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