Filipinos have always been known to innovate and traverse challenges albeit meager resources. From the conversion of surplus military jeeps after World War II to decorated public transportation that the Philippines has been known for, the substitute banana for tomato as a main ingredient for catsup, to lamps powered by saltwater that will be beneficial to rural coastal villages – these innovations have certainly made a global imprint and inspired a number of entrepreneurs to solve the next problem and find the next game changer.
The past few years have witnessed the birth and continuing development of the startup ecosystem, with the influx of local and foreign enablers, accelerators and incubators and steadfast support from government. In March 2017, we, at PwC Philippines, formally launched our own VentureHub@PwCPH at the QBO Innovation Hub in Makati City. VentureHub@PwCPH primarily aims to assist startups execute their ideas, and help convert their businesses to become corporate leaders.
The rise of candidate entries to acceleration programs and competitions is also a testament to this growth, as well as expansion on the nature of products and services offered that are presently not only limited to computer and mobile applications, but now also slowly creeps into financing systems, logistics, human resource programs and even energy innovations.
Small but sound beginnings
From direct interactions with startup founders and technocrats, one cannot help but admire the energy, passion and drive that they carry; the optimism of building an idea to an actual solution. The dynamism and vigor fuel each day with high hopes of making their dreams into a reality.
Amid the euphoria, however, is a sense of pragmatism, particularly on the challenges of financial constraints and network building – identifying and marketing to potential customers and clients, striking a fair deal with suppliers and vendors, and maintaining interest from your investors and creditors.
In a number of mentor matchup programs, we have always been asked the best and opportune time of preparing and reviewing respective business models and maintaining accounting books, which unfortunately have been typecast as administrative nuances. We say, the sooner, the better. This is further underscored with regulatory developments in the horizon, including Senate Bill 175, Innovative Startups Act, as authored by Senator Bam Aquino that seeks to provide fiscal incentives, and talks on a possible stock exchange solely dedicated to these types of entities. Registration will be reviewed and assessed by assigned agencies, including the Department of Trade and Industry, which needs to guarantee and confirm the startups’ qualification. We likewise anticipate a similar screening process by the Philippine Stock Exchange should it decide to open the bourse as alternative financing channel for these companies.
An idea not only has to be a breakthrough in concept, but also has to be feasible and financially viable. This can be mainly proven with some level of number-crunching as seen through spreadsheets, ledgers and accounting records. Accordingly, solid and sound foundation has to be established at the onset in order for small beginnings to materialize into great things.
In an interesting twist, startups, which sometimes evolve into disruptors, find themselves in the same predicament of being disrupted, especially when faced with the tasks of preparing financial reports, complying with tax regulations, and rationalizing assumptions incorporated in business forecasts.
Regrettably, local rules and applicable tax and accounting framework are still unable to make the distinction and provide that flexibility to startups; and therefore mandated to follow the same set and list of requirements. From our own audits and reviews, the more common themes of issues revolve around asset capitalization, revenue recognition and documentation.
On capitalization, the question lingers on which expenses can form part of an asset and be presented in the balance sheet instead of being directly charged against income. We have seen the recurring practice of all cash disbursements being conveniently treated as expenses in the income statement, resulting in no actual fixed assets being recognized in the books except for tables, chairs and other furniture and fixtures. A technology startup entity with no asset pertaining to software and computer application developed in its financial statements? It happens. Correspondingly, judgment is key in discerning which costs are directly attributed to developing its product and consistently applying such costs. These judgments can be defined by the very nature and function of the expense, whether production or administrative related.
Startups likewise find difficulty in identifying at which point revenue should be recognized – upon receipt, delivery, completion of service, or customer approval. On occasion, startups also bundle goods and services into one package and consolidate recording under a single line item in both the financial statements and business models, without considering the peculiarity and varying circumstances of each. Generally, the simple determining factor resides in customer acceptance; hence getting better appreciation of the terms and conditions in making a customer or client say ‘yes.’
What documents to ask from customers, suppliers and vendors, and discerning which should be maintained, kept and turned over to bookkeepers is a daily struggle, given the consequent implications of tax fines, penalties and even fund misuse. How do we account for and properly document credit card liquidation, representation expenses including meals and transportation (i.e. Uber and Grab), and employee allowances and incentives? The easiest workaround is having all of these scanned if office space is a limitation. Startups need to ascertain that documents are properly labeled and under its legal registered name.
Indeed, having the country’s first fabled unicorn will be an indication of how far our startup ecosystem has reached and achieved. It, however, does not have to be the sole basis of defining success. The search does not have to be a race against time. The more important tasks should be centered in creating a business environment conducive to propagate entrepreneurship and founded upon correct systems and practices. As such, we need not worry in having one unicorn when our ecosystem can easily generate teams of horses.
Pocholo C. Domondon is a partner from Assurance, Deals and Corporate Finance and also the markets co-lead for Priority Targets of Isla Lipana& Co./PwC Philippines. of Isla Lipana& Co. Email your comments and questions to email@example.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.