Start-ups build control systems to manage new risks.

The word control can conjure up nefarious images of a micro-manager or a poor delegator. However, control systems are central to meeting your organization's goals and growing on a sustainable path. A well-controlled organization is more likely to attract capital, talent and to execute on its growth plans. We help STEM founders establish control systems that support your start-ups' culture, policies and operations.

Why controlling your start-up is critical.

Money markets have been loose, and capital abundant since the financial meltdown of 2008. The environment that emerged created vast opportunities for innovation and disruption and start-ups have been enjoying exceptional growth ever since.

But we are entering an era of very high uncertainty. Russia's invasion of Ukraine coincides with high inflation rates in North America. The days of ultra-low interest rates may very well be behind us, paving the way to a new era of liquidity management and capital discipline. Stewardship of capital will rapidly emerge as a core competence for the start-up community. Enter the CFO.

Culture is the founder's central control tool.

Founder's need reliable partners in the C-suite. It is well understood by audit firms that the "control environment" has an outsized impact on the firm's ability to meet its objectives and report accurate results.

In our experience working with STEM founders, their focus, rightfully, is product development and positioning the firm for GTM and investors. Their technical training allows them to identify opportunities that non-STEM professionals simply don't see. And while STEM founders remain laser-focused on their product, there must be a concurrent effort to build the business internally. The development of necessary capabilities is as central to growth as the product roadmap and the go-to-market strategy.

"Strategy is a commodity, execution is an art." -Peter Drucker

CFOs help founders and other C-suite team members create the conditions for a healthy control environment. By holding your managers accountable and proactively identifying risks, your start-up can ensure that your entire organization is built on a foundation of integrity and excellence.

Financial leaders are also well positioned to oversee data quality, establish metrics and report variances to plan so that the remaining C-suite team members can respond to emerging priorities. This culture of accountability is an imperative in the highly uncertain environment that we're entering. And it isn't created overnight. It must be supported by the right policies.

Boards must devise the best policy-based controls.

An experienced advisory board, or the Board of Directors depending on your governance structure, can help STEM founders and their C-suite leadership team establish the right policies that contribute to a healthy control environment. Boards and management should also ensure the development of the enterprise risk-management (ERM) framework and a risk assessment process for the organization.

Furthermore, the stories that are told in meetings, the questions that are asked during 1x1s and the reports that are provided to senior leaders and the Board all form part of the cultural control environment. Policies add to the narrative by making clear what employees can and cannot do.

For example, authorizations for contract approvals, codes of conduct and values statements help establish clear norms for a growing organization. Policies can (and should, and usually do) cover relations between employees, with customers, vendors, investors and regulators. A well thought-out policy playbook, coupled with thorough employee onboarding, is a solid starting point. Once the culture and policy controls have been designed, management gets into the weeds with operational controls.

Management is responsible for operational controls.

The term "internal controls" often connotates financial controls that help the firm ensure their reported financial data is accurate. In reality, financial controls are the tip of the iceberg. Operational plans set short-term goals that are pursued with various activities (or "playbooks"), which means that relevant controls must be in place to monitor progress towards those goals.

Internal controls, then, can be applied to your go-to-market strategy, your talent acquisition and retention plans and other departments of your business, including IT, purchasing and administration. To make the design of internal controls more practical, management should undertake a thorough exercise of defining their control objectives and control activities, for each business process that is being built.

For greater clarity, a control objective is an operational goal that must be met. An example could be that "Outbound sales activities are adequate to create pipeline." Then, a control activity can be defined such as "SDRs make 10 outbound sales calls per day."

The control objectives should be a top-down exercise whereas the control activities should be defined at the team level in order to gain buy-in and operate effectively.

A brief overview of internal controls

Founders should enlist the assistance of experts in order to design their control frameworks. It's one thing to hire someone that understands control theoretically and it's yet another to engage a CFO that understands the practical limits of controls and how they operate.

Internal controls can be key controls or general. They can be automate or manual. They can be preventive or detective. There are other "control attributes" too. In a nutshell, control systems are complex and their design is critical to how effectively they operate.

WHAT TO DO NEXT?

As a STEM founder, you want to succeed. And increased geo-political uncertainty is creating a complex set of macroeconomic responses that are likely to affect your start-up, indirectly, if not directly. Here's what you can do to build effective control systems:

1. Ensure your Board is well-versed in strategic and operational control, as well as ERM;
2. Retain a fractional CFO or hire a full-time CFO that will help you work through cultural, policy and operational controls;
3. Build a control matrix as well as a risk register for your firm;
4. Treat the implementation of controls as a significant project that requires Founder buy-in and engagement;
5. Test your controls for effectiveness and address any deficiencies before they become material;
6. Incorporate control narratives into your storytelling to reinforce the importance of good governance.

BluePrint CPAs has depth in governance, culture-setting, policy-making and operational controls. We can also help you with your GTM, talent and financial strategies.

Kit Moore, CPA, CA, CMA is an entrepreneur that simplifies tax and financial strategy for other business owners. The team at BluePrint CPAs can assist you with financial technology, tax strategies, mergers & acquisitions, succession & exit planning and, more importantly, your overall business strategy.