June 14, 2017
Finance 101 for Startups: 10 Things You Need to Know

When you’re running a startup, managing the finances are important, but it shouldn’t be your first priority. While it’s common for early stage companies to recognize the necessity of basic accounting services (read: hiring a bookkeeper), often overlooked is the creation of a financial management structure to help the organization not just track, but strategically grow and sustain itself for the long haul. You wouldn’t build a house without an architect, would you? The same goes for setting up financial infrastructure - you don’t want your bookkeeper getting too far without a financial architecture in place to lay the foundation for future growth.

I recently interviewed Dave Chapman, Founder and CEO of Starter-Fluid (and a former colleague at m-Qube, a few years ago) to discuss finance and accounting for startups. As CFO at m-Qube, Dave helped build and sell the company to Verisign for $260M. Today, his growing company Starter-Fluid works with startups and fast growing companies to provide both strategic and tactical finance support.

Here’s a roundup of 10 financial necessities startups should establish early on:

  1. KPIs:  Take the time to establish, and live, your Key Performance Indicators (KPIs).  KPIs should certainly evolve over the life of the company, but always have stakes in the ground to give you context for how you are performing now vs. where you need to be.  Early KPIs may be as simple as cash burn or hiring metrics, or website metrics. As the company engages with the market, the KPIs will evolve to become more customer or market-centric.

  2. Weekly Management Team Meetings:  Get in the habit from day one. Bring together the management team to have the voices of all strategic disciplines present. It’s an opportunity to check in, even if just for 30 minutes. Establish the cadence early and make it a religion, treating it as one of the most important meetings of the week to exchange ideas and perspectives. All functions have a strategic purpose and greatly impact your company’s ability to succeed. It’s important for all team members to be aligned on KPIs and financial decisions being made on a company level to ensure that each of their strategic initiatives are in support of the collective goals.  

  3. Dashboard:  It’s been said, “You can’t manage what you don’t measure.” So true. A dashboard supports your weekly management team meetings to help reinforce what the KPI’s are, and how your company is performing relative to those metrics. The repetition of reviewing the status of KPI’s and other important information in the dashboard will  drive the importance of these metrics, as well as the accountability to them throughout the org.

  4. Create a Thoughtful Chart of Accounts: Creating a well structured chart of accounts - a list of accounts in your accounting system - that you are going to use to account for the financial performance of the business is imperative to having a well functioning accounting system. A chart of accounts will feed into everything from managing the books, to budgeting and forecasting, and even support your dashboard. Think of the chart of accounts as the basic foundation of the accounting system. While it’s a bit geeky to talk about the chart of accounts, if your foundation isn’t solid, the structure you build on top of it will likewise be unstable. Once you establish a chart of accounts, you should control changes to it strictly.  

  5. Develop and Iterate Your Financial Plan: First, ensure your financial plan is structured consistently with your chart of accounts. Second, have input from the entire senior management team. Once created, frequently evaluate whether your plan is still relevant.  You may find a number of your assumptions prove to be wrong. Early stage companies should plan on revising their financial plans a minimum of every six months.

  6. Understand the Impact of Your Decisions to Revenues and Expenses: Is that recent affiliate agreement actually paying off as you had hoped? When presented with two product development opportunities to meet customer needs, have you carefully run the numbers and made sound assumptions to know which is the better investment of your team’s time? Are you considering the hidden costs when signing a new lease, or hiring that next employee? These are all important financial decisions, and many times, the future of your business can hinge upon even just one of them.

  7. Control the Burn: Obvious, you say? At the most basic level it’s easy to have a sense of your burn rate, but do you have a real handle on what levers you can use to change it, and how new financing options will affect it? You also need to know when is it time to increase or decrease your burn, as circumstances may dictate. Having a second opinion of someone who’s managed a startup can be incredibly helpful in making these decisions, and in determining the best allocation of funds.

  8. Know your Cap Table: While most organizations understand the need to develop a capitalization table spreadsheet to track “who owns what,” it’s critical to continue to manage the cap table as investment and ownership changes occur. Issuing equity you don’t have or miscalculating one shareholders equity can leave you with unhappy investors and an expensive fix.

  9. Connected Financial Tools: Over the last 10 years there’s been an emergence of financial management tools that are helping organizations with everything from financial reporting to billing to payroll. Save yourself time, resources, and headaches by working with tools that play well together and are managed from the cloud. Tools like Gusto for payroll, for billing and invoicing, and Fathom for financial reporting can be cost effective and help you scale for a while.  Be sure to determine the specific needs of your organization and find the tools that best satisfy those needs.

  10. A Tempered Hiring Strategy: Many growing companies aware of their growing finance-related needs are unsure when to bring on full-time finance folks, and in which order to bring in different team members. It’s not an all or nothing play. There are other options for startups to have the depth and breadth of an entire team, from the bookkeeping help to the CFO level strategic oversight, without having to decide which to hire. For example, Starter-Fluid’s typical engagement is one where bookkeepers and controllers work alongside CFO’s who take a strategic approach to the books and all aspects of a company’s finances. It’s usually most cost-efficient to hire an outsourced firm that provides a stratified finance solution on a part-time basis vs. hiring these team members, one at a time, when a company really doesn’t need full-time support.

Christine Fiske is a contributor to VentureFizz. She is also an independent marketing and strategy consultant. Follow her on Twitter @fiskers.