If our startup sinks, everyone else gets a life raft — but Founders go down with the ship.
There are a million stories about how to scale a successful startup, but what we rarely hear about is what happens when things aren't so rosy, which is ironic since most startups don't have that picturesque outcome.
The reality is most Founders find themselves inextricably tied to their startup baby at a very personal financial level. This means when things go sideways, it's not just the startup that's in jeopardy — it's our personal lives that get pulled into the mucky-muck.
Most big businesses of today were once small, scrappy, and innovative startups.
We all know the feeling in the beginning when ever...
There's an inflection point in growing startups where our focus shifts from building products and helping customers to hiring staff and dealing with internal bullshit. That shift in focus is the death knell for growing startups as it slowly and completely takes our eye off the ball.
If we look at larger companies we can see this in full view. 90% of their focus (sometimes all of it) is spent internally with warring parties and fiefdoms more focused on their jobs and career paths than anything the company actually produces. (I've made the argument before that all the important stuff was probably done long before them anyway.)
Our job as Founders is to do everything in our power to prevent this loss of focus, and it absolutely starts with us.
Next we're going to analyze our financial statements and operating expenses to see if they accurately reflect all of the financial transactions we just inputted. If you're using your own accounting software to update your company's income statement that works too.
The nice thing about our handy Income Statement is that once we plug in all the values, the story from there is essentially told. All of our columns add up and ultimately tell us the honest truth – “did we make any money?”
How we use this information is key. The Analysis step here is about getting all the troops rallied (assuming we have troops to rally) and ask:
“What did we just learn, and what changes do we need to make?”
Unlike a Profit and Loss Statement, ou...
We're going to update our financial statements using a simple accounting process that requires zero professional accounting experience or accounting software — it's just our income statement spreadsheet.
Click here to download our template to follow along.
The next step after we've captured all of our financial transactions in our spreadsheet accounting system will be to process each of the financial records in order. Earlier we began recording transactions from our bank accounts and credit card statements, so now we'll drop them into the Tabs we set aside for business expenses and revenue.
We've broken our spreadsheet accounting system into a handful of useful tabs to populate.
Here's the quick list, then we'll go ov...
Building solid financial statements starts with digging through all of the financial transactions in all of our accounts. In our example, we'll do this with a spreadsheet but you can use your accounting software to comb through your financial records and do the same thing.
Once you've done a little bit of startup accounting you'll realize that keeping good financial records is just about process. You don't need complicated accounting software or a finance background, just a dead simple accounting system you can repeat monthly.
In our own business at Startups.com, we've managed the company's financial position for over a decade using the same basic accounting methods for an 8-figure growing company. We use a basic fi...
Founders don't get lucky — that's how lottery winners make their money.
From the outside, though, it often looks the same. People read about a company going public or hear about some Founder they know getting their startup acquired and think "Wow, what good luck they've had!"
They view our windfall as some stroke of luck, and as importantly they view our proceeds as something that should be doled out to everyone. In the worst case, they may even try to make us feel guilty about such great fortune — if we haven't already done that to ourselves.
In order for a Founder to exit they couldn't rely on luck. Luck is what happens when we're at the blackjack table and you get dealt an ace and a king. Luck is w...
Now that we know how to set up our income statement and what the major parts of our financial statements look like, let's create a little monthly accounting system to manage the financial records of your own business.
This is where most people freak out and shout “Good God! It’s Accccounnttttinnnnng!”
Yes, friends, it is indeed the sneaky devil that we call "business accounting". But guess what? Accounting for startups, or just keeping track of basic financial health isn't that hard because initially it'sj ust basic bookkeeping. Our bank accounts aren't exactly processing "millions" (yet!) so we can stick to some startup business accounting that's easy.
We like to keep startup accounting easy, so that as the business ...
Now that we have most of our assumptions in place, the fun begins. We can start modifying our assumptions that drive sales revenue or fixed costs that will begin to calculate net operating income.
When we forecast an income statement all of these variables work in tandem to support our net operating income formula. Once we line net operating income up with our assumptions, we can move the conversation with potential investors toward what the assumptions are versus debating the whole income statement.
We've already captured most of our indirect costs, capital expenditures, and other costs incurred within our Fixed Items and Assumptions, so most of the work is done already. We can calculate net income by s...
Anyone can look like a hero in good times — but it's the bad times that truly forge Founders.
The good times mask bad behavior. When things are good, we can make tons of mistakes that simply get glossed over. It's not until the shit starts hitting the fan that we're really tested as Founders, and as leaders.
Have you ever noticed how every startup that just raised capital seems like they are doing everything right? They just hired a ton of staff, signed a huge new office lease, and paid for a big media splash to show off their stuff.
It's hard to feel like we're "wrong" when our coffers are overflowing with fresh capital. Any dumb hire we make or bad use of capital doesn't have a consequence — yet.
Startup Founders are not entitled to success, yet we sure act like it.
When we're sitting in a room full of Founders or pouring through social media, we're inclined to think everyone is "killing it" but us. We hear of these meteoric rises, huge funding rounds, and big exits and invariably wonder when all that goodness will happen to us.
What we form is an "entitlement to success." We believe that because we see so much of it happening elsewhere, by virtue of that, it's only a matter of time until it happens to us.
What we miss when creating that entitlement is just how flawed the foundation of that premise is and what a house of cards we create with our own expectations.
In the early days of our formation, when we'r...