How does accounting at a startup work?

How does accounting at a startup work?

Entrepreneurial Accounting is one of the research areas at the Center for Financial Reporting and Auditing (CFRA). Especially in the early stages of a company, accounting is not the top priority for many entrepreneurs. Right from the get-go, they often neglect the importance of this aspect. 

The annual financial statements of a company do not give an outlook for the future, but reflect developments that have already happened. This also defines the problem of traditional financial accounting, because a look into the financial future is essential for startup companies. Moreover, many visionary founders can very well describe how their own ideas can revolutionize an entire industry, but the specific implementations, including the planning of monetary circumstances, is often difficult due to complex regulatory requirements. 

Accounting should not be an afterthought 

The knowledge of a startup CFO is broad. He or she makes sure that entrepreneurs and investors have an overview of the company’s financial situation, and develops strategies for optimizing processes and plans future investments of the company’s financial resources. In addition, the CFO supports founders in maintaining relationships with lenders and investors. Unlike at a “traditional” company, the CFO cannot count on controllers, treasurers, and financer, because these positions have not yet been established at a startup company. So there is a lot of room for independent decisions, which also requires a CFO with a certain degree of entrepreneurial spirit. The CFO at a startup company also puts a different focus on specific tasks than the CFO at an established company, because a startup’s main responsibilities are financing and cash management. 

If an entrepreneur is not an expert in the field of accounting, a tax adviser might come in handy. However, not all accountants are familiar with startup business models. Choosing the right consultant is essential for ensuring a suitable partner in tax, accounting, and regulatory matters. Most of the time, entrepreneurs are unware that only these areas can be covered by an accountant. They are looking for an integral sparring partner in the financial field, thus provoking misunderstandings between founders and accountants.

Accounting should not be an afterthought. Early on in their lifecycle, early-stage companies have to start integrating accounting systems and being aware of the CFO’s importance. An accurate documentation of finance makes it easier to assess the company’s previous development, and avoid legal violations.

Entrepreneurial accounting research is socially and politically significant

Berlin has been wearing Europe’s startup crown for a while now, and outranked London as the startup capital. The CFRA at ESMT Berlin could not have chosen a better place for its research. Entrepreneurial accounting investigates the venturing environment, and looks at how young companies handle their accounting. An interesting research topic, because accounting systems have not yet been established or formalized, or are in the development process.

The founder of a startup and the financial counterparts have a different degree of accounting and finance expertise, and thus influence the emerging design of accounting systems at a growing company that is needed not only to comply with regulatory requirements, e.g. the annual financial statements, but also for internal decision-making. This knowledge disparity leads to a significant expertise asymmetry in the startup and its environment, potentially provoking power games.

Entrepreneurial accounting research is relevant for society in broader terms, because the European and worldwide venture market is constantly growing, increasingly contributing to the growth of the country’s economy (gross domestic product). The research results provide valuable insights in how to facilitate startups’ compliance with regulation. Hence, entrepreneurial accounting research is also policy-relevant in that it can help inform legislators on how to create an enabling entrepreneurial economy.

Banking and Finance, Entrepreneurship and Innovation

Financial Services