When should a startup outsource accounting?

In my opinion, pre-seed, seed and VC-backed startups should outsource their bookkeeping, accounting and tax work as soon as they can. 

Once a startup secures funding, the company’s timeline accelerates. Founders are in a race to prove their business model before the startup runs out of cash. In this critical period, every minute spent away from core business activities like product development, sales, and customer engagement is essentially an opportunity cost.

Sure, an experienced founder can do their own books (although probably not their own taxes). 

On the flip side, and probably a bit ironically, it’s the experienced founders who move to outsource their accounting as soon as they have funding. Because it’s experienced founders who know they need to focus on proving out their business model - not mess around dealing with receipts.

The Cost of DIY Accounting

Startups that attempt to manage their accounting in-house often run into a range of issues:

1. Wasted Time: Experienced accountants, like Kruze, know how to efficiently use accounting software, correctly recognize accounting items, etc. While many founders are smart enough to figure these things out, it’s not an efficient use of time. Time that should be spent helping the business hit the next milestone or product launch.
2. Compliance Risks: Missing a single filing deadline or misinterpreting a tax regulation can lead to costly penalties. But, let’s be honest, filling out state and local government forms is basically busy work. Not only do startups not have extra people sitting around looking for busy work, they don’t have the expertise to make sure deadlines are hit. And cleaning up mistakes is even more work than staying compliant! 
3. Investor Credibility: Inconsistent or delayed financial reports can erode investor trust, which could be fatal when you’re attempting to secure additional funding. Professional investors expect the numbers to be right. 

We encourage founders who haven’t raised money to DIY their accounting; it’s not that hard for a very early-stage company. Just get a good accounting software, like QuickBooks Online, connect it to your bank account and credit cards. However, as soon as you start hiring a team, expense tracking, payroll taxes, and sales tax nexus all become real issues best left to someone who’s done it before.

5 Signs It’s Time for Your Startup to Outsource Accounting

• More Than 12 Months of Runway
  • Indicator: Enough funding raised to be able to afford an outside partner for non-core tasks.
  • With over 12 months of runway, a startup is in a financially stable position to invest in professional services that can streamline operations and improve efficiency. This enables the internal team to focus on growth-driven activities while getting the finances maintained by outsourced experts.
• Team is Overwhelmed
  • Indicator: Internal team struggling to juggle daily operations and complex financial tasks, or is asking to add a large number of employees to the team. This is often the founder who is spending too much time on the books!
  • Why It Matters: Overburdening your team (or yourself as the founder) can lead to errors and keep you from focusing on core business activities.
• Inaccuracy or Inconsistency in Financial Records – Mistakes!!
  • Indicator: Frequent corrections to financial statements, or inconsistencies between different reports.
  • Why It Matters: Errors or discrepancies in financial reporting can undermine confidence among investors and can lead to poor business decision-making.
• Internally Generated Cash Flow Management Issues
  • Indicator: Recurring late payments, difficulty in tracking expenses, or not collecting revenue from clients.
  • Why It Matters: Poor cash flow management can jeopardize the business.
• Investor & Stakeholder Expectations
  • Indicator: Increased demand for transparent, professional, and frequent financial reporting.
  • Why It Matters: Reliable financial reports are crucial for maintaining investor and stakeholder confidence.

Tips for Startups Outsourcing their Accounting 

1. Budget For It: As soon as you secure funding, allocate a portion of it for outsourcing key operations like accounting.
2. Vet Carefully: Choose an accounting firm that understands the startup ecosystem and has a track record in your industry.
3. Consolidate Taxes and Bookkeeping: Companies that raise venture funding will have to regularly go through due diligence. It’s a huge time saver if your startup’s outsourced accounting firm can handle all accounting, finance, and tax questions.
4. Streamline Operations: Make sure you choose a firm that uses standard, cloud-based technologies. This will help keep you from being locked in with just that one provider.
5. Answer Questions: Even with a strong fintech setup, your bookkeeper will have questions; make sure you answer these promptly to keep your books in order.
6. Monitor and Review: Periodically assess the performance and value-addition of the outsourced service to ensure it aligns with your growth and compliance needs.

So, When Should a Startup Outsource Accounting?

As soon as you can! As a founder, your primary objectives post-funding should be hitting critical business milestones that position you well for the next funding round. Outsourced accounting enables you to do just that by taking non-core, time-consuming tasks off your plate, while ensuring your financial operations are handled professionally and efficiently. And we recommend you find a unified accounting and tax provider, like Kruze, so that you only have to make a single call during stressful times like when you are doing due diligence.