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FEATURES OF FINANCIAL ACCOUNTING IN STARTUPS
Lobyntsev Pavel Sergeevich, Plekhanov Russian University of Economics, Moscow
E-mail: pavel.lobyntsev@gmail.com
Abstract. This article discusses the exceptional importance of financial accounting for small businesses and its impact on the financial performance of the company. The main tools for organizing a system of accounting and data analysis have been studied. The key functions of SaaS systems designed to solve the basic range of tasks for a business owner are analyzed.
Key words: startup, economy, economic growth.
In the XXI century the number of startups starting their activities in the global economic system is steadily growing every year. This type of companies has certain specifics and significantly differs in many aspects from big-size companies. At the same time, all the necessary tools have already been created for financial accounting in large corporations, and there are also a sufficient number of educational programs and specialized services. While the market for accounting products and the number of specialists dealing exclusively with startups and small businesses is still in the development zone and in short supply, they cannot fully satisfy the demand. This explains the high level of relevance of this topic at the moment.
The importance of management accounting for startups cannot be overestimated. This category of companies does not have excess capital, which allows the owner to make a large number of incorrect management decisions: invest in inefficient areas, produce products that do not have customer demand, direct most of the working capital to low-liquid assets without predicting cash gaps in the near future [1]. For this reason, it is very important to have tools and specialists who can organize the correct system for accounting based on actual events, correctly draw up a planned forecast and provide the owner with information for analysis and decision-making. In addition, the lack of a good financial reports system often leads to the reluctance of investors to finance the project [2], which for this category of companies means the complete impossibility to continue work.
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It should be noted that a startup operates with less data than corporations, but the methodology and the ideal amount of financial reporting are identical. Venture investor Nikolay Davidov, in his article about Unit Economics [3], provides an impressive amount of indicators that should be calculated in the financial accounting system for companies of any size, including a group of metrics that allow you to calculate the forecast of profit per user: UA, CPA, CAC, ARPU, COGS, ARPC, LTV. It is worth noting that for a startup, the calculation of various parameters is of critical importance: management decisions depend on the data obtained, which determine the further vector of investment spending, which in turn affects the entire success of the project.
With a big number of companies, the demand for qualified finance professional specialists is huge, with 151,000 economists, accountants and auditors only in the one state of California in 2021 [4]. The main reason for this demand is that the lack of a well-organized management accounting process and the lack of the necessary tools can negatively affect the performance of the whole company. The specifics of startups require a very dynamic development, and all processes, including setting up management accounting, must be organized in the shortest possible time, which in turn is impossible without convenient software. However, in practice, the prevailing number of startups have an extremely limited budget, which makes this type of company the most sensitive not only to the speed of implementation, but also to the cost of software solutions.
There are many different tools for financial accounting. According to the study, 60% of companies still continue to keep an event log in MS Excel [5]. SAP and ORACLE products are also gaining popularity. These classic examples of management accounting systems perfectly meet the needs of large businesses due to the very wide possibilities for customizing the functionality, and, as a result, the maximum automation of all processes. On the other hand, these software solutions have a high cost and require a significant period of time to organize implementation, which, as discussed above, is a big obstacle for startups [6].
For this reason, a large number of services are currently appearing on the SaaS market, the functionality of which covers only the necessary minimum for small businesses, does not involve full automation and complex integration with other systems, but allows you to set up the process from scratch as soon as possible. This is especially important because 64% of startup project owners deal with financial accounting on their own [7]. Also, these systems have a low cost: according to investopedia.com, a subscription to the use of small services is $50-$150 per month [8], which is ten times lower than the cost of high-level automation products, even without taking into account the cost of their implementation.
The list of tasks that the financial accounting system in a small business is designed to solve is relatively small. The key aspect is to take into consideration all the events that actually occurred (payments made, payments received, etc.). This information is most important for the subsequent analysis of activities, which in turn allows you to make important management decisions and adjust the work of the
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organization in the near future.
The second important function is integration with major payment systems and services. The specifics of a startup imply the inability to have a large number of staff positions immediately after the company is founded, and, as discussed above, often forces the owner to perform the main pool of tasks on his own. At the same time, the availability of easy-to-configure integration of the financial accounting system with payment systems removes from the owner the big time-consuming issue of transferring data from one system to another and at the same time allows avoiding a number of errors associated with the human factor.
Along with this, it should be noted that the function of customizing income and expense items is of great importance, which allows to customize the list of cash flow parameters in the most convenient way for financial accounting by adapting the data structure to the request of the business owner [9].
The accounting function is one of the most common in all services, however, it does not require detailed consideration within the framework of this article, since the market in this area is already saturated with offers and therefore requires much less personal participation on the part of business owners. According to a study by the journal "Capital Counselor", 24% of small businesses are already actively using outsourcing of personnel, and this process is growing steadily [10].
However, another classic function of a staff accountant, which is document management, still has a direct connection with SaaS products in this area. The fact is that in many areas of business, the speed of document management with a client significantly increases conversion and, as a result, is a very important success factor at the initial stage of business development [11].
Another important function is the structuring of financial reports, which is, the processing of the received data to provide the user with comprehensive information necessary for making management decisions. At the same time, it is the reporting function that is the most difficult in terms of the user interface [12]. The fact is that the specifics of the business largely affect the list and structure of the required reports. While setting them up is a rather time-consuming process, due to the fact that at the stage of opening a company and building a financial accounting system, many owners do not have a clearly formulated request for the structure of the data necessary for analysis.
Finding the perfect balance between reporting system functionality and usability is a difficult task for a developer. Some services, such as "PlanFact", offer only three main forms of financial accounting by default: balance, cash flow budget and Profit and Loss budget. Others, such as "WA: Finansist", offer to build a large number of reports: both the obvious (for example sales report) and the trend analysis report that is necessary at the initial stage only for a limited number of users, illustrating the absolute and percentage deviation of actual values from planned ones.
It is precisely because of the dissatisfaction with the functionality of the reporting system that many users leave the package solution for financial accounting and return to using MS Excel as a software that allows you to customize the display of
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data that is most suitable for individual requests. On the other hand, users tend to use more serious software products when they have problems with automation and synchronization - not all SaaS solutions of the lower price sector are able to satisfy requests for software interconnection with other services.
Based on all of the above, we can conclude that the financial accounting system in startups differs significantly from the similar system in large companies in terms of the requirements for the cost and speed of setting up the process and the cost of software. However, to date, there are a sufficient number of services on the market that can cope with basic tasks at a low cost.
References:
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3. Business model and Unit economics [Electronic resource]. - Access mode: https://mk.digital-dolina.ru/modul-davydov
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9. Manko S. Kak navesti poryadok v finansah companii. Prakticheskoe rukovodstvo dlya malogo i srednego biznesa - Izdatelstvo Alpina Publisher, 2019. -248 p.
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