Manage Finances Like Your Startup Depends On It

Run your company like you’re in it forever but manage your finances like you’ll sell tomorrow. Learn how to run your company by the numbers.

Startups come with a lot of uncertainty and risks and sadly most fail.

After founding (and successfully exiting) two startups, I’m convinced I have developed bipolar disorder, given the roller coaster ups and downs I went through in each startup. But, through it all, I’ve learned some hard lessons. If someone asked me for a single piece of advice on how to avoid startup failure, I would tell them to run their startup by the numbers!

Running a startup by the numbers includes processes, tools and people to produce and analyze an organization’s financials and data to help navigate uncertainty.

For many entrepreneurs, particularly ones with a tech background (like myself), finances might seem boring but neglecting them can result in the failure of the startup — it’s that simple!

In one of my former startups, we almost went out of business since one of our main channel partners gradually stopped selling our product over the course of a year. In another startup, a public company took months to approve a large purchase order, while we continued to pay our staff servicing their project. Had it not been for efficiently managing our finances, we wouldn’t have persevered, despite having a successful business with loyal customers.

Let’s look at how to run a startup by the numbers in two parts: an overview of the basic components and general tips on how to apply these.

The Basics

The following are some standard financial components most organizations work with (there are plenty of free templates/examples for each online):

1. Pro Forma: These are typically spreadsheets with projections (e.g. Pro Forma Income Statement). If your startup has historical data, projections are based on that (i.e. bottom-up approach). If not, you can guess using a top-down approach by looking at the total available market (TAM), serviceable available market (SAM) and serviceable obtainable market (SOM). Pro Forma financials are necessary for investors but also crucial for putting together viable strategic and tactical plans.
2. Budget: Once you have Pro Forma revenues and expenses, you can create an annual budget, broken down by months or quarters. A budget can be used for past and future purposes by comparing actuals to planned budget numbers and looking at what’s planned ahead.
3. Income/P&L Statement: This provides an overview, for a given period of time, of all your income (top line), cost of goods sold, operating expenses, EBITDA (earnings before interest, taxes, depreciation and amortization), and net income (bottom line). Income statements are useful for determining margins such as gross profit, net income and individual expenses (e.g. for operational efficiency compared against other companies). Organize an income statement the way you work, not necessarily the way an accountant wants it (e.g. product, sales, marketing, and G&A instead of SG&A).
4. Cash Flow Statement: This shows the cash in and out of your organization for a given period. There are three main types of cash flow statements: operational (revenues, expenses), investment (e.g. assets, property/equipment, investments) and financing (e.g. equity, debt, dividends). Cash flow statements help with planning timely payments and future cash needs.
5. Balance Sheet: A snapshot of the company’s value for a specific date (e.g. year end). It includes three key things: the company’s assets, liabilities and shareholders’ equity. Assets are categorized as current/short-term (e.g. cash, AR, inventory) and long-term (e.g. equipment, property). Liabilities too are split into short-term (e.g. AP) and long-term (e.g. debt). The difference between the assets and liabilities is the shareholders equity, the value of the company.
6. Accounting & Banking: Accounting typically involves accounts receivables (AR, income), accounts payables (AP, bills), preparing financial statements, and dealing with banking matters (e.g. reconciling statements, lines of credit, loans, credit/debit cards, bank fees).
7. Capitalization (Cap) Table: A table/list showing percentages of ownership in an organization (who owns what and how much; e.g. stocks, warrants, options), common versus preferred shares, share status (e.g. outstanding, diluted), and other relevant information.
8. Other Considerations: Other aspects of an organization’s finances include travel & expenses (T&E), supplies, equipment, vendor contracts, and so on.

The Tips

Here are some general tips to help you keep an eye on common finance related problems:

1. Profitability: To build a sustainable business, revenues need to be more than expenses. As obvious as this sounds, it’s a good reminder for startups to keep an eye on what matters most (for typical organizations): profitability and staying cash positive.
2. Cash: Cash is king! Manage your cash flow. Forecast/hope for the best case scenario but plan for the worst (lower revenues, higher expenses).
3. Expenses: Run a tight ship! Manage expenses/wastes/overhead closely, increase efficiencies/revenues/margins/automation. Hire only when it hurts. Do not frivolously spend.
4. Savings: Have an emergency fund for a rainy day.
5. Current: Record all finances. Be able to answer questions on the fly (e.g. during financing/acquisition events, cap table, AR/P) and accurately reflect a company’s value in real time.
6. Monitor: Review the financials and related data (e.g. dashboards/reports for KPIs/OKRs) on a set schedule (e.g. weekly, monthly, annually).
7. Tools: Use tools like QuickBooks and Xero to provide basic accounting features such as invoicing, paying, budgets, reports, dashboards, and more.
8. Systems: Develop proper planning (e.g. budget) and daily operations systems (SOPs).
9. Personal: Maintain a wall of separation between business and personal finances.
10. GAAP: Comply with Generally Accepted Accounting Principles (accrual accounting) since all investors, banks and related financial third parties will expect that. Don’t postpone switching to GAAP since the problem will continue to grow.
11. Staff: Have a dedicated finance person/team (e.g. office manager, controller, CFO) and a good accountant/firm. Having trusted advisors and consultants can also help, particularly with big picture planning, fund raising and problem solving.
12. Government: Get help from your accountant on proper tax planning (e.g. estimated taxes owed).

Conclusion

Running a startup is not for the faint of heart but if you have systems in place that provide you the data you need to make intelligent decisions, you can not only significantly reduce the risks of your startup failing but more excitingly, build a startup for rapid scaling.

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