Startup Economics, Finance and Accounting 101
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A quick look into some of the necessary finance, accounting and economic needs for early stage startups. It is a short survey, and there is more to come on this really interesting space. For more information, please contact Dan@techbrainstorm.com
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Startup Economics, Finance and Accounting 101
- 1. Accounting, Economics & Finance for Startups 101 Dan Nelson TechBrainstorm Consulting Dan@techbrainstorm.com November 18, 2017 Startup LeadershipProgram
- 2. Agenda Accounting & Economics For Startups 101 • Accounting intro • Flavors of Accounting • Cash vs Accruals • Financial Statements • Balance Sheet • Economics Intro • Intro Value Chain • Analyzing Revenue • KPIs • Pricing • Revenue Exercise How to for your startup (20-30 min) • Accountants at Startups • Bank Account Strategy • Bookkeeping Strategy • Pro Forma Models • Strategic Planning & Budgeting • Sales Budgets • Operational Budgets • Headcount Budgets • Reporting • Taxes
- 3. DAN NELSON Entrepreneur, Virtual CFO & Recovering Accountant Email: Dannelz@gmail.com Twitter: @Dnels113 Linkedin: linkedin.com/in/dannels Education Professional ExperienceClient Portfolio
- 4. Accounting is the Language of Business TechBrainstorm
- 5. Flavors of Accounting Financial AccountingManagerial Accounting Bookkeeping Income Statement Statement of Cash Flows Balance Sheet Taxes Break Even Analysis Budgeting Market Projections Cost Accounting Growth Marketing Payroll AP/AR Reconciliations Internalreportingfor management “Economics” External Reportingfor Investors “Finance” Record Keepingof all the transactionsthat happen “Accounting” TechBrainstorm
- 6. Cash vs Accrual Accounting Cash Basis Revenue and expenses are recorded when money is received and paid Less ability to track budgets and outstanding items. Can not be used for large publicly traded companies. Accrual Basis Revenue and expenses are recorded when they are incurred rather than when cash is paid. Leads to accounts receivable and accounts payable and unearned revenue Important for budgeting, and understand proper financial positions Example: What if you are billed by a consultant for services of $10,000 incurred during the month of November, received the bill during in December, yet pay in January?
- 7. Financial Statements Revenue -Cost of Goods Sold Gross Margin -Sales &Marketing Costs -General & Admin Costs . Net Operating Income (ebitda) EBITDA +Depreciation - Δ Accounts Receivable - Δ Inventory . Cash from Operating +Cash from Investing* +Cash from Financing* . Net Change in Cashflow Income Statement Statement of Cash Flows * Investing is yourcompany buying otherthings * Financing is yourcompany raising money Balance Sheet Assets = Liabilities + Owners Equity Flow Flow Static
- 8. Balance Sheet The Company’s Assets are owned either by outside creditors or it’s owners Assets = Liabilities + Owners Equity Cash Inventory Accounts Receivable Equipment Real Estate Unearned Revenue Credit Cards Accounts Payable Mortgages Convertible Notes Retained Earnings Preferred Stock Common Stock
- 9. The most common major among American billionaires is Economics. Business Insider http://www.businessinsider.com/most-popular-college-major-for-billionaires-2017-10
- 10. Value Chain Analysis Starting at the beginning, what are the step-by-step processes your business undertakes to get from zero to a finished product for customers? Customers ServiceActivitiesAssets Customer Acquisition & Sales StrategyEmployees Raw Materials TechBrainstorm
- 11. Revenue Analysis Revenue = Quantity x Price Customers Purchases per Customer New Customers x Churn Rate- Total customer engagement minutes x Aggregate Avg minutes between sales Cost per AcquisitionMarketingBudget / Engagement minutes per customerxAvg Customers KPIs
- 12. KPIs: Key Performance Indicators KPIs are the important metrics your business needs to run, and are different for each business. These models should be used to create your Model Financial Metrics Profit/EBITDA Gross Margin % Annual/Monthly Recurring Revenue (ARR/MRR) Churn Average Annual Expenses To Serve One Customer Process Metrics (Business Centric) Percentage Of Product Defects/Returns Net Promoter Score (NPS) Content pieces created New Followers Sales & Managerial Metrics Number of Sales Avg Cost/Unit Avg Sales/Customer Type Avg Sales Lead Time Customer Acquisition Cost (CAC) Customer Lifetime Value (CLV) Churn Average Annual Expenses To Serve One Customer Marketing (SEM/SEO/Social) Employee Metrics TechBrainstorm **Customer Acquisition Costs & Long Term Value
- 13. 1. If nobody’s buying your product, it’s because the gap between price and perceived value either doesn’t exist or it’s not large enough 2. Price can serve as a proxy for quality 3. Coming up with packages that appeal to different customers will be more profitable for you and allow customers to feel better about their relationship with your company 4. Figuring out what goes through a customer’s mind when she first sees your product can help you set a price. 5. Your price needs to stand up to scrutiny 6. People tend to overvalue things they already have, a pattern known as the endowment effect. This is something that enterprise companies should be particularly aware of Pricing Strategy https://www.sequoiacap.com/article/pricing-your-product/ Sequoia Capital’s Pricing Strategy How many units do you need to sell to pay your own salary? Most startups are UNDER priced. Dangerous long-term precedent to set Keep it simple! Only have 3 prices tiers (not 8, not 12)
- 15. ‘How to’ for your startup
- 16. ‘Accountants’ at Startups Seed Series A Series B • Founder • Financially oriented advisor • Virtual CFO • Full time “Numbers Guy” (COO, Biz Dev or Analyst) and office manager/ bookkeeper • Virtual CFO w/shared services • Full time CFO • Accounting team “Numbersy-related’ Tasks • Excel & PowerPoint • Monthly & board reporting • Bookkeeping & financial statements • Future projections • Budget to actual reconciliations • Financial modeling • Payroll processing • Vendor selection • Performance Analysis • Pricing Analysis • Marketing • Working with Tax Accountant
- 17. Employee Expense Reimbursements Invoiced Expenses & Purchase orders Rent – Purchase Orders – Service Providers - Consultants– etc. Payroll & HR Providers Bank Bank Account Strategy Credit Card Checking Savings API Connection Bookkeeping Software Company Expenses Web Marketing Expenses - Office Supplies – Furniture – Computer – Software – Subscriptions – Marketing Expenses - etc. $ $ Best Practices • Simplicity is key. Use one bank • Minimize the amount of corporate credit cards. Get employees into habit of expense reports early! • APIs are your friend • Savings Sweep accounts can generate interest revenue Revenue
- 18. Key Book Keeping Processes MonthlyAllocation& Reconciliations Accounts Payable& Receivables At month end, run through all transactions on the accounts and assign them to the relevant account. Manage all processes around invoice recording, payment and accounts receivable and bills payable. MAKE SURE TO USE ACCRUAL ACCOUTNING Financial Statement Preparation Bookkeeping Software Manager First line of Defense on Cash Flow Issues Approve payments Other Tasks:
- 19. Financial (Pro-Forma) Models Financial Models are quantitative models that reflect the physical (or digital) operations of the business. Good models can be used for strategic planning by taking management assumptions and estimates. 100% necessary for institutional fundraising If your company can affect KPIs to X, Y, Z what will be the Financial Results in the future? Communicate how you understand the economics of your business. Will NEVER ACCURATE, however, importance is in the direction Techbrainstorm Pro-Forma Financial Statements Budget KPIsActuals + + =
- 20. Good Financial Models They should be: • EASILY UNDERSTANDABLE to audience. Formatting and organization are key. • Simple and consistent assumptions and results! • Traceable assumptions to practical results. Use today’s results as benchmark. • Should be custom, unless you have a super specific model for your industry. • ALWAYS in EXCEL!!! Goal: Turn Managerial Estimates, metrics, KPIs and budgets into Financial projections.
- 21. Budgeting Sales Budgeting Expense BudgetingHeadcount Budgeting Figure out sales rates and projected revenue based on KPI assumptions such as: • How long is sales cycle? • What is the close rate (by sales person)? • How do we add new clients to the pipeline? • What is the value of each sale? • How often do customers return? • Cost per acquisition Once you have a sales forecast met, start to think about how many people you need: • How many developers are needed to finish phase x? phase y? phase z? • How many deals can each sales person close? Does it scale? • What is needed for support? Logistics? What do you need to support your headcount and sales efforts? • Rent space sqft by employee • Warehouse space needed • Software subscriptions • Marketing needed to support sales • Consultants
- 22. Understanding Burnrate Startup Budgets And Timing Burn: Are Founders Winging It? Posted Nov 1, 2015 by Lucas Matheson on Techcrunch.com
- 23. Reporting & Dashboards If you cant measure it, you cant manage it -Mayor Mike Bloomberg Use Data APIs from your main business services software into one common dashboard with GUI custom reporting capabilities. Use a service or software layer such as: Tableau Grow or klipfolio Ad-Hoc/Live Periodic
- 24. Taxes Pay your Taxes! Federal State Local Franchise Find a tax accountant!!
- 26. NEW: The Excel Toolkit for startups! • Intro to excel • Understanding & Navigating Data • Formatting Tips and Tricks • Introduction to Functions & Formulas • Vlookup Functions • Sumif Functions • Takeaways • Appendix o Keyboard Shortcuts Lose the Mouse o Appendix: Other Handy Excel Features o Good vs. Bad Data o Pivot Tables TechBrainstorm