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5 Ways to Keep Your Financials on the Rails When You’re in Super Scrappy Start-up Mode

Chris Schwalbach  ·  September 11, 2019  ·  7 min

You’ve acted on your great idea and started a business. You realize that eventually, you will have to keep records, hire a bookkeeper, or have to justify your financials to an investor or the IRS.

But that time isn’t now. Right now, you’re too busy running your business. You’re still in super scrappy start-up mode. 

So, you’ve got the DIY version. Maybe you’re doing the books yourself. Maybe your spouse or a friend is doing it for you.

Right now, it probably seems like it’s just one of the last items on your list. But it adds up and time flies and then next thing you know, your accounting records, your contracts, and your corporate formation documents are not in good order. We call it corporate hygiene. Sure, you can skip a shower for a few days, but if you go a little too long, well . . . gross. And it starts to show and smell.

One of our recent clients had to recover from a similar problem. They had grown a successful company. They were up to more than 30 employees, but the critical documents from the “early days” were not in good corporate hygiene. They had incentive compensation and equity agreements that weren’t signed, convertible notes they couldn’t locate and more. Suddenly, they were closing on their Series B round, and the legal bill was more than $200,000 to clean up the corporate records and execute the Series B. Keeping up on the corporate hygiene will save big bucks in the long run.

The risk isn’t necessarily this substantial for every company. But trying to re-create information from memory because you lack a paper trail or records can be painful, time-consuming, and expensive.

You may not have to justify anything yet, but if you continue to grow, you will. If you don’t have the foundation – the numbers and records from these super scrappy start-up years – can you justify it? Can you stay on that growth track?

Here are a few hacks for keeping enough of your critical stuff on the rails.  

#1/ Contractors vs. Employees

Many start-ups begin with contractors before they offer full-time employment and that’s fine. But as these people become true employees, it’s important to be very diligent about what’s a contractor and what’s an employee.  

Treat them as employees in every aspect of the business. Protect your company with an effective onboarding program and then with some simple paperwork. Create a standard offer letter and a standard inventions assignment agreement that ensures any intellectual property they create remains the property of your business.  For a great resource, check out www.cooleygo.com where they offer lots of standard employment documents.

Pay your employment taxes. It might seem like something you can put off, but don’t. The pain and expense of paying state or federal taxes in arrears are not worth it. The process can take years. The IRS is painfully slow, and these audits never go away. 

So, stop paying with checks and hire a payroll company. The payroll companies are easily affordable and if you need to bring benefits into the equation, Professional Employer Organizations (PEOs), are becoming much more affordable for start-ups, too. They’ll all very accurately handle the payroll, the deductions and the record-keeping for you.

#2/ The CYA Box

This is literally a paper box. I like using printer-paper boxes. When you simply have no time to file, it’s a total hack way to store your essential documents until you can find time or hire someone to do your filing. Use a black Sharpie and write “CYA” right on the side of the box. It’s not the most elegant filing system, but it works.

Every time you have something vital that you think you might need later, throw it in the box. You can also put a Post-it note on top explaining what it’s for. It might be a bank statement or a contractor agreement or something from a customer.

Maybe 90% of what you’ll put in this box will never be used again. But there will always be that one critical thing that will have you saying, “Thank God that was in there.”

The box will end up being chronological with the most recent stuff on top. When you realize you need something from March, you can flip through and find it quickly.  

When you’re in super scrappy mode, you’re too busy. You’ll forget the details or forget something important as the business grows. Everyone thinks they need to do all the filing, but they put it off and put things in different places. The information is often lost. The CYA box prevents this.  

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#3/ Divide and Conquer

When you’re starting out, many entrepreneurs are just using their personal money to get things done.  It’s totally normal, but as soon as possible, it’s very important to clearly separate your personal and business activities. This usually starts with banking and credit cards.  

Create the wall. It’s important for reporting and when you need to do your taxes, but it’s also a risk-management strategy that can protect you against liability claims. Even corporations and LLCs are at risk if there isn’t a clear line between personal and business finances.  

So, go get a separate account and credit card for your business. But even if you don’t have a business credit card, it’s a good idea to have a separate personal one that you use only for the company. Keep business expenses in their bucket and reimburse that card through the business.

#4 Checks and Balances

Review your bank statement and do your bank reconciliations if you can! All companies will want to check their bank statements. If you’re like most start-ups, you don’t have the time to go through 60, 100, or 300 lines of entries and get them into an accounting system. You have to keep working, so you put it off, it’s another of those “I’ll get to it later” items.

Save yourself the pain of attempting to remember what that charge was for from several months ago. First, you will probably forget and second, you will waste a lot of time trying. Instead, sit down with your coffee and a red pen the day after you receive your monthly statement. Make a note on every line identifying what each expense or income is. You can easily remember the previous month’s activities.

Put the statement in the CYA box or a separate folder. This serves as your memory bank.  

E-commerce companies can download their transaction reports and save a copy, making notes where discrepancies occur. If you shipped 25 items, but your Amazon report says you shipped 22, make notes on the report. Was it a return? A cancellation? Reporting from e-commerce platforms is strong so take advantage of it to help manage your records. Keep up with them manually when volumes are still small!

#5/ Scan the Stuff With Signatures

Can you easily find copies of all of your signed vendor contracts? Customer contracts? Board resolutions? The company with the $200,000 legal bill ran into just this problem. They hadn’t created or preserved signed documents such as board resolutions, and it cost them.

Create a mental rule that every signed agreement, everything that has a signature on it, is scanned and saved. It doesn’t matter how you do it. DocuSign and Adobe Sign offer electronic signing and store your documents. They are a good solution for super scrappy start-ups. But so is taking your phone out and using a mobile app to PDF a three-page contact and saving it out to your Dropbox or Google Drive.

Whether you need these documents for your year-end, legal, or dispute resolution, you’ll be able to access them quickly.

What If You’re Already Off the Rails?

First, begin with doing it well today. You may wish to go back and do some historical clean-up too, but the important part is to start the good habits first. 

Second, avoid going back too far if you don’t really need to. There is a price to be paid for going backward. A good rule of thumb is to look at the calendar year when we’re advising clients. If it is February or March, we’ll suggest they go back to January 1 and pay the price on doing two or three months of cleanup.

If it is July or August, you need to know if you’re going to be able to create your tax returns at the end of the year. If you can, that’s great. If you can’t, you may have to go back.

If you’re starting, use these growth hacks to keep your start-up on the rails. And when your company is ready for that next step, your finances will be too.