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Accounting, Economics & Finance for Startups 101
Dan NelsonTechBrainstorm [email protected]
November 18, 2017
Startup Leadership Program
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
DAN NELSONEntrepreneur, Virtual CFO &
Recovering Accountant
Email: [email protected]: @Dnels113Linkedin: linkedin.com/in/dannels
Education
Professional ExperienceClient Portfolio
Accounting is the Language of Business
TechBrainstorm
Flavors of Accounting
Financial AccountingManagerial Accounting
Bookkeeping
Income StatementStatement of Cash Flows
Balance SheetTaxes
Break Even AnalysisBudgeting
Market ProjectionsCost Accounting
Growth Marketing
PayrollAP/AR
Reconciliations
Internal reporting for management“Economics”
External Reporting for Investors“Finance”
Record Keeping of all the transactions that happen“Accounting”
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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?
Financial Statements
Revenue-Cost of Goods SoldGross 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 your company buying other things
* Financing is your company raising money
Balance Sheet
Assets = Liabilities + Owners Equity
Flow Flow Static
Balance Sheet
The Company’s Assets are owned either by outside creditors or it’s owners
Assets = Liabilities + Owners EquityCash
InventoryAccounts Receivable
EquipmentReal Estate
Unearned RevenueCredit Cards
Accounts PayableMortgages
Convertible Notes
Retained EarningsPreferred StockCommon Stock
The most common major among American billionaires is Economics.
Business Insider http://www.businessinsider.com/most-popular-college-major-for-billionaires-2017-10
Value Chain AnalysisStarting 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
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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 AcquisitionMarketing Budget / Engagement minutes
per customerxAvg Customers
KPIs
KPIs: Key Performance IndicatorsKPIs 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
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**Customer Acquisition Costs & Long Term Value
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)
Exercise
Let’s analyze a company
‘How to’ for your startup
‘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
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 ExpensesWeb 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
Key Book Keeping Processes
Monthly Allocation & 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:
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
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Pro-Forma
Financial StatementsBudget KPIsActuals
+ + =
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.
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
Understanding Burnrate
Startup Budgets And Timing Burn: Are Founders Winging It?Posted Nov 1, 2015 by Lucas Matheson on Techcrunch.com
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
Taxes
Pay your Taxes!Federal
StateLocal
Franchise
Find a tax accountant!!
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 Datao Pivot Tables
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