When Airlift failed, its CEO and co-founder blamed the Pakistani market and tough global economic conditions for its downfall. That pill may have been swallowed by the majority as it is easier to blame external factors rather than internal.
Startups in Pakistan face a range of challenges as they strive to establish themselves in the market and grow their businesses.
One of the most critical aspects of a startup's success is its financial health, which is closely tied to its accounting and financial processes. In this blog post, we will discuss why internal controls and governance over financial and accounting processes are critical for startups in Pakistan.
Almost all of startup founders and young entrepreneurs focus on their business idea which may be the right thing to do when you are starting out.
In terms of startup failure rates, a study by CB Insights found that globally, approximately 70% of startups fail within the first 20 months of operation
While many startups may cite their failure because of lack of funding, tough regulatory conditions or lack or market response, the main reason boils down to lack of governance, internal controls and appropriate reporting framework.
For example, if appropriate funding is not received, maybe the founders underestimated their operating expenses or over-estimated their revenue stream and burnt out their cash reserves faster than anticipated. Similarly, lack of market response could have been assessed better if an independent review of the revenue model / market survey would have been done.
In short, startups would fare better if they have proper internal controls and governance over their accounting and financial operations
First and foremost, internal controls and governance over financial and accounting processes help to ensure the accuracy and reliability of financial information. For startups, this is especially important, as investors, lenders, and other stakeholders rely on accurate financial information to make informed decisions about the business. Without proper internal controls and governance, startups risk errors, misstatements, and even fraud, which can have a significant impact on their financial health and reputation.
In addition to ensuring the accuracy of financial information, internal controls and governance can also help startups to identify and mitigate risks. Startups face a range of risks, including market risk, operational risk, and financial risk, which can impact their ability to achieve their goals. With proper internal controls and governance, startups can identify these risks and take steps to mitigate them, helping to protect the business and its stakeholders.
Another key benefit of internal controls and governance over financial and accounting processes is that they help to promote transparency and accountability. By establishing clear policies and procedures for financial and accounting processes, startups can ensure that everyone in the organization is aware of their responsibilities and the consequences of non-compliance. This can help to promote a culture of transparency and accountability, which is essential for startups as they seek to build trust with investors, lenders, and other stakeholders.
Finally, internal controls and governance can help startups to comply with regulatory requirements. In Pakistan, startups are subject to a range of regulatory requirements, including tax laws, labor laws, and securities laws. Failure to comply with these requirements can result in fines, legal action, and reputational damage. With proper internal controls and governance, startups can ensure that they are meeting these requirements, helping to protect the business and its stakeholders.
In conclusion, internal controls and governance over financial and accounting processes are critical for startups in Pakistan. By ensuring the accuracy and reliability of financial information, identifying and mitigating risks, promoting transparency and accountability, and complying with regulatory requirements, startups can build a strong financial foundation that will support their growth and success.
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