Introduction
Intro
We’re probably here because we’re launching a startup and freaking out about how finance works. We don’t consider ourselves a “financial type” or we have some finance background but are wondering if any of it really applies to startups.
This course is designed to provide the least amount of information we need to do a competent job of managing our startup’s finances in Year 1 and beyond. That’s it. If by the end of this course we still don’t understand startup finance, we should go home, put our head in the toilet, give ourselves a swirly, and then quit the startup world altogether.
Just kidding! We mainly just wanted to say “swirly” in a finance course ;) The point is, if we have no clue what we’re doing, we’re in the right place.
Who I am and why I’m so Nerdy about Startup Finance
A quick tidbit about me and why this is a topic I care a lot about. I’m Wil Schroter, the Founder + CEO of Startups.com. But at night, I’m also secretly our Chief Financial Officer as well. I even wear a cape with a dollar sign on the back. That puts me somewhere between a knock off of the Riddler and the superhero version of the Monopoly man. But I digress.
What’s important is that I’ve been managing startup finance for 25 years across 9 of my own startups (3 of which were venture-backed) and countless other startups that I’ve advised, mentored, or in some cases, acquired. So I’ve been on the front lines of startup finance through lifetimes worth of pain.
In my travels, I’ve learned one thing: Founders rarely understand how finance works and are terrified of what they don’t know. My job here is to demystify how finance works and lay out an incredibly simple way to start managing finance that I can explain in one day.
The Least We Need to Know About Finance
Realistically, until a startup reaches a certain size (typically in Years 2 or 3) Founders only need to know 3 main things about startup finance.
We don’t need to become financial wizards – we’re not running a hedge fund here – but we need to get a basic idea of how our finances will potentially play out over the next year or so. We do this using a handful of key assumptions about the business that calculates into a full financial forecast.
An “income statement” is just a simple spreadsheet that tracks our revenue and expenses each month. We’ll provide a template that we can use to populate our own numbers to get started. It’s essentially paint-by-numbers.
Our business isn’t very big early on, so the finances usually aren’t too complicated. In Year 1 we just need to know how to record income and expenses. It’s the same process every month, so once we figure it out for one month, we just rinse/repeat the same thing every other month.
This whole course is built around making those 3 concepts super easy to understand and manage. Almost every aspect of building and managing a startup’s finances maps back to just those 3 principles. If we can take the time to master those, we’re 90% of the way there in terms of managing the finances of a startup. The other 10% is stuff we couldn’t possibly teach in a single course, and by the time we’re big enough for it to matter, we’ll be able to hire someone else to worry about it.
Stuff we won’t cover
There are some big topics that we’re specifically NOT going to cover which are whole courses unto themselves.
- Taxes. We won’t make many references to tax situations because it’s a massive category. However, we’ll talk about where we’ll record certain types of taxes like payroll taxes or sales tax. We just won’t be going over how to prepare our taxes. That’s extra.
- Software (Quickbooks, etc). We’re going to focus entirely on a single spreadsheet that’s free and easy. It won’t work for everyone, and in some cases, we may defer to software like Quickbooks in lieu of what we’re doing. That’s cool, just know that we’re not covering those packages, but rather the fundamentals of how finance works.
- How to be a CFO. Someday our intrepid startup will need a full-time finance person. They will have a fancy degree (hopefully) and provide more complex guidance. While we won’t walk away with an MS in finance, we will walk away with the chops to be a competent bookkeeper through Year 1 and beyond.
- Complex Cash Flow Issues. In order to develop a “one size fits most” finance crash course, we may be leaving some of the nuances of our business - such as how we manage cash flow – out of this course. We’re not ignoring it, but if we’re going to be managing a complex commercial real estate transaction or forecasting demand and inventory around a voluminous number of SKUs – our model is going to be a little too simplified.
This is how we do it
Our framework is built by helping us understand what startup finance is about, how to set up a simple document to manage our finances, and then learn how to easily manage them each month.
PHASE 1
Understanding Basic Finance
We’ll walk through the most fundamental aspects of startup finance that any Founding team member needs to know. We’ll explain where startup finance is a bit different than traditional finance and the areas we’ll need to learn in order to be confident around our finances.
PHASE 2
Assumptions
Startups are constantly guessing about future sales numbers, how many customers they might acquire, or what costs might be. But how do they arrive at these crazy numbers? We’ll unpack the processes that we’ll need to develop some basic assumptions about our business that we can use to build a forecast of how it will work.
PHASE 3
Forecasting
Once we have our assumptions in hand, we’ll begin turning those assumptions into a forecast of the future by populating a wondrous spreadsheet called an “Income Statement” that will silently rule our lives for the foreseeable future.
PHASE 4
Managing our Monthly Finances
Lastly, we’re going to discuss how to manage our monthly finances like a pro -- or at the very least like a reasonably well-educated amateur! Here we’ll look at how to capture all of our income and expenses, enter them into our Income Statement, and find out if way made any money.
Feel free to fast forward to the parts that are the most pertinent. Each phase ties together but isn’t entirely dependent on knowing all of it to understand the whole course.
The Goal
Our goal with this exercise is to learn the least we need to know to set us up to create a super simple finance document that anyone can follow and use in Year 1 – and beyond. When we’ve crossed the finish line, we’ll have a solid foundation to work off of in getting all of our financing ducks in a row:
We’ll have a solid grasp on all of the basic finance terms and practices.
We’ll be able to set up and manage a basic income statement (a spreadsheet where we’ll manage all our income and expenses).
We’ll know how to tackle some solid forecasting for the year to come.
What all that preamble behind us, let’s get started on becoming an absolute financial powerhouse!