Accounting, Economics & Finance for Startups 101

Dan NelsonTechBrainstorm ConsultingDan@techbrainstorm.com

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: Dannelz@gmail.comTwitter: @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”

TechBrainstorm

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

TechBrainstorm

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

TechBrainstorm

**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

Techbrainstorm

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!!

Thank you!Dan Nelson

Dan@Techbrainstorm.com

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

TechBrainstorm