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Basic accounting errors founders make
Basic accounting errors founders make

Of late, have come across multiple early-stage startups making a basic accounting error. While digging their choppy monthly revenues, I realized these startups book revenues in the month cash was received, and not when the product/service was delivered. While this seems very tactical to founders early on, it’s important.

Examples – a SaaS startup charged & booked annual revenue upfront, while clients could cancel any month with refund. A hardware startup did the same, while delivering products over months & when clients could cancel anytime before delivery.

I understand why you’d do it. You need cash and if it’s in your bank, you’d want to use it pronto. But it’s in violation of proper accounting practices & your financial statements are wrong.

More importantly, your investor communication & strategic plans aren’t based on reality. You’re using cash that you haven’t yet ‘earned’ to foot your bills. Your bank balance & runway calculations are exaggerated. If a big client pulls out, you need to refund and suddenly there’s an unplanned cash crunch. Also, your MoM growth, margin trends, churn, etc. are misleading. It may even put off potential investors.

So don’t assume it’s trivial – get an accountant, use deferred revenues and revise your investor deck & financial statements.

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