking, in the right sense of the word. I don’t mean they get creative by falsifying figures or anything like that, what I mean is that they are creative in the way that they think about solving problems in a financial sense.
I would describe it as entrepreneurial thinking, as opposed to just looking at the cold numbers and figures in the way that a traditional accountant would. What you don’t want is an accountant that literally just does the figures and relays the information to you. You want an accountant who talks to you about the stuff that you want to do and offers support far beyond their financial expertise. You need someone who can tell you and help you, from a financial viewpoint, how you could achieve your goals.