Accounting for Innovation

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// RSM Australia’s Gavin Stacey explains why doing some fundamental record-keeping early on in your startup will reap benefits later on…

Every startup on its own innovation journey will encounter countless hurdles along the way. It’s important to identify these as early as possible so you can overcome them and prevent them from becoming roadblocks.

Trying to avoid these hurdles altogether is futile. It’s better to ensure you put your time and energy into jumping the right hurdles at the right time.

The best way to do this is to get the ‘boring stuff’ – such as accounting systems and business structures – sorted early. After all, as startups are in their initial stages, it’s crucial to invest time early into the business side.

This allows entrepreneurs to concentrate on the unknown and unique hurdles, while knowing the essential, albeit boring, stuff is taken care of.

There are countless business and accounting hurdles that can pop up along the way, and many ways to approach each of these. I don’t want to scare you off by concentrating on all of them, so here is a little boost to get you over some key hurdles that others have stumbled at:

  1. Get your structures right

a. With next to zero cash in the bank and a whole lot of ideas running through their heads, entrepreneurs often find themselves well along the business journey before they’ve even stopped to think about what structure they are trading through. This can cause massive issues down the track.

b. There are many types of structuring options available, all with pros and cons, but for startups, a massive pro of accessing additional sources of funding (i.e. capital raising, Research and Development Tax Offsets) can be achieved a lot easier via a company (Pty Ltd) structure.

2. Use your financial data for good (not just a tax return!)

a. Reconciling accounting data files is not fun for anybody outside an accountant’s office, but it is incredibly important to track your costs on a regular basis.

b. There is only a limited amount of resources ($$$) available to startups and having clarity of your current and forecasted costs will only help to extend your runway.

3. Track your own time

a. It’s easy to concentrate only on the cash expenses when tracking the costs of innovation, but the greatest cost is often your own time.

b. Cash will generally be required to pay your suppliers and developers, before you would ever consider paying yourself, but this does not change the fact that you should be at least tracking your own time.

c. There is a massive opportunity cost associated with your time, as most founders have a skillset that could be well used in another business. So, do not treat your own labour as free, but rather compare to a market salary.

d. Using timesheets to track your time and allocate your hours to projects will also come in handy when it comes to claiming Research and Development Tax Offsets and other government grants. This really comes in handy later.

4. Make sure Reward = Effort

a. “It’s always OK… until it’s not” – meaning those ‘back of the napkin’ arrangements with friends and family could potentially blow up down the track.

b. In order to keep things “OK”, it’s important to track the inputs from all parties (time, cash, expertise etc) and ensure the remuneration and reward aligns to this. This will change often, so having open conversations on an ongoing basis (such as monthly) will help reduce this risk and keep everyone on the same page.

5. Identify the roadblocks early

a. It might be a hard pill to swallow, but not every idea you have will be a good one. As such, it is important to determine if something cannot be commercialised as early as possible so your resources can be channelled into something better.

b. I have seen startups tweak their business plans weekly as they face roadblocks that make their original path unachievable. Recognising these roadblocks when you hit them, and addressing them early, allows the venture to continue, albeit in a slightly different form.

Bonus tip – know what you don’t know and when to ask the experts.

For example, knowing the right time to register a patent, formalise agreements, setup an employee share scheme or get some financial modelling sorted is a genuine skill.

Recognise when such hurdles are too big to jump alone and reach out to professionals to advise.

Even if you don’t think you can afford their services, start a conversation because they can always point you in the right direction or validate the journey you are on.

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Written by: Gavin Stacey, Senior Manager RSM Australia

RSM Australia is a sponsor of Startup News.

Main image by: cottonbro from Pexels