As a founder, you are required to have experience or at least a fundamental knowledge in accounting, financial statement classification, and financial reporting, only then you will be able to control your cash and to maintain a professional relationship with your investors.
Adapting the 80-20 rule, I would like to think that the following 3 tasks must be categorized in the 20% section of your task-list as a founder, where the 80% section contains critical tasks such as sales activities, managing teams, and developing your competitive product.
The 3 tasks are:
1. Daily Accounting, Weekly Posting
On a daily basis, identify and record every economic event of your startup. Each event that causes cash inflow or cash outflow should be recorded on time. As a startup, you may use Microsoft Excel or Google Sheet to master this task.
On a weekly basis, let's say every Thursday, arrange a meeting with your external auditor or the freelanced accountant to sit together for a couple of hours to post the work you did to the accounting system. Learn the principles of accounting, it should help you a great deal, because a working knowledge of accounting is desirable for virtually every field of endeavor. After a while, you should be able to perform this task by yourself, and to master it as well.
2. Operate by a Budget
By definition, a budget is a formal written statement of management's plans for a specified future time period, usually one year. Once adopted, the budget becomes an important basis for evaluating performance. In addition, a budget can't be built in the first year of the startup life, due to high uncertainty of business activity and the lack of past performance to use as a starting point. In large organizations, the budgeting process starts at the beginning of Q4, sometimes September, to fully build a budget just before December ends.
At this stage of your business, you should be able to build a budget using assumptions and drivers. For instance, if your business model is SaaS, then the first step is to start with the sales budget by projecting revenue drivers such as:
- No. of Subscribers Per Bundle
- Pricing Per Bundle
- Monthly Churn Rate Per Bundle
Once the sales budget is confirmed, you may proceed to operating expense (OPEX), capital expenditure (CAPEX) budgets, to end with financial budgets, which are the cash budget and budgeted balance sheet. These budgets focus primarily on the cash resources needed to fund expected operations.
Take your time, I'd advise no more than 45 days, to build a fair and achievable budget. When the objectives in budget are met, it will have a positive effect on you, your team, current, and future investors. In contrast, a budget may be used improperly as a pressure device to force improved performance against the CEO.
3. Analyze and Reflect
Analyzing financial statements, on a monthly basis, involves evaluating three characteristics of a company: its liquidity, its profitability, and its solvency. Short term creditors such as a bank, is primarily interested in the ability of the borrower to pay obligations when they come due, liquidity. Long term creditor, such as a stockholder, however, looks to profitability and solvency measures that indicate the company's ability to survive over a long period of time, and the growth potential of stock value.
Thus, you need to keep an eye on your financials to maintain attractive balance sheet and income statement measures. To succeed with your next move, be it applying for a loan or raising capital, various tools are used to evaluate the significance of financial statement data. Three are commonly used tools are these:
- Horizontal analysis, also called Trend analysis
- Vertical analysis
- Ratio analysis
To stay on top of your game, given the hyper-competitive world where only the top players get the value, you must execute, analyze, and reflect fast. Faster and smarter mean systems, automation.
Assume that you are now on January 1st of the second year. You have a budget to go by, and you have the prior year's financials. Now you need a system to automate the data aggregation, comparison, and visualization for you. You should be able to evaluate monthly performance against budget swiftly, create and share analytics on-the-fly, and be a data-driven leader.
In further articles, I will drill more on each of these tasks individually, and elaborate on our mission at FINENGIN, on how our platform can be your #1 assistant in managing your financial tasks effectively. Until then, keep up the hard work!