presents
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]
!
Startup financial matters are often
confusing…
It’s a lot like learning a language
You need to learn key phrases yourself...
…and rely on translators for the rest.
AGENDA
• Key financial metrics
• Financial statements
• When & how to leverage CFOs & others
• Q & A
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.
Revenue – COGS – expenses !• Net Profit (or Net Loss)
– interest, – taxes, – Depreciation – Amortization expenses !
• EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization
BOTTOM LINE
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)
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
COGs
• Cost of good sold !
• Production costs: direct product costs, hosting, etc. !
• Execution costs: commissions, revenue share, etc.
• Revenue - COGS = Gross Profit (a hard dollar number) !
!• Gross Profit / Revenue = Gross Margin (a percentage)
GROSS MARGIN
Costs to run your business
• Sales & Marketing expenses
• Research & Development expenses
• General & Administrative expenses
EXPENSES
Sources • Trade Receivables (A/R)
• Deferred Revenue (D/R)
• Debt
• Equity
Uses • Trade Payables (A/P)
• Salaries/Wages Payable
• Debt
SOURCES & USES OF CASH
• Cash divided by cash burn !
• Cash burn does not necessarily equal EBITDA – depends on timing of cash receipts vs. bookings vs. revenue
RUNWAY
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
• 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
• 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
• 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
Over a period of time:
• Revenue (“top line”)
• Minus COGS
• Equals Gross Profit
• Minus Expenses
• Equals EBITDA (“bottom line”)
INCOME STATEMENT
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)
• 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?
• 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?
WANT TO LEARN HOW TO FILL YOUR PIGGY BANK?
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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]
!
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