Running a startup is exciting, and your focus should be on the future of your company and the technology you’re developing. However, investors and your board of directors expect their investment to be managed prudently and professionally. You’re expected to do as much as possible with as little as possible, particularly in back-office functions such as accounting and HR.
This article outlines key financial and operational controls that can help streamline your startup’s back-office functions.
Segregation of Duties: Build Trust and Transparency From the Start
Even with a lean team, never compromise on separating duties. This is essential for investor confidence. Ensure the individual authorizing spending is not also processing payments or reconciling accounts. As you scale, consider role-based access controls within your financial systems to enforce this digitally. This protects against fraud and demonstrates a commitment to professional operations.
Other areas where segregating duties makes sense include:
- Cash Payments/Wire Transfers – Most financial institutions offer cash transaction management solutions. At a minimum, set up your account to require a separate initiator and approver for cash transactions. Approval requirements should vary based on transaction size.
- Formalized Spending Approvals and Expense Policies – Implement a clear expense policy that outlines acceptable spending categories, approval thresholds, and reimbursement procedures. Tools like Ramp or Brex offer corporate cards with built-in spending controls and automated expense reporting. These measures help control costs, reduce administrative overhead, and provide valuable data for analysis.
- Strategic Cash Management for Investment Policy – Many startups receive significant cash at funding. A formal investment policy ensures alignment between management and investors on how idle funds should be invested. Investors typically fund operations, not speculative investments.
- Sweep Accounts – The failure of Silicon Valley Bank highlighted the risks of lax treasury management. Many startups held deposits far exceeding FDIC limits. Discuss Insured Cash Sweep accounts with your banker if you have significant cash reserves.
- Burn Rate Management – Your burn rate is under constant scrutiny. Implement a detailed budget tracking monthly expenses against funding milestones. There are tools that integrate with accounting software for real-time burn rate analysis. A good financial model should include scenario analyses (best-case, worst-case, most likely) to anticipate challenges and adapt quickly. Causal is a useful tool for complex financial modeling.
- Payroll Processing – The person processing payroll with a third-party provider should not enter transactions into the accounting system. HR should review payroll as a control measure. Payroll is often the largest startup expense, making segregation of duties particularly important.
- Rotating Duties – Payroll fraud is often uncovered when a longtime processor is replaced or takes an extended leave. Regular rotation of payroll duties reduces risk.
- Payroll Change Report Review – Payroll providers can generate reports detailing changes from the prior cycle. Reviewing these reports can help detect unauthorized pay increases or ghost employees.
Maintaining a Precise Cap Table for Investor Confidence and Compliance
Maintaining a clean cap table is crucial for attracting investors and managing equity accurately. Software like Carta or Pulley can help track ownership, manage stock options, and ensure compliance. Errors in cap table management can create significant legal and financial problems. Equity management tools also can help track stock options and calculate accounting charges required for audited financial statements.
Documenting Your Success
Creating a clear and efficient record system for proper documentation is essential in two important ways:
- Process Documentation – Clearly outline company processes so intended controls are understood and actual practices can be measured against them. Maintain written records as evidence that payroll reviews, bank reconciliations, and other key controls are being performed.
- Source Documents – Maintain complete, well-organized records to support all transactions. Without proper documentation, proving transactions were authorized and recorded properly becomes difficult. Good documentation also allows for quick responses to investor, management, or auditor inquiries.
Advanced Reporting for Data-Driven Decision-Making
Investors expect sophisticated financial reporting beyond basic profit and loss statements. Implement systems providing granular insights into key metrics such as:
- Customer Acquisition Cost (CAC), Lifetime Value (LTV), Churn Rate, and Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR) – Each of these metrics focuses on a different aspect of a company’s financial health, customer behavior, and long-term sustainability.
- Subscription Analytics – Tools exist that offer advanced reporting capabilities.
- Automated Reporting – Automate as much as possible, ensuring reports reconcile transparently with transactional activity.
Proactive tax compliance for startup stability and growth tax compliance is a significant factor in due diligence, even for startups with minimal tax liabilities. Key considerations include:
- Worker Classification – Startups often rely on independent contractors, but misclassifying employees can lead to major tax liabilities. The IRS and state agencies closely scrutinize worker classification. Use the IRS’s 20-factor test or the ABC test (in some states) to evaluate worker relationships.
- Sales Tax Compliance – The Supreme Court’s Wayfair decision expanded sales tax nexus definitions. Many startups fail to implement systems for collecting and remitting sales tax across multiple jurisdictions. Work with a sales tax specialist to determine obligations and automate tax calculations.
- State and Local Tax Compliance – Rapid expansion, remote work, and virtual operations can trigger state and local tax filing requirements. State agencies can associate employees with their employers, increasing compliance scrutiny. Learn more about our SALT compliance services and ensure your business is meeting all obligations.
- International Tax Issues – Expanding internationally introduces complexities like transfer pricing, permanent establishment, and foreign tax credits. Consult with international tax specialists early in your expansion process.
- R&D Tax Credits – These credits can be valuable but require meticulous documentation of qualifying research activities. Track project details, employee time, and associated expenses. Maximize your innovation investments with our R&D Tax Credit services.
- Stock Option and Equity Compensation Tax Issues – Mishandling stock options can lead to compliance issues for both the company and employees. Use cap table management software with tax features and consult tax advisors to comply with Section 409A regulations.
Control What Matters for Your Venture-Backed Technology Startup
By implementing these controls, your startup can build a solid financial foundation while maintaining investor confidence. Effective financial and operational controls ensure stability, transparency, and efficiency as your company scales. Contact us if you have any questions.
