Seeing as I am an accountant by trade, I figured it was about time that I write an article about financial (and non-financial) reporting for life science start-ups. As most visitors to this site come from a science background, this article (part 1) will introduce the high-level concepts of reporting, and the next article (part 2) will explore some of the details. I will note that no previous accounting training is required to understand either article, so, if you do not know a debit from a credit, no need to worry.
Most series A funded life science start-ups will have a full or part-time finance director or VP whose responsibility it will be to manage the reporting process. However, in the case of a seed stage start-up, particularly a lean start-up, this will be the responsibility of the founder. Although this may seem like an intimidating task, it is certainly doable.
“Reporting” is the process by which an organization communicates information to stakeholders for the purpose of making decisions. This can be both internal, between an organization and its management, as well as external, between an organization and its investors, creditors, bank, government, general public, etc. Reporting can also be financial or non-financial. Most people are familiar with general purpose financial statements, namely those consisting of a balance sheet, income statement, and cash flow statement, which are commonly audited by an independent entity to provide some assurance that they are free from misstatement. However, much reporting is non-financial, such as the case of a pharmaceutical company releasing the results of a clinical trial.
When it comes to reporting, every organization needs to be aware of three questions:
(i) Who are the stakeholders?
(ii) What decisions do these stakeholders need to make?
(iii) What information is required to make these decisions?
In the case of a seed stage start-up, the major stakeholders are likely to be the founding management team, investors and Board of Directors, academic or government contributors (i.e. providers of non-dilutive capital), and scientific or clinical advisory board. Below, I discuss steps (ii) & (iii) for each of these. Note that I have included investors and the Board together as the Board will likely consist exclusively of investors (except for perhaps one independent director), so, they are one-in-the-same.
The management team is responsible for the day-to-day operations of the business, and therefore, needs to have its pulse on operations in order to make frequent and effective decisions. The best system of “reporting” to one another is simply via open and honest conversations, however, there are two critical reports that should be kept and updated on a biweekly or monthly basis. First, the company should have a rolling budget to monitor spending, track variances, and calculate runway. This may seem complicated, but in the next article, I demonstrate how this can be easily done with a spreadsheet and some free accounting software. Second, there should be a project plan with documented milestones and outcomes. Whereas lab books maintain detailed notes about experiments and results, project plans are meant to provide a high level view and consolidate information for multiple sources.
Board of Directors
Reporting requirements vary by Board, and can only be ascertained by a having a conversation with the Board. Some Boards prefer regular e-mails with information updates from management, and then meet on an ad hoc basis to discuss issues as they arise. Others prefer to meet on a regularly scheduled monthly or quarterly basis so issues can be addressed in concert. In either case, the Board will require some combination of financial and non-financial (i.e. project or scientific) information. One of the principal benefits of maintaining a rolling budget and project plan at the management level is that it can be summarized or condensed and presented to the Board, thereby “killing two birds with one stone.” Most seed stage Boards do not require management to submit audited general purpose financial statements, which is prohibitively timely and costly. However, as you will see next, this is not always an option.
Government or academic contributors
Government and academic funders are widely regarded for onerous reporting requirements. Although this should not dissuade a start-up from accepting non-dilutive capital, it should be anticipated. Most require detailed project plans to be submitted at the beginning, during, and at the conclusion of the project, and may also require some sort of substantiating financial information to support spending. This might include either audited financial statements over the life of the project, an audit of project expenditures, or copies of project invoices and disbursements.
Scientific or Clinical Advisory Board
Communication with a company’s scientific advisors is generally infrequent and done or a quarterly basis or coincide with significant scientific milestones. Scientific advisors generally require detailed and refined scientific presentations, even more so than the Board, which likely does not have the same degree of technical depth. Financial information need not be communicated to the scientific advisors, provided the company is not experiencing severe financial difficulties.
The next article will explain how to prepare a rolling budget, as well as how to maintain basic accounting records. I will also discuss some basic internal controls that should be implemented, particularly around the custody of cash and the purchasing cycle. However, as mentioned, much of this is doable without an accounting background.