Why thinking like an accountant is essential to helping your startup scale up
Repost from original publication: http://www.geektime.com/2016/10/23/from-accountants-to-startups/
Over the last half a decade, the number of new businesses forming each year has maintained a constant upward incline – reaching almost 700,000 in 2015. This is in stark contrast to what is still a fragile economy in the shadow of recession. According to the U.S. Department of Labor, “Entrepreneurship plays a vital role in the growth of the US economy.” But while forward-thinking business leaders embark on new ventures, it is not without risk.
Unfortunately, startup shelf-life is short. The number one reason for failure comes from attempts to scale “too fast, too soon.” Agile new enterprises may well be the face of the future, but when it comes to scaling these businesses there is a great deal that leaders can learn from the seemingly antiquated giants of the corporate world and financial institutions, in particular.
The Financial Times claims a background in finance is the most common path to top level corporate positions. This is further corroborated by Forbes, reporting that 30% of Fortune 500 company CEOs used to be accountants. An affinity for logical thinking and knack for numbers gives these individuals a competitive edge. Whether you are managing investor relations or company financials, these skills are essential for any business leader. Avoiding early failure requires risk analysis. This lays the way for a new breed of entrepreneur: a leader who can think like an accountant.
Understanding and managing revenues
Inc claims that for small businesses the “biggest challenge” is increasing profits. What’s more, Wasp Barcode’s State of Small Business Report revealed that for businesses with between 11 and 100 workers the biggest difficulty is “growing revenue.”
When a company is failing to make profits, there is often no simple solution. While entrepreneurs may well be experts in their respective industries, they also need to be a whizz with numbers. Despite entrepreneurship’s importance to our economy, the education system is not currently churning out financially-focused business minds. A growth in higher education subject choice means a movement away from traditional core subject study, with many students now opting to explore a range of different degree programs or vocational opportunities. As a result they are not equipped to deal with financial matters. Research from the Harvard Business Review revealed four out of five entrepreneurs are forced to step down from their roles as CEO, before taking companies public.
So, what key skills are they missing? Understanding investor funding, revenue projections and profitability is just the first step. Business leaders need to understand their financials in minute detail. This could be thinking about bottom or top line growth, developing an understanding of unit economics, or even staying on top of IRS responsibilities.
Entrepreneurs need to be able to quickly analyze their books and more importantly, get insights and apply this knowledge in the best way. This could be selecting the right moment to hire and scale, making data-driven decisions to propel your business.
Adopting a sales-focused approach to attract investors
Any accountant will tell you, business growth can only ever come as a result of increased resource or efficiency. This might sound relatively straightforward but understanding your incoming finance and revenue channels can be a challenge. While your Kickstarter campaign may have been enough to get the idea off the ground, when it comes to attracting VC funding, you need to understand what makes a business attractive to investors.
Entrepreneur contributor Murray Newlands ranked insight into “financial performance” as key for investors, evaluating business opportunities. “Venture capitalists will look for a potential of high returns and a clear exit opportunity,” he says.
Really understanding this means being able to talk revenue streams, issuing shares, debt payments and prospect growth. Entrepreneurs are by their nature, incredibly ambitious. If you can back this up with a concrete plan and a sales-oriented outlook, driven by hard facts, your proposal will be more attractive.
Of course, there are plenty of cautionary stories of the startups that successfully attained funding and still failed. Take, tech startup Calxeda; the company raised $103M, but was ultimately forced to close operations when funding dried up. “We simply ran out of money,” an executive from the company told The Register. DoubleTwist raised $56M but fell to a similar fate, “We had a great product and a great team, we just didn’t have the revenues,” CEO and founder Robert Williamson told the San Francisco Chronicle.
A rush of VC funding in 2014-15 has resulted in a comparably quiet period of late, and the surge of fallen unicorns in recent times mean investors today are more wary than ever. They want to see a solid plan and this means explaining just how you are going to come up with revenue. Successful accountant-minded CEOs balance their vision with explicit goals, milestones and focus on sales, not just growth.
Aligning shareholder interests
Once you’ve worked out your revenue streams and you’ve gotten VC funding, you’ve overcome two of the largest hurdles for a new businesses. But you aren’t out of the woods yet. Your new accountant-style attitude may well mean your startup might be starting to resemble a corporation, and now you need to deal with shareholders.
A six-year analysis of the largest 2,500 publicly trading organizations, conducted by Booz Allen Hamilton, revealed CEO succession driven by shareholder demands.
Entrepreneurs not only need to juggle the scaling of their growing business, it is essential they also work to keep shareholders happy. This means managing expectations, and delivering on the promises made, in order to avoid boardroom battles. Again, this means thinking like an accountant. Be realistic with your financial forecasting and make sure your business plan is realistic.
Shareholders have invested interest in the success of a business and they want to know how profitable they can expect to be. Investors who do not have confidence in a CEO may react with demands for a change in management, or even seek to recoup their capital. Make sure you are comfortable with assessing your company financials so that when you are on the spot, you can show your shareholders that you have things under control.
The entrepreneurial stereotype might not be one of a number-crunching, investor-pleasing leader with a finesse for plans and details. But as we have seen, businesses that fail to understand and come up with revenues fail. We are entering a new period of investment and entrepreneurial growth, and this calls for a new kind of leader. An entrepreneur needs to be able to lay solid financial foundations as a platform for company growth. They need to be tactical, to strategize like accountant and to understand their company in great depth, not just the bottom line.