Everything Early Stage Founders Need To Know About Tax w/ Wes Rashid | Accountancy Cloud

00:00
Wes Rashid
And you have to adapt as a founder if you want to survive. At the early stage, it's all about survival.

00:05
Amardeep Parmar
That's Wes Rashid, co founder of Accountancy Cloud, which has built in startups for over a decade.

00:11
Wes Rashid
Plug and play now. So if a founder has a business, they need a specialist accountant that really understands the startup industry. Then we can support them with a set of accounts or managing their books or placing someone in their finance team.

00:31
Amardeep Parmar
Many founders are clueless when it comes to their finances.

00:34
Wes Rashid
What we try to do with founders, we will build a financial plan that will include a P and L, a cash flow and a balance sheet to cover all bases. And then we will sit down with them to understand the drivers of their revenue.

00:49
Amardeep Parmar
The point of business is to make profit. But so many companies neglect this when they're chasing shiny objects.

00:55
Wes Rashid
The growth stage is more about systems and execution. But in the early stage, you're seeing founders that are trying to limit their cash burn and make sure that they're on top of the cash flow and hopefully move into a profitable position if they can.

01:12
Amardeep Parmar
Learn how to make a financial model that's realistic, can get you funding and keep you alive. There's going to be so many people listening today who don't know what they're doing about tax and don't know what they're doing about accounting. And you're probably something they stress out about and forget about until it's too late. So what's some of the biggest mistakes you see people make when they're first time founders with their taxes?

01:36
Wes Rashid
Yeah, probably first thing is try to skim as much cost as possible and get the cheapest accountant that's out there. And the problem with that, particularly in the startup industry, is that you do need specialists to work on your accounts, otherwise you kind of mess things up. You know, we come across a lot of SaaS businesses, a lot of online marketplaces, a lot of food and drinks products and consumer products businesses. And they do need specialist support. So when founders kind of skimp on that, you know, you can see it, you can see it when they approach us often with not a clean set of books. And yeah, the other thing I'll say is the doing the basics right. And that means noting down what your deadlines are. And I'll say that Amar, because obviously you guys are working.

02:27
Amardeep Parmar
I've had many fines in the past.

02:30
Wes Rashid
Exactly, yeah. And actually some of the statutory deadlines are, you know, they're fixed and you can get penalties because you are so focused on the day to Day as a founder, they're easy to forget as well. So we do have founders that come to us with a month left to file accounts and asking for some emergency help. So definitely those two things is keep an eye on the deadlines and also try not to skimp too much on the finances and get some expert support an accountant that can actually understand your industry.

03:04
Amardeep Parmar
One thing I've seen a lot recently from early stage companies too, is not understanding the whole difference between incorporating and how that all works. And as you probably know, it's going to be people who do some stuff on their personal accounts, they try to expense it back to their business. And this is how I started out, right? The first company I did originally, I didn't realise how much money I was going to make and then I suddenly had to try and start moving things across and it became really messy. How would you advise people on that side of things of when do they start thinking about this as a proper business? And you need to get the actual books ready as opposed to. Is this just something I'm experimenting with?

03:37
Wes Rashid
Yeah, actually looks really nicely with the first question that you asked as well, because we see a lot of founders that kind of commingle their personal expenses with their business expenses. So first things first, don't do that. Try and make sure that you get a good business account. There are lots of options out there. You know, you can get anything from a, you know, Starling bank or Revolut a Tide and so on to more high street names like HSBC, for instance, Barclays and so on. So the first thing you should do is definitely be looking at opening up a business bank account. And second thing, you need to record your expenses. And there are nifty tools out there that allow you to, you know, take a photo of an invoice and a receipt and that will help with good record keeping.

04:29
Wes Rashid
And then the third thing is to bring it all together is have a good piece of accounting kit. All right, so we like Xero. Other founders might use QuickBooks or Sage, for instance. This is just a really good place, central place to keep those invoices and receipts. Connect your bank feeds onto there as well and that will enable you to just make sure that you've got things like properly organised. So that's the first thing. Second thing is to ensure that your business expenses are wholly and exclusively for actually running your business. Okay. Which means that if you're going out to a social, you know, party on the weekend, that's probably not allowed to be deducted against your tax bill. It has to be for, you know, for your business, 100%. Okay, so you have to be thinking about that too.

05:18
Wes Rashid
Now an accountant can obviously help you make the right deductions in your business. So, you know, if you do find the right accountant, you can easily just speak to them.

05:27
Amardeep Parmar
And on that side too. So many people, especially at the beginning, I think they know the difference between a startup and a small business. And when you think about it from a tax perspective and accounting perspective, what should we think about differently as a startup compared to as if you're an SME or you're just starting a small business?

05:46
Wes Rashid
The way that I see the world is, you know, certainly through the lens of a startup founder. And a lot of the startup founders out there in the ecosystem are typically trying to scale their business through some outside capital, typically through equity financing. So this might mean that, you know, they're going out, trying to get a friends and family around. Then following on from that, maybe angel and then maybe some institutional investment for an outcome that is effectively going to change their life. Right. Whereas a small business, I mean, I run a small business ultimately and you know, my goals for the business is I want to maintain it as a bootstrap business, I want to maintain profitability.

06:30
Wes Rashid
I've got no short of ambition like the startup founder, but I'm not going to be suitable for any sort of venture scale or any institutional investment as a business. So I would say like the outcomes, the way that it's structured, you know, from a tax and accountant perspective is pretty much exactly the same. You're going to set up a limited company, you're going to run payroll, you may have to file quarterly VAT returns and you're going to file your end of year taxes and your annual accounts as well. But what happens on the cap table. That's entirely different.

07:02
Amardeep Parmar
And on the VAT side you mentioned there as well. So it's interesting, I think sometimes the debate about when you should get registered to, and there's some people that argue should register straight away because people take you more seriously. But then at the beginning we've got all these other problems to take account of. Sometimes the extra overhead can be quite burdensome for some early stage founders. At the same time, if you do it right and you're making losses, for example, then you might be able to reclaim more back than you would be paying. So what do you advise people there or how should they be thinking about their decision?

07:34
Wes Rashid
As I was saying, just don't be hasty. Right. Let the business kind of work itself out for you, which means if you know you're spending money on software development or any type of expense that has a VAT charge on it, all right, then you still got plenty of time to actually register voluntarily for VAT. Now if you reach the threshold, which is £90,000, you have to compulsorily apply for VAT. So if you look at forward 12 months and your taxable supplies essentially the turnover reaches or is likely to go over £90,000, then you're obliged to apply for VAT registration.

08:18
Wes Rashid
But when it comes to voluntary registration of VAT, you have to decide, you have to look at that 12 months forecast, you have to see whether or not you are likely to go over and you should make a decision whether or not you should vet register for VAT. Then if you are a business that is typically loss making, we see a lot of these businesses and you want to reclaim the VAT that you're charged, that's entirely possible, but don't use it to purely subsidise your business. This is what HMRC does look at. It's likely that HMRC will send a letter, a compliance check if you continue to make claims consistently. So that's something to look out for. But there's no reason why, if you've got a trading activity that qualifies for VAT, then yeah, it's a definitely a possible option.

09:18
Wes Rashid
Now your point around, you know, whether it looks more professional, there are some cases where you have, you know, a young startup working with a big corporate, for instance, to be honest, that's more of a commercial decision. But you know, you have to take the relationship, you know, on face value really. In most cases you might be pushed or forced towards registering for VAT and you just have to judge it at the time. To be honest, what we tend to do is we tend to walk through the steps in applying for VAT and we'll work with the founder to make sure that's done.

09:59
Amardeep Parmar
And looking at startups too, like you said, some of them looking to raise funding in the future and when they're trying to get their books ready in order to be able to, maybe the lead investor wants to see their books, wants to really understand their numbers, when should they be thinking about it's time to get a CFO or get somebody with that experience if they don't have somebody in the founding team or is that something which is you don't need at the early stages? Very, very early stages?

10:23
Wes Rashid
Probably not. You probably get a really good accountant or financial controller to prepare some management accounts and your investor can look at those. I would say a good solid fractional CFO can come in around about seed to series A. That's probably a really good sweet spot, I would say, for actually getting a CFO in because they're there to actually provide strategic advice to the founder. All right, not necessarily pull lots of different reports and clean up your books and stuff like that. That's really slightly lower level for strategic cfo. But you can do CFO like things like for example, you can, you know, ask for a financial model if to get investor ready, to get your pitch deck ready. You can have someone support you through this whole due diligence process.

11:17
Wes Rashid
You can have someone maybe prepare a cash flow forecast so you can start to bring these elements in early, even at the earliest stage. But yeah, C to series A tends to be the sweet spot for cfo.

11:29
Amardeep Parmar
I imagine there'd be some people listening as well who, when you said the word financial model, freak out because they don't really know what that means. So could you walk us through a bit there? In terms of financial modelling, what does that actually mean for a startup and for an early stage founder? When do they need to start thinking about that?

11:43
Wes Rashid
Now, I would argue obviously as an accountant that having a good financial plan or a financial model, all right, is kind of a mandatory thing. It's something that I see we have one in our own business and we see it as our own operational plan. And to be honest, it's a really good way of really understanding the drivers of your business. Now a financial plan is one where you are forecasting over sort of a mid to long term horizon, you know, whereas something like a cash flow forecast, for instance, you're only looking 12 months ahead, but with a financial plan you're looking three to five years ahead. Now that might not necessarily, might not be totally necessary for a pre seed startup.

12:31
Wes Rashid
One or two years based on a product that hasn't even been launched, you just literally are sticking your finger in the air. So that, and what's the point of trying to forecast out three to five years? Investors know that you're likely going to pivot and you know, all they want, really want to see in a model like that is some ambition. But for a business that has been going on for one or two years, where you've got a bit historical information in your business, then you can actually look to forecast your business in terms of, you know, what are the drivers, what are the revenue drivers of your business. You know, how are you acquiring customers, how are you looking to scale your team? You know, these things can be actually built into a financial plan.

13:16
Wes Rashid
It can actually be very useful for a startup when they look back and say, oh, well, that, you know, that quarter has, you know, got, has gone by. How are we doing on sales, you know, how are we doing on profitability now? How are we doing on cash flow? What we try to do with founders, we build a, we will build a financial plan that will include a P and L, a cash flow and a balance sheet to cover all bases. And then we will sit down with them to understand the drivers of their revenue, to understand, you know, all the costs that go into it. And we'll look at whether or not they're going to be looking to fundraise over time.

13:53
Wes Rashid
So we even look at, you know, the level of dilution they'll experience as well to determine, you know, at the end of the five years, you know, what sort of revenue target they could get to. And then we build something called a baseline case which they can use internally and then two other financial plans off the back of it. One is, would be called an aspirational financial plan and one, if were looking at a downturn situation, a financial plan for that as well. So they kind of, will kind of work out exactly what's, you know, what they think is going to happen in the business, their reasons for that, and then start trying to create a financial plan that supports that story. So when they do go out to pitch, things are in sync.

14:38
Amardeep Parmar
Hello. Hello. Quick interruption. To let you know a bit more about BAE HQ, we're the community for high growth Asian heritage entrepreneurs, operators and investors in the UK. You can join us totally free at thebaehq.com/join. There you'll get our CEO structure in your inbox every week, which is content, events and opportunities. You can also get access to a free startup fundamentals course by joining. Let's get back to the show. I think you can always tell when somebody hasn't had somebody external to their financial plan when it's in a pitch deck because it pretty much always looks like that. And in year five it's always 50 million. So you look a lot of pitch decks. It's always 50 million in the fifth year and it's like, I think you just, they've just decided that's what they want to make in that year.

15:26
Amardeep Parmar
And it's not really based on numbers as you said, but looking at the cash flow side as well. So obviously in the long time you've been working in this industry, you're going to have seen many people where cash flow is the thing that's taken them down, where they might have had a good business, undercover, underlying business, but the cash flow, they just couldn't quite work that out. So what advice you have for people about cash flow? Because I think it's one of the things for us, for example, which we've had our own problems with recent times, where there's money coming in, but it doesn't come in time to pay different bills and all of that, different crisis management. How should people think about cash flow and make sure that they aren't scuppered by that?

16:03
Wes Rashid
Yes, the first thing you need to understand the two principles of cash flow, which is cash burn and then cash Runway. Okay, so cash burn is, you know, when everything nets off your income and expenses. If you are left with a negative balance at the end of the month, then you are burning cash and the extent of that is going to affect your cash Runway. So your cash Runway is typically, here's your bank balance. This is how much money you've got today. And based on your cash burn, it's going to last a certain amount of time. All right, that might be six months, that might be 12 months, or lucky, you might have 18 months or more in your bank account. If you understand those principles, then you can understand that there are some core reports that can help you manage your cash.

16:59
Wes Rashid
One is called a cash flow statement, which is essentially a list of income and expenses. Think about all your cash inflows and all your cash outflows all in one report. That gives you a good indicator of any risks or opportunities for increasing cash flow and reducing your cash burn. Equally, it might help you spot some risks, some unintended tax payments of tax penalties or whatever in your cash flow as well. So understanding a good cash flow statement can be helpful. And one way to get a view of that is to have some good, solid management accounts. The, the way that I like to sort of work with founders, and I think this is really low touch. Just have a really good cash flow forecast that is accurate for at least three months, but is projected out 12 months.

17:58
Wes Rashid
And the reason why I say that is people should be almost building in the habit and the routine of looking at their cash flow every week, right? If not every week, then at least every month, because things do change. You know, that customer that you thought you were going to land tomorrow suddenly delays actually signing a contract or that you know, that customer, for instance, or that supplier, let's say, you know, has given you some really harsh payment terms and you suddenly are left with a huge bill that you have to pay immediately. Right. These sorts of things can be captured through a cash flow forecast. And that forecast is something that needs to be updated all the time. All right? So I think that's a good start of a 10.

18:46
Wes Rashid
So understanding the principles of how Cash Burn and Runway works, ensuring that you've got good set of manager accounts with a cash flow statement. And then third, I would say, you know, and it sounds like a lot, by the way. Sounds like a lot, but it's definitely worth it because it keeps you on track, helping you manage and control your cash flow. And that can only really be, you know, put you in a really good stead for making the right decisions that will obviously, yeah, reduce your, you know, make sure that you manage your cash flow effectively.

19:20
Amardeep Parmar
So obviously, you're talking to founders all the time, right, about cash flow in runway and in the traditional VC model, right, it was that you raised what, 18 months to two years worth of runway. You burn through that, tried to get your metrics and then raise another round, but now there's been a big more focus on profitability and obviously having never ending runway because you're not burning cash for your under. How have those conversations been with you? Have you found that there's been more interest in people really trying to work out how to get to profitability quicker? Or is it still this mindset about how to, like how. How the conversation going about runway with founders, is it people trying to shift away from that mindset of, okay, I need to burn through this and raise another round? Or how is that going now?

20:02
Wes Rashid
Yeah, I just think it's, you know, founders attitudes now and the direction of travel that we want to take. Their businesses has changed because the market has changed and you have to adapt as a founder if you want to survive. At the early stage, it's all about survival. At the growth stage, it's more about systems and execution. But in the early stage, you're seeing founders that are trying to limit their cash burn and make sure that they're on top of their cash flow and hopefully move into a profitable position if they can. And actually, it's funny because investors that are writing institutional checks, they're looking for the next unicorn. So how do you balance profitability with, you know, growth, you know, the old average adage of growth at all costs? It's really difficult.

20:53
Wes Rashid
So founders are left with the decision, you know, of just surviving, making sure they move into profitability, you know, probably at the expense of perhaps a down round because they don't have, you know, the growth that they once had or looking for other alternative sources of finance. But yeah, I'd say it's a reflection of market more than anything. We're seeing a lot more businesses that are moving towards a state where they are accepting that the market conditions are probably, the bar is higher, there's definitely a lot of capital in the system. So yeah, checks are still being written, it's just the bar is higher. So being aware of that, I think founders are making decisions to move more into profitability. That said, you know, you still get businesses that are, you know, in the startup space.

21:45
Wes Rashid
They're building the product, need the money for software development and growth and you know, are, you know, are taking, ultimately taking a risk on the business. So we still continue to see businesses that, you know, are still on that sort of hockey stick trajectory and burning cash like anything.

22:00
Amardeep Parmar
And another part of the news right now, right, it's about how the tax system in the UK changing and all the different ways that affects entrepreneurs as well. What do you think that amongst all the noise that entrepreneurs actually need to pay attention to if they're trying to build their business, the most effective way?

22:18
Wes Rashid
You look at. God, the last two or three years I think the tech industry has been hit pretty badly to be honest. If you look at the R and D tax credit regime, it's gone through multiple changes. I still believe that there's a lot of value in R and D tax credits for startup businesses to help support their innovation, to support their R and D projects. But the rates have gone down year on year. We're now moving into what's called the R and D merge scheme for businesses that is supposedly going to help simplify the R and D tax credit submission. So I think that's certainly one thing to look out for.

23:00
Wes Rashid
And just to mention that, you know, if you are truly innovating then the R and D tax credit scheme is still, you know, a valuable scheme for many startups out there, but it certainly has certainly gone through a lot of change. We've seen corporate corporation tax rates increase from 19 to 25% might not affect a lot of loss making startups, but certainly those that are moving into profitability, we've seen the employers national insurance rates increase as well from 13.8 to 15% which might mean that hiring is stagnated. And then you've seen Some of the restructuring and some of the innovate UK smart grants that's happening as well. So I do think it's been one thing after another for the startup industry. But the way that I see it is, you know, as any founder will testify, you know, you could be hit with tailwinds.

24:04
Wes Rashid
You know, it's all about taking one step forward at a time. It's still a quite a healthy tax regime in the uk. There are still know deduction, tax deductions that you can make to reduce your tax bill or to be more tax efficient at least. So, and obviously we can help with that. So things like for instance Paint and Box is a really good one for paintable products. SUIs and EIs for companies that you know, are looking to raise money and trying to get investors on board the EMI option scheme in particular for their employees or to try and you know, incentivize high value employees as well. So yeah, it's still a quite a good place to run and scale a business here.

24:54
Amardeep Parmar
And what's the question you get asked about the most by like clients and people who find out what you do? What's the burning question entrepreneurs often have for you?

25:03
Wes Rashid
Can you help me out? I've got my accounts to follow in about a month's time. Yeah. So what we try to do is we try to help founders manage and control their finances. We're very much plug and play, you know, so if a founder, you know, has a business, they need, you know, a specialist accountant that really understands the startup industry, then we can support them with, you know, set up accounts or managing their books or you know, placing someone, you know, in their finance team to run the whole month end process for them or if they want some advisory support, maybe they need some support with R and D tax credits or they need a fractional CFO to work in their business once or maybe two days a month so they can understand their numbers to support them with decision making.

25:56
Wes Rashid
We can do that. We've very much got a service that is plug and play. We're supporting the founder in a very flexible manner. So we're more than happy to speak to anyone really. We always say that we try to be as helpful as we can. We're happy to give up our time just to have an initial discussion. You know, there's no obligation to use our service whatsoever. And we are a startup ourselves. We've been in the industry now working startups for about 10 and a half years. Celebrated our 10th year anniversary last July. You know, we have, you know, a lot of cool people that really want to help out startups and we've been doing this for a number of years, helping startups grow, scale and exit businesses. So yeah, it's an industry that we are really passionate about.

26:43
Wes Rashid
So don't feel like you that, hey, you know, you've got stuffy accountant on the end of a line, just come say hi, we're happy to have a coffee and if you want to get in touch with us, scooter accountancycloud.com.

26:56
Amardeep Parmar
For yourselves as well. What's the biggest growth area you see in your business?

27:00
Wes Rashid
Growth area in our business is over the last few years has been the development of our culture and our people. Absolutely been one of the things that we've really honed in on. As you get happy people, you get, you know, diversity in your team and then you get great outcomes. As far as, you know, the sort of, you know, growth area or industries or whatever. We're very much worth day one focused on the tech startup industry and we moved into consumer products. We've done E commerce and food and drinks products as well. So we're really excited about all of those industries. They've all got common thread with those founders in that they're incredibly ambitious trying to scale their business and be the number one brand. And you know, we have two basic principles.

27:49
Wes Rashid
at Accountancy Cloud, we want to work with really cool, interesting clients and you know, me personally, myself, I want to work with really cool people. I believe that we've got really cool people in our firm and we're working with really cool people that are running some really cool and interesting businesses.

28:08
Amardeep Parmar
So we're going to need to do quick fire questions now. But I'll just say as well, thank you for doing our accounts and solving our crises as well. Really appreciate that. So first quick fire question is who are free Asians in Britain that you think are doing incredible work and you love to shout them out?

28:23
Wes Rashid
Yeah, no worries. So I actually had a few. So Simmy Dhillon from Simmer eats really cool food and drinks businesses. I really admire the fact that he's completely bootstrapped business. Has done that with Simmy as well, which is really cool.And some amazing content out there on LinkedIn. A young startup founder, a young business, should I say. But a startup founder called Nitika Vyas runs Alia Money because I believe that, you know, what they're doing in the financial wellness space is just really cool to see and I think it's a female founded team, 100% female founders. So really I'm excited to see what they do, but they're doing some incredible stuff and I just love their proposition as well. And then, yeah, third would be Mursal from Chatterbox. Yeah, I remember when she was on the Bethnal Green Ventures, accelerator programme.

29:23
Wes Rashid
I was a mentor for that cohort. And yeah, she's just come on leaps and bounds with that business and, yeah, really powerful, impactful business. So I'm loving what she's doing as well.

29:37
Amardeep Parmar
Awesome. And if people want to find out more about you, find out more about accountancy cloud. Where do they go to?

29:42
Wes Rashid
Yeah, so Accountancy Cloud, accountancycloud.com. Very easy to find us. You can hit myself up on LinkedIn. That's Wes Rashid or Asima Hafesji, my co founder, who should be doing this podcast, by the way. I've been roped in last minute, so, yeah, there you go.

30:00
Amardeep Parmar
So she's off screen now. So if you saw us pay for react there, that's why. So second last question as well. So if people have a new way to help you, what could they do?

30:10
Wes Rashid
Well, you know, if you think that this has been helpful, if you've got any value out of our conversation and you've got any friends that are struggling with their finances, then, you know, why not introduce them to us and we'll be more than happy to spend some time with them and discuss their accountancy needs.

30:31
Amardeep Parmar
So thanks so much for coming in today and it's exciting. We're going to be working together on a few different things as well. Together.

30:35
Wes Rashid
I'm looking forward to it.

30:36
Amardeep Parmar
And have you got any final words?

30:38
Wes Rashid
Yeah, really excited about this partnership and just looking forward to interacting with the Bay community and yeah, other than that, yeah, I'm just looking forward to the next few months ahead. So thanks for having me.

30:53
Amardeep Parmar
Thank you for watching. Don't forget to subscribe. See you next time. 

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