As a venture capital fund manager, your top priority is delivering strong returns for your investors. However, to run a successful firm, you must keep your own house in order, especially in the area of accounting. This means adhering to VC fund accounting best practices.
While VC fund accounting is similar to the accounting function of other financial organizations, there are unique challenges you will encounter. To help you better understand the hurdles your firm might face, join us as we take a deep dive into VC fund accounting 101.
Why Venture Capital Fund Accounting is Essential for Success
VC capital fund accounting is critical to the health and longevity of your firm. Conversely, neglecting this key function can decrease visibility and expose your firm to avoidable risk.
Mitigating risk is just one reason you need to get serious about VC fund accounting. You also need to optimize your accounting processes for the following reasons.
The VC Space Is Tightly Regulated
The venture capital fund industry is often viewed as the wild west. There was certainly a time when this was the case. However, as the market has grown, it has garnered the attention of regulators. Today, regulators maintain a watchful eye on the VC industry.
- Firms in the U.S. must adhere to Financial Accounting Standards Board (FASB) best practices.
- International firms must follow the rules set forth by the International Accounting Standards Board (IASB).
- Domestic firms also have to follow SEC regulations.
Depending on where your firm is registered, you may have to follow rules from state and local governments as well. All these rules can easily become overwhelming. But if you overlook even one regulation, you could face fines or other penalties. Therefore, you must have accounting processes that support compliance.
Your Reputation Is Everything
Venture capital is popular. All this popularity has led to the rise of many different VC firms. The question is, how do you stand out and build your investor pool? The answer is you need to develop and maintain a great reputation.
Following the latest VC fund accounting practices can help you do just that. With good accounting processes in place, you can promote visibility and transparency with your investors. You can establish your firm as a reputable, trustworthy operation that always puts its investors first.
Accounting Supports Fast Decision-Making
How can you make fast, informed decisions if your back office is not organized? The answer is you can’t. However, fast decision-making is a staple of VC fund management. If you cannot act fast, opportunities to generate revenue can – and often will – pass you by.
Streamlining your accounting functions will help you make decisions at the speed of venture capital. You can evaluate opportunities and mitigate risks while simultaneously delivering strong returns for your investors.
Good accounting strategies will also enable you to optimize transparency. You can use these insights to monitor the health of your firm and address minor concerns before they threaten business continuity.
Venture Fund Accounting 101: Key Accounting Standards
Your firm is undoubtedly performing some form of accounting already. The question is, are you taking an approach conducive to the growth of your firm?
To evaluate the efficacy of your processes, ensure that you have procedures in place that support all of the following VC accounting needs:
- Venture capital tax planning
- Full scope auditing
- Executive search services
- Transaction advisory functions
- Financial modeling
- Governance and compliance in alignment with government entities
- Internal audits
- Purchase price allocation
- Capital call functions
- Due diligence
- Opening balance sheet audits
- Pre-transaction planning
Notice some holes in your accounting workflow? If so, it is time to fill in the gaps so that you can more effectively manage your VC firm. There are two ways to go about finding support:
- The first option is to continue managing your accounting function in-house. This effort is costly and time-consuming.
- Alternatively, you can outsource key functions and tap into external accounting expertise. Let’s explore the options available to your firm.
In-House VC Accounting vs. an Outsourced Approach
When deciding whether to outsource or keep things in-house, you should consider the following factors.
From a cost perspective, outsourcing may seem like the more expensive option. However, that idea is a myth in practice. In reality, outsourcing is often more cost-effective than managing accounting in-house.
Think about what is required when hiring a new professional. When addressing your accounting needs internally, you must employ at least one dedicated professional who can support accounting and financial management. Depending on the size of your firm, you may need to hire multiple individuals.
When you add up the cost to search for talent, interview potential candidates, go through the hiring process, and then pay salary and benefits for the individual(s) you hire, you can easily incur tens of thousands of dollars in expenses per employee.
Comparatively, outsourcing is typically the most cost-effective solution because you can tap into a team of experts that is set up and ready to go helping you handle critical accounting functions.
If you hit the new hire jackpot and find a world-class accounting professional, addressing this function in-house is a great option. But what are the chances that you will actually find the right new hire on the first attempt? As you know, there are no guarantees when you bring in new team members.
On the other hand, you can easily evaluate the skill of an outsourced service provider before committing to them. You can read reviews from different brands, see if they have won any awards, and schedule a consultation. You can use these resources to find the ideal provider for your growing firm.
The in-house approach provides minimal scalability. One new hire can only do so much in a single day. When you exhaust their capabilities, you must bring in yet another new employee. That situation means incurring onboarding and recruiting costs all over again.
Conversely, outsourcing gives you access to all the accounting resources you need to grow. A great outsourced services provider can evolve with you, scale their services, and ensure your accounting needs are always met.
Need help now? If so, the in-house approach will not be the right move for your firm. Sure, you could rush through the hiring process. But that can be very risky.
Even if you hire the right person, they must be onboarded. As a result, it could be months before you see measurable improvement in your accounting workflow.
On the other hand, an outsourced services provider can get up and running in a couple of weeks. Since they have scalable resources, they can assign additional team members to your account during the onboarding process to get your accounting in order fast.
Think Outsourcing Is the Right Move? We Can Help
That wraps up our VC fund accounting 101 guide. Now you know the VC accounting basics, why VC accounting is so vital, and how to address this key back office process. After learning more about VC accounting headaches, you may also be considering outsourcing this function. If so, Finlyte can help.
At Finlyte, we offer comprehensive outsourced accounting services for a wide range of clients, including VC firms. The Finlyte team can augment the capabilities of your staff, or we can become your back office. Whether you need us for a little support or complete support, we have you covered.
Working with our team, we’ll help you get organized, achieve compliance, improve visibility, and be prepared for growth. Learn more about how our team can support your firm. Book a free consultation today to discuss your firm’s accounting needs.