Financial controls for tech start-ups
Tech start-ups are at the forefront of innovation, disrupting the existing markets and changing our lives for the better. But when it comes to financial controls, most of them need external know-how to continue to grow and develop successfully.
Defining the term financial controls
Establishing financial controls is challenging yet crucial for tech start-ups because it’s the most successful ones that will grow fast from just a small group of founders to a big company with hundreds of employees. However, they don’t usually have the in-house accounting expertise to handle such growth appropriately.
Financial controls are, by definition, processes, policies and procedures aimed at monitoring and controlling an organisation’s financial resources. They are essential for the operational efficiency of any business. For this article, we’re going to focus on the three elements of financial controls especially relevant to tech start-ups: reporting and audits, actionable data for quality insights and forecasting, and authorisation processes.
Challenges of providing advisory and accounting services to start-ups
When a company grows from 2 people to 200 in a year, establishing proper processes and controls is no walk in the park. Apart from easy scalability of the spend control system due to spiralling expenses, these businesses really do need comprehensive and granular financial controls based on cloud technology.
Reporting to investors
Close investor oversight and rigorous requirements for spend reporting demand centralised financial controls that cover all aspects of spend authorisation and auditing. Control and transparency are essential to investors, so any process setup and execution has to be not just perfect, but also fully visible.
Need for advisory services and high-quality data
Start-ups require more than typical compliance services, they actually need guidance on how to run their business – which calls for actionable data. That’s why tech start-ups need an advisory firm capable of identifying, structuring and validating the data that will form a reliable basis for good decision-making.
KPIs and forecasting
Properly structured and verified accounting data is a must for making informed business decisions. Financial performance indicators go far beyond what traditional accounting can do, they actually give an outlook on the business as a whole. A key focus lies on understanding the company’s financial health as well as finding effective ways to move the business forward.
The core elements of financial controls in tech start-ups: reporting, actionable data and a capable authorisation system
For start-ups in particular, meaningful reporting is fundamental because they answer to investors who usually demand a lot more than traditional accounting can give. For them, it’s important to understand the company’s financial performance indicators. So the reporting must be complete and flexible and this can only be achieved with actionable data.
For quality insights and forecasting, data has to be structured, specific and with business context, i.e. all expenses have to be coded properly in the accounting system. This builds a reliable basis for cash flow forecasting, cost projections, expenditure structure and much more.
A well established, granular authorisation system adds greatly to data quality; its setup includes various expense authorisation levels, custom authorisation criteria, rules for authorisation delegation and fraud monitoring procedures. A clearly defined authorisation process enables accounting practices to both share accountability with the client and act properly on their behalf.
An app stack that facilitates resilient financial controls for tech start-ups
It is indeed possible to cover all aspects described above by setting up a trusted app stack that allows easy access to high-quality verified data and enables efficient collaboration between a business and its advisory practice. Such an app stack consists of three capable tools: a cloud accounting system like Xero or QuickBooks Online, Receipt Bank for the automation of pre-accounting data capture and ApprovalMax for implementing adequate authorisations to ensure that the right people are in charge of each and every expense.
How this app stack works
Step 1 – Digitising invoices
Receipt Bank extracts the relevant invoice data, enters this information into the fields of a digital bill and attaches a scan of the original invoice. These digital bills including their attachments are subsequently published to ApprovalMax for authorisation. Alternatively, bills can be created directly in ApprovalMax by authorised users such as suppliers or contractors.
Both invoice digitisation methods prevent unauthorised bills in the accounting system and shield sensitive accounting data from users who submit bills.
Step 2 – Validating data
For all bills with a corresponding approved purchase order, it is possible to match bill and purchase order in ApprovalMax, which includes copying certain information such as the bill's coding from the original purchase order. This step is optional.
No matter which way bills arrive, after entering ApprovalMax they will be reviewed and coded by an accountant first. In this step, the accounts and tracking categories are checked to confirm that the spend allocation is correct.
After this initial control, usually performed by the practice, bills are routed to the responsible budget holders on the client side. ApprovalMax runs a fully automated multi-step and multi-role authorisation process which is based on one or several criteria pulled from the accounting system (supplier, amount, GL code, tracking category, etc.). The highly flexible approval matrix can easily be extended to suit growing businesses with increasingly complex spend tracking patterns and a rising number of approval criteria that need to be taken into account.
Step 3 – Pushing approved bills to the accounting system
After full authorisation, outstanding bills are pushed to the accounting system marked as ready to be paid. Any bills that have already been paid before approval will be published to the accounting platform together with the payment information. An audit report that captures the authorisation history including approver comments is created automatically and attached to each bill; it can be viewed directly in the accounting system.
Step 4 – Automated audit reporting
As part of the approval process flow, ApprovalMax generates automatically an audit trail for all processed finance documents such as bills or purchase orders. Audit trails contain all authorisation decisions and exceptions that have occurred and include comments, delegations, rejections and other details. On completion of the approval workflow, an audit report is created for and attached to every approved document. Both will be kept in the accounting system, where the audit reports can be viewed without having to log into ApprovalMax.
In conclusion: high-quality data, a clear authorisation system and accurate real-time reporting are at the heart of powerful financial controls. The right tools that facilitate this approach will establish efficient financial controls in technology start-ups of any size, and support the provision of sophisticated advisory services on top of basic accounting.