Financial Control in Early Days
A new company has bad news everyday. It hurts. To avoid stress, founders unconsciously stop checking revenue or audience numbers if they do not grow. Do not cut yourself from reality. Identify your key metrics and check them on a regular basis. Facing early signs of trouble forces you to take action. Otherwise, it would be too late to react.
Action steps
- Know and control your monthly burn rate. How much have you spent this month? What is the outlook for the next two-three months?
- Get a basic formula for your revenue. Control and grow its parameters.
- Prepare a Plan B for the case when things go worse than expected. How can you save the company if all money are spent?
Expenses
Know and control your monthly burn rate. Look for ways to decrease spending and defer payments. Move expenses from fixed to revenue-based: commissions for employees and revenue share for partners.
Team. Base salaries, bonuses and commissions, payroll tax. Consider offering smaller initial salaries with commissions, revenue share, equity options or bonuses for hitting specific business objectives.
Capital expenses. Big one-time investments in the business. Equipment, real estate. Look for partnerships with bigger companies who can do capital investment on your behalf. E.g. if you want to open a hostel, look for a partner who has relevant real estate assets.
Corporate and administrative. Office/coworking, banking fees, cash register, internet access, computers, utilities. Just keep these expenses to the “normal” level to your industry. Do not spend too much energy to find the cheapest possible bank or office.
Product. Cost of materials. Outsourcing contracts. Retail locations lease. Learn the norms of your industry. What percentage of the final sale price should be spent on product creation?
Sales and marketing. Brand identity design. Ads. Partner commissions. Payment systems commissions. Fulfillment and delivery. Returns and chargebacks. Merchandise (t-shirts, laptop stickers). At the early stages invest in brand, but not in paid promotion.
Business taxes. You are already paying your government payroll and sales taxes. Opt for profit-based corporate tax, not for revenue-based. Reinvest all free cash back in the business. Profit taxes should be close to zero.
Revenue
Identify your primary revenue streams. What are you paid for? What are the key types of customers and offerings that bring most money in? In early stages focus on one to three key revenue streams.
Write a revenue formula. E.g. revenue equals the average check times the number of customers. Keep it simple, two to seven basic parameters. This input numbers are your key business drivers. Think of ways to increase them.
Make projections on your key business drivers. How is your average check will change? What customer dynamic do you expect? Will revenue share with distribution partners change?
Create revenue projections. Focus on the next two to four months. Also have a figure for the current calendar year and the next one.
Terms to know
Cash. How much money do you have on your corporate bank account and in cash register? Is there any other liquid assets you can sell any time? Globally, in average first-time entrepreneurs start new businesses with $5 000 - $50 000 at hand.
Runway. How much time can you survive without any money coming in? How much time can you operate if the revenue will come in at the current level? A year and a half is great, one year is very good, half a year is ok, but risky. Runway below half a year is very risky. Think of ways to reduce spending or raising more money now. Or change the idea.
Unit economics. How much does a customer pays? How much does it cost to create a product and what are the margins? How much does customer acquisition costs? Are there repeat purchases? What is the lifetime value of a customer?
Operational profitability. It is time when your monthly revenue exceeds the monthly spending. The typical breakeven formula says that revenue from your margins (sales - costs of goods) should exceed the fixed costs of business.
Profits and dividends. Typically a new business keeps profits around zero for a long time after reaching breakeven. All free cash gets reinvested in business and salary increases. In many cases the original investment is formalized as a loan from a founder to the business. So the first free cash is going back as a loan repayment (tax-free!) and not as dividends. The first real dividends are rarely paid in the first two years of operations.
Financial management
Make and keep current your projections. Write down your projections for burn rate and revenue for the next few months. Does not matter whether it is a piece of paper, online text file or a spreadsheet. Review them regularly, e.g. every month.
Have a simple tracking process. Record all transactions as they happen (expenses and revenue). Then regularly sort them by type of transaction. Also keep a separate record of liabilities (future payments you owe) and accrued revenue (promised payments by your customers). Be ready for long delays in customer payments.
Prepare plan B. Have a plan if thing go worse: less revenue, more expenses, slower growth than expected. Does your bank offer overdraft option? Discuss additional loans with current investors, friends and family long before you need them.
This article is a part of Earlydays, an open guide for first-time entrepreneurs.
Written by Yury Lifshits — yury@yury.name — @yurylifshits
