We’re preparing the launch of the CFO box, a convenient solution for founders and finance teams to setup and improve their finance operations towards automation and actionable visibility.
In this first part, we cover the key topics, the vital elements to consider at the initial stage of a company to start a Finance Process. Follow the steps, adapt and adopt them for your company and you will be ahead of most.
We will go over each element to guide you along your decisions.
We are big fans of Xero (we include some specific suggestions for Xero users), but this process toolkit can help one whichever software they ultimately use. The thinking process remain the same whatever solution is implemented.
Get the super convenient CFO Box toolkit now (For free)
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Current version: 2019-07-07
1. Finance Processes to set up when Starting the Company
Pick an accounting software
Accounting is simple: every business financial transaction (such as a sale or a purchase) is recorded against different ‘accounts’, building the P&L (profit and loss) statement and the balance sheet of the company. If we consider the ‘technology’ behind this, we go back to the 15th century in Italy, for the first documentation of what’s called “double entry accounting”. That’s to say that every accounting software follows this concept and allows to record anything you will need.
The differentiators are the User Experience which allow to record some transactions faster (we explain how Accounting is progressing along the ”self driving” journey in When cars drive themselves, what do accountants do).
Changing accounting software is a pain, so plan for years to come:
- You need the full year accounts to fill taxes (on top of having proper visibility), which means switching can only be done at very specific time… you don’t want to switch accounting software.
- You will probably lose past data, because different software might have different data format and storage ability.
- It can take months to switch accounting software, which means two systems would be in use along the process.
That being said, here are the things to consider:
- Friendly Bank Account reconciliation: Most transactions have an impact on cash at some point, so the bank reconciliation has always been a top step of bookkeeping process. Some software are friendlier than other.
- Bank data import: Are there automated feed available? Or at least a simple way taking just a few minutes (For Xero users with banks not integrated, we offer Bank2Xero)?
- Reconciliation interface: Similar to an email inbox, is it a page you will be happy looking at regularly?
- Management of Sales: Accounting software can generate invoices, send to client, send payment request reminder. You kill many birds at once. Sales have to be recorded in your accounts anyway.
- Issue of invoices: Sales have to be recorded in financial accounts, hence generating them directly in the accounting software means doing both tasks at once.
- Management of unpaid invoices: Once issued, payments often have to be chased… the accounting software should act as a manager for such receivables.
- Recording & Preparation of Tax
- Sales tax recording: How will the recording be done on every transactions?
- Often there will be some additional processing to do for tax filing. Evaluate what’s really a blocking point vs. a nice to have.
- If you have multiple companies in different countries: Using the same software across countries can bring benefits which outweights the issue of different software for each country.
- Storage of Supporting Documents
- If you can attach documents to transactions in your accounting software, you be able to check data at any time in seconds. Much better than having no clue what a transaction is for and if the recording is correct.
- Reasonable Price, not the cheapest
- While enterprise solutions might be priced in the $1000s and much more, SME friendly accounting software are just a few $10s per month. Trying to optimise for $100 or $200 a year is often much more costly… we mentioned the issue of having to switch accounting software at a later date
- Volume of Transactions
- Are you an e-commerce company which might have 100,000s of transactions? How will the software behave? Will you record all transactions or just a daily summary?
- For example, Xero announces a 2,000 monthly transactions limit (it still works above that and there are workarounds such as dedicated add-ons)
- Online
- It’s 2019, do we still have to explain that being able to access things while travelling and collaboratively is useful?
Process Suggestion
- Pick an accounting software you can use for years to come.
- Ensure you have admin access. Don’t allow an external ‘partner’ to have the ability to lock you out of your financial accounts.
Software Suggestion
- No Spreadsheet! Do you really want to record double entry accounting for all your transaction, build the formula for P&L, Balance Sheet, and miss on business management feature that you will need anyway (sales management, suppliers payable, reconciliation…).
- Xero: leading online solution for SMEs at an affordable price.
Pick a Bank
- Price
- Maintenance fee: usually low vs. transaction fees
- Transaction fees: Foreign currency exchange (FX) and are what makes a bank account service expensive.
- Modern Interface
- Despite their claims, many bank interfaces are counter-intuitive. Pick one that will not make you sick using (if possible).
- Integration with Accounting Software
- When bank transactions data feeds your accounting software, significant time is saved.
- Values
- Banks are financing the economy… is the bank you’re picking behaving in line with your and your company’s values?
Process Suggestion
- Store monthly bank statements as PDF in your company’s cloud storage, allowing to quickly compare previous accounting balances when needed.
Bank Suggestion
- In Singapore: DBS, OCBC, UOB and HSBC have direct feed to Xero, sending data daily
- For international Transactions: Paypal, TransferWise
Record Business Expenses
Differentiate the different purchases which can be done by a company:
- Paid by the Company
- With Automated payments. More and more purchase payments are automated… think of card payments like Amazon Web Services, Heroku and most software. The best is still to record the purchase with the proper receipt or invoice from supplier: proper documentation will come in handy in the future (audit, or even just internal verification). If not possible, pre-recording can be set using repeating purchases (at least in Xero) or a “Bank Rule” (in Xero) to automate reconciliation.
- With Invoices for manual payment
- Paper invoices – Sorry that you have to deal with paper; Scan and use the digitalised version as other digital invoices
- Digital – Record as a purchase with the digital copy as supporting document. Then process at the appropriate payment batch.
- Paid by Founders/Staff
- See the Personal Expenses section below.
Process Suggestion
- Never process a payment to a supplier if the purchase is not recorded in accounting software beforehand. It has to be recorded anyway, no point delaying and risking duplicate payments and creating mess.
- Decide payment batch process:
- eg. Every Friday; or
- Twice a month on 15th and 28th
- Create dedicated email addresses (group/team email with different members, dedicated email or email alias) for each company.
- eg. [email protected] and [email protected]
- For Xero users:
- Copy the ‘email-to-bill’ address from your Xero (in the Purchase Bill page) and record it in your email contacts so you can forward documents to Xero’s Drafts.
- Then setup email filters to automatically forward purchase invoices and receipts (from the appropriate email inbox)
Software Suggestion
- Xero: works great for PDF documents forwarding, and manual recording (<1 minute per transaction)
- Receipt Bank: Allows to pre-process purchases from any sources (with or without PDF).
Fixed Assets
Fixed assets are not expenses. They show in the Balance Sheet’s Assets section, with expense coming over time, when it’s used. For Example, a laptop might cost $3,600 when purchasing it, but being used over 3 years, it’s really a $100 expense per month. Lucky is, accounting covers that.
Fixed assets might be laptops, office furnitures (desks, chairs, sofas), cameras, drones, ping pong tables and other big purchases.
- Tax incentives – Many countries are pushing towards automation, allowing to deduct from corporate tax the value of assets purchases. What’s available to you?
- Purchase Policy
- Who can purchase assets?
- What? For computers, you can define brands and models the company goes with so the next purchase can be done in seconds, saving precious time. Refresh the policy every few months when needed
- Where do you purchase? Should you look for a few dollars savings at each purchase or simplify the process with a regular supplier? Apple offers corporate discount once buying a few computers per year for example.
- Depreciation Policy – Assets are purchases which are used over a long period of time, hence the need to “depreciate” to record the expense over the lifetime of the asset. Depreciation might different from Tax deduction based on country’s regulation.
Process Suggestion
- Define the different kind of assets needed for your company and the purchase and depreciation policies for each
- A purchase policy might be
- Tech team members get $5k per 2 years to have powerful equipment
- Non Tech team members get $3k per 3 years
- A depreciation policy might be
- 36 months straight depreciation, in line with expected usage.
Software Suggestion
- Avoid spreadsheets to calculate depreciation: your accounting software should have a depreciation feature, and spreadsheets too often have errors.
- For Xero users: the Depreciation policies are define in the software, making recording of assets and depreciation a one-click process. No reason not to record depreciation monthly anymore.
2. Additional Processes once Employees join the Company
Congratulations, the company grew and the there is now a team!
Despite all the talks of ping pong tables and other fancy benefits, getting paid will be a significant part of a good experience for employees in a company. Let’s get this working.
It’s time to think of Payroll
- Tax Calculations – Depending of the country, the calculation is different but should still follow a clear formula. Some countries are puzzling, like Indonesia where even specialist softwares can lead to different results. In any case, find the best formula and apply it consistently. You should not have to re-build formula every month.
- Bank Transfers & Payments – Employees don’t like delays in their salary for some reason.
- Pick a payment date. Plan a few days of lead time to prepare the calculations and approval and keep the rythm going every month.
- Some software and banks can automate the payment or simplify it significantly:
- Direct push from payroll software to bank
- Export of a file for bank transfer preparation in online banking
- Payslips – Most software should be able to generate an acceptable payslip.
- Tax Filings – Companies might have to provide an annual salary report, for example the IR8A in Singapore. A dedicated software will cover that.
- Leaves – Payroll software can host your leave policy and act as the platform for staff leave request submission, approval and management.
- Recording – Salaries are often a main area of expenses for a business, so proper recording in accounting is key.
- Pick a software which can integrate with your accounting software.
- Even if salary payments are delayed, recording should be done, showing the liability of the company for such unpaid salaries.
Process Suggestion
- To allow generation of annual summaries (often required by tax authorities), the software should be used for a full year (calendar, company financial or country fiscal year depending on the case). So pick a solid solution early and avoid changing.
Software Suggestion
- Avoid spreadsheets: generating payslips, annual summary and other requirements would add up quickly and offset any software cost savings.
- Xero can cater for simple cases (basic payslip, little change of salary). Full payroll feature available in Australia, New Zealand and the UK.
- Complete solution for Singapore: Talenox or HReasily
Managing Personal Expenses
- Set up a policy – Make the policy clear to avoid surprises and align expectations
- Who can claim? Everyone? Only sales team?
- What can be claimed? Everything? Only taxi and F&B to entertain prospects and clients?
- How much can be claimed? Define individual expense amounts (eg. $100 per F&B) and total for a period ($500 per month)
- What’s the period of claim? Can someone claim an expense made 6 months ago?
- Per Diem: do you have standard payment for travel? Which amount? Country regulation might have limits on acceptable rates for tax purposes (otherwise staff might be taxed on such income, for example here is the Singapore Tax Authority (IRAS) guide on Per Diem)
- When will reimbursement be done? Along salary or separately? Splitting from payroll can significantly simplify the process and avoid delays.
Software Suggestion
- Avoid manual submission: No one likes to do expense reports, and operational recording quickly becomes a mess.
- Software includes mobile app allowing to take pictures, generate submission report and integrate with accounting software to record
- Xero: for basic policies
- Expensify: for more control
3. Setting up to Generate Revenue
Recording Revenue Efficiently and Accurately
- Automated Sales Invoices and Receipts – Subscription managers like Stripe, Chargebee might be generating such sales document for you. How will you record it in accounting software?
- Manual Sales Invoices – Generate the invoices from your Accounting Software and manage them from there: payment due date, received payments, etc.
- Deferred Income – When an invoice is for a service provided over time, it should not all be recorded as revenue on the date of the invoice. It should be a deferred revenue, and the revenue be recorded through accruals over the time the service is provided. Xero users can do that in seconds (See our guide How to Record Accruals in Xero).
Process Suggestion
- For Xero users: Activate auto reminders to chase for payments
Software Suggestion
- Avoid to generate Sales invoices from a system not connected to your accounting software– that would mean having to generate them twice (because it has to be in accounting too).
- For Xero users: Use manual invoices and Repeating Invoices as appropriate.
Offering Different Payment Methods
- How will clients pay you? International bank transfers are often a mess to process, and expensive.
- Which currencies should you be able to receive?
Provider Suggestion
- For multiple bank accounts: TransferWise (receive EUR, USD, GBP, AUD and NZD)
- Card payments: Stripe (receive payments from most countries and cards; transfer to bank accounts in major countries)
Managing Sales Tax
- When do you have to register? Threshold varies from country to country.
- Should you register earlier to benefit from tax reduction?
4. Raising Funds
Well done, your company grew and you’re now looking to raise funds to scale further.
Discussing with potential investors will involve many topics, from your team to your product, from your vision to your conversion funnels.
One of the topic will be financial situation.
Getting ready for Financial Due Diligence
The good thing is… that having followed the different steps properly from day 1 mean that there will be no surprise, no rush to generate financials at the last minutes.
You will save lots of stress.
You will give to investors an image of a serious company on top of their operations. That’s much better than a messy operations where money gets lost with no clarity of where.
That will save you time to raise funds. That will improve your valuation.
With past data under control, you can then focus on the business plan and financial projections to promote the vision and future that investors will invest in.
Get this CFO Box Part I toolkit as a nice PDF:
Current version: 2019-07-07