November 14th, 2022 | By: Wil Schroter | Tags: Funding
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, our scoreboard is used to make every possible adjustment in the business.
It's not just about measuring gross profit or positive cash flow. It’s about how all of the decisions we made need to be adjusted, from staffing to marketing to how much we spent at the company party.
We may use software to manage Accounts Payable and Accounts Receivable, but we use our document to coincide with the objectives of our business plan.
All of the variables that drive our revenue growth and our financial forecast, as well as the costs that support them like the cost of goods sold, prepaid expenses, and of course, fixed costs, are in this financial statement.
Every new business has a small initial investment of time to get this accounting system in place, but keeping accurate records is something we're going to have to do no matter what.
Before we respond to the data — let’s make sure it’s correct! A general rule of thumb, once we’ve finished entering all of the financial data, is that if we do at least one pass at making sure all the entries are correct, we’re going to find at least one error!
This could be as simple as double counting an expense line or realizing that the SUM total in our spreadsheet doesn’t include one extra cell or row. It happens a lot.
A good way to keep track of our math is to look for a figure like “net income” and see how it fluctuates as we begin to enter more data. If going into the month it looked like we would break even, and now it looks like we’re making $50,000 — our math is broken somewhere! (or just had a crazy good month – but probably not).
Another great way is to do a quick comparison of each line item from last month to this month to see where and how there might be some really abnormal jumps.
If we’ve been paying $350 per month in credit card processing fees for the last few months and all of a sudden our bill is $950 this month — chances are we may have combined a few of the wrong costs. All of these little checks make a huge difference.
As part of “closing out the month” on finances, it’s also the time to look back on the actual performance of the assumptions and KPIs that got us there.
This is also when we compare what we thought our cost assumptions might be around variable costs like Cost per Acquisition and Average Order Value and compare them to actuals.
If we're raising capital from potential investors, this will be key information they will zoom in on. Many investors skip right past balance sheets and other financial information and look at the key assumptions anyway since that drives the whole financial section of our pitch.
With that, it’s also a good time to adjust our financial projections now that we have another round of concrete data. The assumptions should always be changing with actual results, but that should work right in line with the new data that we’re taking each month.
This is also where sharing the financial results with the key constituents (like who's running marketing) becomes incredibly important so that they understand where and how their efforts are impacting the bottom line.
At the end of every month, every cost should be reassessed — no matter how trivial it may seem.
Even little costs, like that $15 per month the company pays for Spotify, need to stand trial. The best way to evaluate the impact of costs that can be shaved (we love our Spotify...) is to take the monthly cost and make it an annual cost.
$15 doesn’t seem like a lot of money, but $15 x 12 months = $180. A $99 per month charge seems reasonable, but at almost $1,200 per year – that starts to matter.
Startups have a nasty habit of letting ongoing costs run without constantly evaluating and reducing them. We should assume that every month every salary, SaaS product, interest payment, marketing spend, and meal needs to stand trial.
If we’re constantly vigilant about costs — we’ll see huge benefits in the long run.
All of this really comes down to one thing — did we make any money?
All of our planning going into each month should be calibrated toward how close we can get to breaking even (in the early days) and then how much profit we can generate later (that part isn’t hard to understand).
In most cases we’ll have a shortfall — growing a startup is hard! So, if we intended to break even this month, and instead we landed at negative $10,000, our next step is to put together a plan to make up for the shortfall in the ensuing months.
That may mean cutting back some expenses or extending our sales targets. Either way, we must constantly modify our approach based on the never-yielding “Net Income” line.
Analyzing and managing the income statement is about making tons of little tweaks, and not just throughout the month. At Startups.com (where I’m also the CFO) we update and tweak our income statement as often as 3x per day. Every new marketing cost we see, every time an assumption changes, and every time we forecast our goals just a little bit differently – we make adjustments.
That type of diligence allows us to know at any given time how every aspect of our business will be affected in real-time. When the month comes to a close we’re not surprised by the results because we’ve been using the income statement to feed us constant decision-making data on where we can spend our resources.
We don’t need to be as nerdy as we are about keeping the income statement updated, but by all means please consider the income statement to be a critical piece of the daily decision-making.
So that’s it! That’s pretty much the shortest version of a crash course in Startup Finance that we can possibly get through.
Going forward, the only way for this to really make sense is to just run through the numbers over and over. This isn’t like submitting our taxes where it has to be 100% right the first time. This is about just laying down a foundation and then constantly tweaking it as we learn more and become more familiar with the process.
If you’re not 100% sure about some of the values you’ve inputted (like LTV, CAC, or anything else) — don’t worry. They are going to change anyway, so it’s OK to just get some values in there to get started and adjust as we go forward.
The same goes for our month-end accounting. If we get something wrong the first couple of times we can always go back and fix it.
Startup Finance isn’t about having any kind of mystical powers or knowledge. It’s just about understanding the basic moving parts and refining them nonstop.
I hope you’ve enjoyed this course and would love to hear what you thought about how we approached it. If you’d like to drop me a line, I’m always easy to find — firstname.lastname@example.org.
Founder + CEO (oh, and CFO)
Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.