back to basics: financial fundamentals for startups

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presents Back to Basics: Financial Fundamentals For Startups

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Back to Basics: Financial Fundamentals for Startups taught by Dan Allred from Silicon Valley Bank at Intelligent.ly in Boston. This deck covers basic accounting principles, income statements, balance sheets, cash flow, company financial statements and more.

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Page 1: Back to Basics: Financial Fundamentals for Startups

presents

Back to Basics: Financial Fundamentals For Startups

Page 2: Back to Basics: Financial Fundamentals for Startups

Financial Fundamentals: Money 101March 17th 2014

Smith Anderson Silicon Valley Bank

(617) 796-6958 [email protected]

Twitter: @SmithTown561

Glen Mello Silicon Valley Bank

(617) 630-4188 [email protected]

!

Page 3: Back to Basics: Financial Fundamentals for Startups

Startup financial matters are often

confusing…

Page 4: Back to Basics: Financial Fundamentals for Startups

It’s a lot like learning a language

Page 5: Back to Basics: Financial Fundamentals for Startups

You need to learn key phrases yourself...

Page 6: Back to Basics: Financial Fundamentals for Startups

…and rely on translators for the rest.

Page 7: Back to Basics: Financial Fundamentals for Startups

AGENDA

• Key financial metrics

• Financial statements

• When & how to leverage CFOs & others

• Q & A

Page 8: Back to Basics: Financial Fundamentals for Startups

TOP LINE REV / SALES

• Gross Sales or Revenue regardless of cost, liabilities etc.. – Used to discuss growth of the business over time. – Important, however there is more to the story.

Page 9: Back to Basics: Financial Fundamentals for Startups

Revenue – COGS – expenses !• Net Profit (or Net Loss)

– interest, – taxes, – Depreciation – Amortization expenses !

• EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization

BOTTOM LINE

Page 10: Back to Basics: Financial Fundamentals for Startups

BOOKINGS

• The financial value of business that you have under contract

!• i.e. “we booked a deal with Amazon for $240k over 2 years”

!• Not a financial statement item—“dashboard” item.

!• Total Contract Value (TCV) vs. Annual Contract Value (ACV)

Page 11: Back to Basics: Financial Fundamentals for Startups

REVENUE

• The accounting value of a sale during a specific time period • a.k.a: “rev rec”, “recognized revenue”, “scored revenue” !

• Sale à revenue when the product has been delivered and payment terms are defined and agreed to.

• Cash upfront – Deferred Revenue (Liability) • Bookings > Delivery > Revenue > Collection > A/R

Page 12: Back to Basics: Financial Fundamentals for Startups

COGs

• Cost of good sold !

• Production costs: direct product costs, hosting, etc. !

• Execution costs: commissions, revenue share, etc.

Page 13: Back to Basics: Financial Fundamentals for Startups

• Revenue - COGS = Gross Profit (a hard dollar number) !

!• Gross Profit / Revenue = Gross Margin (a percentage)

GROSS MARGIN

Page 14: Back to Basics: Financial Fundamentals for Startups

Costs to run your business

• Sales & Marketing expenses

• Research & Development expenses

• General & Administrative expenses

EXPENSES

Page 15: Back to Basics: Financial Fundamentals for Startups

Sources • Trade Receivables (A/R)

• Deferred Revenue (D/R)

• Debt

• Equity

Uses • Trade Payables (A/P)

• Salaries/Wages Payable

• Debt

SOURCES & USES OF CASH

Page 16: Back to Basics: Financial Fundamentals for Startups

• Cash divided by cash burn !

• Cash burn does not necessarily equal EBITDA – depends on timing of cash receipts vs. bookings vs. revenue

RUNWAY

Page 17: Back to Basics: Financial Fundamentals for Startups

Events that drive value in the company: !• Commercial milestones: distribution agreements, customers,

bookings, revenue, etc. !

• Market milestones: users, working business model, etc. !

• Technical milestones: proof of concept, working prototype, etc.

MILESTONES

Page 18: Back to Basics: Financial Fundamentals for Startups

• One Page: Communicate progress to key stakeholders (investors, employees, etc.) !

• Time-based representation of how company is tracking against key financial goals (perhaps other time-bound goals as well) !

• Not a financial statement

DASHBOARDS

Page 19: Back to Basics: Financial Fundamentals for Startups

• Questions to ask yourself: – What drives value in the business (bookings, gross margin,

technical progress, distribution deals)?

– What resources do you need to drive this value (people, time, money, etc.)? !

• Your dashboard will: – Track the value you are building in the business. – Track the resources you are consuming as you build value.

BUILD YOUR DASHBOARD

Page 20: Back to Basics: Financial Fundamentals for Startups

• Income Statement – A movie – Tells the financial story of a company over a

span of time !

• Balance Sheet – A picture – Indicates the financial health of a company at a point in time

FINANCIAL STATEMENTS

Page 21: Back to Basics: Financial Fundamentals for Startups

Over a period of time:

• Revenue (“top line”)

• Minus COGS

• Equals Gross Profit

• Minus Expenses

• Equals EBITDA (“bottom line”)

INCOME STATEMENT

Page 22: Back to Basics: Financial Fundamentals for Startups

Assets • Cash • Receivables (A/R) • Inventory • Fixed Assets • Goodwill & Intangible Assets

Liabilities • Salaries, wages • Payables (A/P) • Deferred Revenue (D/R) • Debt

Assets = Liabilities plus Equity

BALANCE SHEET

Equity • Paid-in Capital • Retained Earnings (Loss)

Page 23: Back to Basics: Financial Fundamentals for Startups

• As much as you are comfortable doing… !

• At a minimum: – Articulate 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 time and progress (i.e.

dashboards), using financial language that is readily understood or simply conveyed by you.

WHAT SHOULD A FOUNDER DO?

Page 24: Back to Basics: Financial Fundamentals for Startups

• Prepare forward looking financial statements (budgets, projections, etc.) !

• Close the books every month and prepare historical financial statements !

• Manage billing & collecting !

• Manage revenue recognition & educate stakeholders (including you) on complexities !

• Reality check your expense assumptions.

WHAT SHOULD HIRED CFOs DO?

Page 25: Back to Basics: Financial Fundamentals for Startups

Q & A

• Don’t be SHY

Page 26: Back to Basics: Financial Fundamentals for Startups

WANT TO LEARN HOW TO FILL YOUR PIGGY BANK?

SVB BOSTON—FREE 1:1 SESSION http://learn.intelligent.ly/svb-office-hours

Page 27: Back to Basics: Financial Fundamentals for Startups

Financial Fundamentals: Money 101March 17th 2014

Smith Anderson Silicon Valley Bank

(617) 796-6958 [email protected]

Twitter: @SmithTown561

Glen Mello Silicon Valley Bank

(617) 630-4188 [email protected]

!

Page 28: Back to Basics: Financial Fundamentals for Startups

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