The Finance, Accounting, Compliance, and Taxation Challenge All Startups Must Overcome

Written by: Team Ontropi
Date : 3 Oct 2024

India’s startup ecosystem has witnessed a massive transformation in recent years. As of October 2023, over 1,12,718 registered startups are operating in 763 districts across the country. India’s startups are also receiving good funding from a variety of investors.


At the same time, Indian startups are facing a host of financial headaches in terms of proper accounting, compliance with local regulations, and taxation problems. These challenges can prove to be life-threatening too. For instance, Anand Mahindra has suggested that 90% of Indian startups fail within the first 5 years of operations with poor financial management being one of the crucial showstoppers.


Some of the common pitfalls that startups face include:

In this blog, let's talk about 4 finance-related challenges that all startups address as part of their financial planning and management:


Finance challenges for Indian startups

Around 20% of startups fail in their first 2 years. In the initial phase, the lack of financial support (or early-round funding) is a major challenge for most Indian startups. But even startups that do secure funding early face problems. Most startup founders turn to family or friends or rely heavily on angel investors to invest in their business ideas. These funds often come with too many strings attached or don’t add any value to the business operations, leading to wasted time, resources, and opportunity.


Accounting challenges for Indian startups

Inefficient, inadequate, and improper accounting is another major startup challenge, driven by rapid business growth and limited resources. Typically, Indian startups face accounting-related challenges in:

Among the critical issues stemming from poor accounting and financial reporting, startups fail to maintain a healthy cash flow to sustain their daily operations. Achieving this involves improving their accounts receivable and payable processes. But many startups don’t even know that they have a problem in this area. This can be fatal as poor cash flow has a direct impact on the company’s liquidity. According to Fundera, 82% of businesses fail due to cash flow-related problems.


Additionally, early-stage startups lack real-time data for effective financial planning. Inaccurate forecasts and budgets often lead to:


As a solution, startups must build in practices and processes for better financial recording, accounting, reporting and analysis. This could include monitoring their daily cash flow using relevant metrics like expense sheets, overdue invoices, and payment collection. Additionally, startup entrepreneurs must plan for unforeseen expenses and maintain a healthy cash reserve. For instance, unforeseen events like the COVID shutdown can derail even well-funded startups.


Compliance-related challenges for Indian startups

Despite the recent improvements, the business environment in India continues to be complex and challenging for most startups. Stringent bureaucratic process and lengthy paperwork creates complex challenges for the growth of most startups.


Indian startups have a host of legal requirements to be compliant with, including the following:



Business incorporation :

This includes compliance with the type of business to be incorporated. For example, sole proprietorship, partnership, private limited, or LLP


Licensing requirements :

Licenses are essential for running any business (including startups) in India. Startups have to comply with running their business with the right license. Additionally, business licenses can vary between industries, thus requiring domain-specific regulatory knowledge.


Documentation requirements :

Startups in India also have to comply with mandatory documentation requirements. This includes a host of documents related to business incorporation, customer contracts, and work-related agreements.


As new finance and accounting-related regulations come into effect, startups must quickly understand how these laws impact their business and embed the regulatory requirements into their financial processes.


Taxation challenges for Indian startups

India’s complex taxation system is a major reason why many Indian startups are relocating to international locations. With the introduction of the Angel Tax system in 2012, Indian startups face a lot of tax-related hurdles. The Angel Tax aims to control money laundering and was levied on early-stage startups to track their funding from angel investors.


Additionally, tax evasion is a major concern in the Indian business environment. Non-compliance with taxation laws can attract heavy fines, legal disputes, and even a loss of brand reputation. Allegations of tax evasion can severely impact small startups with limited financial resources. This can also impact their brand reputation and investor confidence.


Hence, Indian startups need a reliable tax consultation partner to understand and comply with the country’s complex taxation system. Further, tax and accounting teams must keep track of all taxation laws and navigate through these challenges.


How Ontropi can help Indian startups

With their continued focus on business growth and operations, Indian startups fail to address the challenges of FACT – namely, Finance, Accounting, Compliance, and Taxation. Besides, they also lack the knowledge required to steer clear of these challenges.


It’s here that a solution provider like Ontropi can help. As a digital platform, we connect startup entrepreneurs with investors and mentors with the right resources. We have a growing community of startup founders who are on their way to achieving their business aspirations.


Do you want to work with the right technology partner with the necessary tools and resources? We could be the right choice. Connect with us today.