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How We Secretly Lose Control of Our Startups
Should Kids Follow in Our Founder Footsteps?
The Evolution of Entry Level Workers
Assume Everyone Will Leave in Year One
Stop Listening to Investors
Was Mortgaging My Life Worth it?
What's My Startup Worth in an Acquisition?
When Our Ambition is Our Enemy
Are Startups in a "Silent Recession"?
The 5 Types of Startup Funding
What Is Startup Funding?
Do Founders Deserve Their Profit?
Michelle Glauser on Diversity and Inclusion
The Utter STUPIDITY of "Risking it All"
Committees Are Where Progress Goes to Die
More Money (Really Means) More Problems
Why Most Founders Don't Get Rich
Investors will be Obsolete
Why is a Founder so Hard to Replace?
We Can't Grow by Saying "No"
Do People Really Want Me to Succeed?
Is the Problem the Player or the Coach?
Will Investors Bail Me Out?
The Value of Actually Getting Paid
Why do Founders Suck at Asking for Help?
Wait a Minute before Giving Away Equity
You Only Think You Work Hard
SMALL is the New Big — Embracing Efficiency in the Age of AI
The 9 Best Growth Agencies for Startups
This is BOOTSTRAPPED — 3 Strategies to Build Your Startup Without Funding
Never Share Your Net Worth
A Steady Hand in the Middle of the Storm
Risk it All vs Steady Paycheck
How About a Startup that Just Makes Money?
How to Recruit a Rockstar Advisor
Why Having Zero Experience is a Huge Asset
My Competitor Got Funded — Am I Screwed?
The Hidden Treasure of Failed Startups
If It Makes Money, It Makes Sense
Why do VCs Keep Giving Failed Founders Money?
$10K Per Month isn't Just Revenue — It's Life Support
The Ridiculous Spectrum of Investor Feedback
Startup CEOs Aren't Really CEOs
Series A, B, C, D, and E Funding: How It Works
Best Pitch Decks Ever: The Most Successful Fundraising Pitches You Need to Know
When to Raise Funds
Why Aren't Investors Responding to Me?
Should I Regret Not Raising Capital?
Unemployment Cases — Why I LOOOOOVE To Win Them So Much.
How Much to Pay Yourself
Heat-Seeking Missile: WePay’s Journey to Product-Market Fit — Interview with Rich Aberman, Co-Founder of Wepay
The R&D technique for startups: Rip off & Duplicate
Why Some Startups Win.
Chapter #1: First Steps To Validate Your Business Idea
Product Users, Not Ideas, Will Determine Your Startup’s Fate
Drop Your Free Tier
Your Advisors Are Probably Wrong
Growth Isn't Always Good
How to Shut Down Gracefully
How Does My Startup Get Acquired?
Can Entrepreneurship Be Taught?
How to Pick the Wrong Co-Founder
Staying Small While Going Big
Investors are NOT on Our Side of the Table
Who am I Really Competing Against?
Why Can't Founders Replace Themselves?
Actually, We Have Plenty of Time
Quitting vs Letting Go
How Startups Actually Get Bought
What if I'm Building the Wrong Product?
Are Founders Driven by Fear or Greed?
Why I'm Either Working or Feeling Guilty
Startup Financial Assumptions
Why Every Kid Should be a Startup Founder
We Only Have to be Right Once
If a Startup Sinks, Founders Go Down With it
Founder Success: We Need a Strict Definition of Personal Success
Is Quiet Quitting a Problem at Startup Companies?
Founder Exits are Hard Work and Good Fortune, Not "Good Luck"
Finalizing Startup Projections
All Founders are Beloved In Good Times
Our Startup Culture of Entitlement
The Bullshit Case for Raising Capital
How do We Manage Our Founder Flaws?
What If my plan for retirement is "never retire"?
Startup Failure is just One Chapter in Founder Life
6 Similarities between Startup Founders and Pro Athletes
All Founders Make Bad Decisions — and That's OK
Startup Board Negotiations: How do I tell the board I need a new deal?
Founder Sacrifice — At What Point Have I Gone Too Far?
Youth Entrepreneurship: Can Middle Schoolers be Founders?
Living the Founder Legend Isn't so Fun
Why Do VC Funded Startups Love "Fake Growth?"
How Should I Share My Wealth with Family?
How Many Deaths Can a Startup Survive?
This is Probably Your Last Success
Why Do We Still Have Full-Time Employees?
The Case Against Full Transparency
Should I Feel Guilty for Failing?
Always Take Money off the Table

What’s the Least a Founder Should Know About Finance?

Wil Schroter

What’s the Least a Founder Should Know About Finance?

A Founder that doesn't understand startup finance is a liability to the company.

The very survival of a startup comes down to whether we have enough cash to survive. If the Founder can't answer that question, it'd be like hopping on a jet with a pilot that doesn't understand how to read the altimeter, compass, or fuel gauge. They might be a great pilot, but without knowing the fundamentals, that trip is going to end poorly.

Fortunately, Founders don't need an MBA in finance to be competent, we just need to understand a few basic principles very well. While I'm the Founder + CEO of Startups.com, I'm also our CFO. That's because I learned long ago that with a solid understanding of just a few key principles, we can make (and avoid!) really critical decisions instantly.

Gross Profit vs. Net Profit

Richard Branson famously admitted a few years back that he went decades without fully understanding gross profit versus net profit, so let's agree even the best of us fall short on this.

If we sell a cup of lemonade for $1 and it costs 25 cents to produce that product (cup/mix/water), our gross profit is 75 cents. But if we then paid our kid sister (we're 8 years old in this model) $2 per cup to work the stand, we're actually losing $1.25 in Net Profit. We also royally suck at compensation models.

Gross profit is our leading indicator that we might be able to make money (the product is profitable), but net profit tells us whether we actually are making money (the company is profitable). There's a massive difference.

Burn Rate

In case this term is unfamiliar, a "burn rate" is another way of saying "how much money are we losing each month?" Since startups are always investing way ahead of their income, we are almost always losing money, which means we are "burning" through a certain amount of cash every month.

Remember — we can only have a burn rate if we are losing money each month. If we're profitable, we're golden. Our burn rate, however, is the slider that we move to exchange how fast we want to grow with how long we want to live.

If we have $1 million in the bank but are burning at $100k per month, we've got 10 months left to live. It's that simple. A smart Founder will start with a target of how much runway (months to live) they would like to achieve and then manage their burn rate backward based on their cash position.

Cash Position

We should always know our cash position down to the dollar on any given day. Why? Because in the formative years, nearly every decision we are going to make directly impacts our cash position, which directly impacts how much longer we can survive. Not knowing our cash position on any given day is like going scuba diving without knowing how much air is left in our tank.

What we should be focused on at all times is our "worst-case cash position" which means if we paid out all the debts we owe right now, how much would be left over? We then take that number and divide it by our monthly burn rate and it tells us exactly what worst-case scenario is.

A Founder's job is to make sure we don't run out of money. But we can't effectively do our jobs unless we understand, down to the dollar, exactly where our money stands.

In Case You Missed It

Should I Pay People With Equity? (podcast). Paying people with equity is a time-honored tradition in cash-starved startup land. However, have you ever stopped to consider the real cost? Join Wil and Ryan as they break it down.

What Should I Never Say to an Investor? With our best intentions, we often shoot ourselves in the foot making lofty assumptions or declarations that investors hear all the time and just start shaking their heads. Let's avoid that.

How much should I budget for an MVP? I've got this incredible idea for an app in my head and I'm thinking about building the MVP (Minimum Viable Product) with a developer. I've never done this before, so I'm afraid of spending too much money. What should I do here?

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Ben Oguntimehin

Love the read

Reply4 years ago

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Gregory Goldman

Interesting read.

1 Replies

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