Taking your business from a Start-up to a Scale-up is an incredible milestone. As you focus on building your brand and raising capital to grow, it is vital to simultaneously focus on financial reporting. Having a proper financial reporting structure not only demonstrates success, but it also instills investor confidence in the business, and its management.

Start-up vs. Scale-up

A Start-up company is a business in the early stages of operations. At this point, a company has established minimal structure and likely lacks policies and procedures since efforts are primarily focused on expansion and growth. On the other hand, a Scale-up company has reached the maturity stage through the implementation of internal protocols and procedures. Consistent sales growth and financial stability enables Scale-ups to hire specialized, experienced personnel to effectively support business expansion.

The team at Grewal Guyatt LLP has extensive experience working with companies from the Start-up stage, and as they continue toward the Scale-up stage. Through this process, we have identified the following common accounting and finance challenges:

Neglect of the Finance Function

Through expansion, businesses often neglect to develop their finance functions. At the Start-up stage a bookkeeper may be sufficient to manage the company’s financial records, however through growth a finance team encompassing specialized expertise becomes essential to handle more complex transactions.

As a company progresses toward the Scale-up stage, investors and lenders become key stakeholders and rely on financial statements to understand the company’s overall financial condition. At this point, maintaining up-to-date financial statements that are readily available becomes key and in the absence of a robust finance team, this may be challenging.

Adopting Incorrect Accounting Standards

At the Start-up stage the significance of adopting the appropriate financial reporting framework for a business is often overlooked. The most common accounting standards for non-listed entities in Canada are Accounting Standards for Private Enterprises (ASPE), Accounting Standards for Not-For-Profit Organizations (ASNPO), International Financial Reporting Standards (IFRS), and in certain instances, U.S. GAAP. There are many factors to consider when selecting the optimal financial reporting framework for your business which may depend on the reporting requirements related to the industry and jurisdictions in which your company operates and its strategic goals (i.e., Initial Public Offering).

The Implications of Contractual Agreements

As a company grows, contractual agreements become inevitable for certain transactions including financing, share or asset purchases, raising capital through private lenders, and employee stock option plans, amongst others. These complex transactions require expert judgment to determine the accounting treatment, and accordingly will impact the presentation of the financial statements. For instance, under ASPE and U.S. GAAP, stock options that vest on a future liquidity event (i.e., initial public offering, sale of the business in the future, etc.) may not require a share-based compensation expense and liability to be recognized until the triggering event occurs. This means no impact to your bottom line until a future date when the likelihood of a triggering event is probable. As companies progress toward the Scale-up stage, it is critical to strengthen the finance team to ensure proper analysis of complex transactions and recommend appropriate advice on the financial reporting implications prior to engaging in any contractual agreement.

GG Observations

During a growth phase, avoid losing sight of the financial reporting function. It is key to managing the business while ensuring that regulatory obligations and investor expectations are met. The GG team of professionals can help your company achieve financial success by assisting in handling complex financial matters that may arise as your company progresses toward a Scale-up.