Know your numbers

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We know you’re a genius. You’re building a phenomenal company, one that may change the world, but you never took or don’t remember what you learned in that Accounting Class.
Often entrepreneurs drown in paperwork and receipts as they try to flush our their business plan. It’s important to keep your books straight from the beginning and keep track of the most important thing: the money. In this hands on workshop, we will take you back to basics, covering the fundamental metrics and financial accounting principles that will make or break your startup.
Expert:
Dan Allred – Silicon Valley Bank
www.thecapitalnetwork.org

Published in: Business, Economy & Finance
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Know your numbers

  1. 1. Know  Your  Numbers   The  Capital  Network   12/5/13   Dan  Allred   Silicon  Valley  Bank   dallred@svb.com   TwiDer:  @dgallred   hDp://danallred.tumblr.com    
  2. 2. Financial  maDers  are  oIen  confusing.  
  3. 3. It  is  a  lot  like  learning  a  language.  
  4. 4. You  need  to  learn  key  phrases  yourself...  
  5. 5. …and  can  rely  on  translators  for  the  rest.    
  6. 6. Today  we  will  cover:   •  Key  financial  metrics   •  Financial  statements   •  When  &  how  to  leverage  CFOs  &  others  
  7. 7. Key  metric:  bookings   •  The  financial  value  of  business  that  you  have   under  contract  –  i.e.  “we  booked  a  deal  with   Amazon  for  $240k  over  the  next  2  years.”   •  Not  a  financial  statement  item,  but  oIen  a  key   “dashboard”  item.   •  Total  Contract  Value  (TCV)  vs.  Annual  Contract   Value  (ACV).  
  8. 8. Key  metric:  revenue   •  The  accoun^ng  value  of  a  sale  during  a  specific   ^me  period.   •  You  will  hear  accountants  say  “rev  rec”,   “recognized  revenue”,  “scored  revenue”,  etc.   •  A  sale  typically  becomes  revenue  when  the   product  has  been  delivered  and  payment   terms  are  defined  and  agreed  to.   •  Example  from  prior  slide.  
  9. 9. Key  metric:  COGS   •  COGS  =  cost  of  good  sold.   •  The  costs  to  produce  the  goods  being  sold  (i.e.   direct  product  costs,  hos^ng,  etc.)  and  to   execute  on  the  sale  (commissions,  revenue   share,  etc.).  
  10. 10. Key  metric:  gross  margin   •  Revenue  minus  COGS  =  Gross  Profit  (a  hard   dollar  number)   •  Gross  Profit  divided  by  Revenue  =  Gross   Margin  (a  percentage)  
  11. 11. Key  metric:  expenses   •  Costs  to  run  your  business   –  Sales  &  Marke^ng  expenses   –  Research  &  Development  expenses   –  General  &  Administra^ve  expenses  
  12. 12. Key  metric:  bo5om  line   •  Revenue  minus  COGS  minus  expenses.   –  Net  Profit  (or  Net  Loss)  includes  interest,  taxes,   deprecia^on  and  amor^za^on  expenses  (most  of   you  do  not  need  to  worry  about  this  for  now)   –  EBITDA  =  Earnings  Before  Interest,  Taxes,   Deprecia^on  &  Amor^za^on  (i.e.  all  the  stuff  you   don’t  need  to  worry  much  about  at  your  stage).  
  13. 13. Key  metric:  sources  &  uses  of  cash   •  Sources:   –  Trade  Receivables  (A/R)   –  Deferred  Revenue  (D/R)   –  Debt   –  Equity   •  Uses:   –  Trade  Payables  (A/P)   –  Salaries/Wages  Payable   –  Debt  
  14. 14. Key  metric:  runway   •  Cash  divided  by  cash  burn.   •  Cash  burn  does  not  necessarily  equal  EBITDA  –   depends  on  ^ming  of  cash  receipts  vs.   bookings  vs.  revenue.  
  15. 15. Key  metric:  milestones   •  Events  that  drive  value  in  the  company:   –  Commercial  milestones:  distribu^on  agreements,   customers,  bookings,  revenue,  etc.   –  Market  milestones:  users,  working  business   model,  etc.   –  Technical  milestones:  proof  of  concept,  working   prototype,  etc.  
  16. 16. Dashboards   •  Typically  one  page  used  to  communicate   progress  to  key  stakeholders  (investors,   employees,  etc.)   •  Time  based  representa^on  of  how  company  is   tracking  against  key  financial  goals  (and   perhaps  other  ^me  bound  goals  as  well).   •  Not  a  financial  statement  (i.e.  not  an  income   statement,  “P&L”  or  balance  sheet).  
  17. 17. Dashboard  exercise   •  Ques^ons  to  ask  yourself:   –  What  drives  value  in  the  business  (bookings,  gross   margin,  technical  progress,  distribu^on  deals)?   –   What  resources  do  you  need  to  drive  this  value   (people,  ^me,  money,  etc.)?   •  Your  dashboard  will:   –  Track  the  value  you  are  building  in  the  business.   –  Track  the  resources  you  are  consuming  as  you   build  value.  
  18. 18. Financial  Statements   •  Income  Statement   –  A  movie.   –  Tells  the  financial  story  of  a  company  over  a  span   of  8me.     •  Balance  Sheet   –  A  picture.   –  Indicates  the  financial  health  of  a  company  at  a   point  in  8me.  
  19. 19. Income  Statement   •  Over  a  period  of  ^me:   –  Revenue  (“top  line”)   –  Minus  COGS   –  Equals  Gross  Profit   –  Minus  Expenses   –  Equals  EBITDA  (“boDom  line”)  
  20. 20. Balance  Sheet   •  Assets   •  Liabili^es   –  Cash   –  Receivables   –  Inventory   –  Fixed  Assets   –  Goodwill  &  Intangible   Assets   –  Salaries,  wages   –  Payables   –  Deferred  Revenue   –  Debt   •  Equity   –  Paid-­‐in  Capital   –  Retained  Earnings  (Loss)   Assets  =  Liabili^es  plus  Equity  
  21. 21. What  do  founders  need  to  do?   •  As  much  as  you  are  comfortable  doing…   •  At  a  minimum:   –  Ar^culate  how  value  is  built  in  your  business  in   financial  terms.     –  Speak  to  financial  resources  required  to  build   value  in  your  business.   –  Represent  this  in  terms  of  ^me  and  progress  (i.e.   dashboards),  using  financial  language  that  is   readily  understood  or  simply  conveyed  by  you.      
  22. 22. What  can  you  hire  CFOs  to  do?   •  Prepare  forward  looking  financial  statements   (budgets,  projec^ons,  etc.)   •  Close  the  books  every  month  and  prepare   historical  financial  statements.   •  Manage  billing  &  collec^ng.   •  Manage  revenue  recogni^on  &  educate   stakeholders  (including  you)  on  complexi^es.   •  Reality  check  your  expense  assump^ons.  
  23. 23. Ques^ons?   Dan  Allred   Silicon  Valley  Bank   dallred@svb.com   TwiDer:  @dgallred   hDp://danallred.tumblr.com  

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