Managing our Monthly Finances

Now that we know how to set up our income statement and what the major moving pieces are, let’s take a look at how to manage the income statement every month.

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 accounting. But guess what? It’s actually not nearly as complicated as people make it out to be. That’s because startup accounting is like trying to manage our expenses when we’re a freshman in college – we don’t really have that many to manage!

Even if we do, and the business is a bit further along, don’t worry. We’ll walk through a step-by-step guide so that we can just fill in each box easily.

But before we get into the process, let’s just make sure we cover a few caveats and concerns:

While we can’t cover the ins and outs of every tax issue, it’s worth making a note of which taxes we’re going to be liable for so we don’t make the cardinal mistake of not filing taxes. The IRS and other taxing authorities get upset if we mess up how much we paid them. But they go full Eliot Ness Untouchables if we don’t pay them at all!

When managing our finances we have to choose between two methods of recording transactions: Cash and Accrual accounting. This is just a decision as to when we determine a transaction should be recorded in a particular month. It’s a small nuance, but an important one.

Let’s assume we hired a designer to work on our company logo. She performed $500 worth of work in January then sent us a bill that we paid in February. Do we record the transaction in January when we incurred (accrued) the expense, or February when we paid it (in cash)?

For this we must make a choice – but it’s an important one because however we choose to record this transaction should work the same for all of our transactions. There’s no wrong or right here, it’s more a matter of how we would prefer to manage our finances.

Here are our two choices:

1. Cash Accounting. We only record the transaction once we’ve paid for it in cash. In this example, we would have posted the transaction in February when the money left our account. The benefit to this is that we can focus exclusively on what transactions moved in and out of bank account. Whatever the time stamp is on those transactions, that’s the month it’s accounted for.
2. Accrual Accounting. We record the transaction when we incur it, even if we pay for it in cash later. The benefit here is that we have a monthly statement that more accurately reflects the decisions we made in this specific month versus when those decisions happened to be paid for in cash. If Johnny makes $1,000 in salary for January but the withdrawal doesn’t post in our bank account until February 2^nd, we can still show that his payment was for January.

If we’re totally lost on which one to pick – choose “Cash Accounting” simply because no matter what we can always defer to the timestamps of what posted to our bank account, even if they don’t directly reflect when and how we made those decisions.

Much like the assembly line of dishes at Thanksgiving time – rinse, wash, dry – every month we will enjoy the ritual that is “monthly close”. Here we will tally up all of our activity, drop it into our Income Statement, and analyze the hell out of the results.

We’re about to walk through each step, but here’s a quick overview of what we’re about to do:

So long as we follow the steps in order, we shouldn’t have a very difficult time accounting just like the big kids. Therefore, without further ado, let’s get our accounting on!

Our first step will be to capture all of the activity that has transpired for the month – ideally as close to the end of the month (and the start of a new month) as possible so that the activity is fresh in our heads. It usually takes a few days or weeks for providers to display a final tally for the previous month so we’ll want to make sure all of our captured sources are fully up-to-date.

In this day and age, capturing this activity usually means downloading statements from our credit card companies, bank accounts and various other providers. For those still living in the Fred Flintstone era, by all means we need to grab paper receipts, mailed invoices and even cash receipts if available.

We’re going to separate our efforts into two distinct categories: Revenue and Expenses. Right now we’re just going to capture the expenses – we won’t process any of them until later.

Our revenue typically comes from three primary forms: credit cards, checks, and cash. Depending on which of these methods applies, we’re going to make sure we track and tally each source appropriately.

In order to capture our credit card activity, we’ll want to go online and download all of the transactions that have transpired for the month. Most of these payment processors will have login portals online where we can access a whole host of information: payments, refunds, chargebacks, disputes, and processing fees.

Be careful – when downloading monthly data make sure the “Date Range” of our download is set to the exact month we intend to record. For example, use 12/01/2031 to 12/31/2031 for the month of December.

There are 4 specific items we want to capture from our payment processor:

1. Income (“Credits”). This is the total income we collected before any debits. This will be a higher number than what was deposited into our bank account because our payment processor will assess a number of debits along the way. We want to record the higher (gross) number in this case so that we accurately capture all the activity.
2. Refunds. A refund is where we deliberately returned money to a customer. Our refunds total should be shown as separate from “income”. Depending on the processor, it should also be shown as a total number for all refunds.
3. Chargebacks/Disputes. Chargebacks and disputes occur when a customer initiates a refund on a charge directly with their bank or credit card company. These get a little tricky because they can be disputed by the vendor (us) as well, so sometimes a dispute will go back and forth a few times before becoming final. Therefore, this value may actually show up negative at first (we were charged with a chargeback) and then positive (the bank issued the money back in our favor) and so on.
4. Processing Fees. Payment processors charge a number of fees associated with every transaction, which can range from “processing fees” (such as the 2.9% that many charge) to “transaction fees” (i.e. “$0.50” per transaction) to “chargeback fees” (i.e. a $25 fee every time a chargeback is filed). We will collectively record all of these fees as a single line item.

For the time being we just want to download and review this information so that we can input it later. Use the checklist above just to make sure we’re not missing a category of transactions.

There’s a small nuance to how checks are managed in our finances based on when and how we want to “recognize” that revenue. For example, is a check considered “revenue” when it’s received, deposited or when it clears the bank? For our purposes, we’re going to specifically focus on when the check has been officially deposited in the bank with the date stamp from our bank.

In order to get an “official record” for when and how to capture how much revenue we have collected from checks, we’re going to download our monthly bank statement and tally all check transactions from there.

The one exception is if there is a case that a check bounces and needs to be subtracted from the total. In that case, all we need to do is enter the new total minus the cost of that check.

Cash is always the most complicated item to reconcile because it is the one way to get paid where the currency can be reused without any paper trail. There’s a reason everyone from taxi drivers to bar owners love cash – it’s impossible for anyone to track (we’re looking at you, Mr. Taxman!)

The most consistent way to manage cash is to deposit it into the bank so that it has a timestamp and amount that we can begin to track. Similar to how we manage checks, we use the data stamp associated with the deposit to determine which month our cash revenue will be recorded.

Can we simply just count the cash and use a value old school gangster style? Yep. But for consistency, it’s better to use “cash deposited”. It’s possible to simply account for cash without depositing it, it’s just a little harder to keep a record for over time.

Not all revenue is captured via credit cards, checks and cash. Sometimes items will be offered in “trade” for example, whereby a credit will exist that doesn’t have a typical transaction associated with it. Other forms of income could be things like rewards points from a credit card. If those cases exist, no problem - just add an additional line item within the Revenue tab and make sure that the total includes those fields as well.

While revenue comes from a few specific sources, expenses come from all over the place. We’re going to need to be thorough about where we capture our expenses on a monthly basis and how to process them accordingly. For now, let’s just focus on making sure we capture every possible transaction.

A quick note on timing – we’re going to focus our recognition of expenses on when it was actually captured in our various statements. If we charged something to our card in January but paid the bill in February, we’re going to consider the bill a “January” expense because that’s when it was recorded in our system.

Our bank statement is often the most valuable source of truth because ultimately all roads lead to the bank account. One important thing to note is that the bank account may often not be the place where we capture the detail of a transaction. For example, if we have 30 charges on our corporate American Express account, but one charge in our bank statement for having paid the balance, we want to record the 30 different charges, and essentially ignore the one big payment (that would be duplicative).

The same goes for things like payroll. Our payroll provider will give us much more detail than our bank account will provide. Our payroll provider may pull a single large payroll debit from our bank account, but we’ll want to ignore that debit and focus on the detail we get from the payroll provider which may include things like employer payroll taxes versus direct employee salary cost.

We’ll get into how to input all of these different line items later, so for now let’s just make sure we have all of the bank account information for the calendar month and we can determine what does or doesn’t fit later.

We’re likely to have a ton of individual credit card charges separate from our bank account (unless we’re using our bank ATM as our corporate card). In addition to our corporate card, we’re likely to have additional charges from employees’ cards as well. Those can be collected as either a spreadsheet of employee submitted expenses (much easier) or the paper receipts if they are in-person transactions (not necessary, but it’ll also work).

Some businesses utilize a loan or line of credit as a directly charged item – meaning they pay vendors directly from that account. A slightly easier way to do this would be to move the funds to the bank account and then pay vendors directly, but if we don’t, we’ll need to capture all the activity in the account for the month. If the transactions only include balance transfers, that won’t appear in this income statement, so we can ignore that.

Receipts indicate that something has already been paid, so if the source of that payment wasn’t our bank account or corporate credit card, a receipt will be helpful. Typically, this would be something like an employee paying for an expense with their own money that needs to be recorded.

Invoices are important but they aren’t always a record of actual payment. If someone sends us an invoice to say we owe money, until we pay it, we may not record it. Regardless, it does help to have all invoices collected and on hand, so we can determine where and how we want to record them later.

If we’re using a third-party provider for payroll like Intuit Online Payroll, Gusto, or Zenefits we’ll want to download a copy of their activity, so we can reconcile it against our own accounts. Often these companies debit our payroll as one lump sum in our bank account which doesn’t give us a lot of detail about how we separate things like employer payroll taxes from contractor payments from employee salaries.

If this is our first time downloading any of this information, be particularly mindful of the date ranges that we capture. Payroll is typically deducted a few days before the actual due date of payroll, so if we’re paying people on the 1^st of the month, the actual debit will likely occur on the 27^th of the previous month. Not a big problem, just be mindful of the offset in case we need to adjust our date ranges when we download.

There are many ways the business may capture activity, but these are the usual suspects. If we have some additional methods by which we’re tracking activity, such as trade credit or deferred costs, by all means, add them to the mix. The point is just to make sure we capture every last item we can think of so we can take it to the next step – processing it all!

Yes, it’s a lot! Capturing every transaction is a bit of effort the first time but once we’ve bookmarked every site and gone through the process a few times, most startups can finish the process in less than an hour. To put that in perspective, it takes one person less than 30 minutes to do it at Startups.com and we have dozens of sources of data to pull from and hundreds of employees.

So now that we have our data, let’s figure out what to do with it.

Overview

The overview tab is going to automatically calculate all the activity from the other tabs. We should never type anything directly into this tab as it doesn’t contain any input boxes. Please note that changes we make to the other tabs may “break” the calculations in the overview tab so let’s make sure to double-check our calculations as we modify the template.

On the other hand, this is the tab where all the magic happens, so as we populate each of the other tabs we’re going to start to see our entire financial picture come into focus.

Revenue

The revenue section will have its own tab in our profit and loss statement. In the revenue tab there will be areas for individual product revenue, refunds, and chargebacks.

We may want to separate the revenue differently, such as per product, which is fine. We’re only separating it by source for the time being so that we make sure we have a consistent way of mapping all of our monthly sources to the income statement. Over time as we master this process, we can adjust it to suit our needs.

Credit Card Revenue

In the revenue tab we will keep separate sections for each product. For example, if our business has three products we will have line items for Product 1 revenue, refunds, and chargebacks, and the same for Product 2 and Product 3. These designations are important because we want to see how each individual product is performing and have granular information in understanding the overall picture.

Our payment processor will provide the source data for each individual product at month’s end. For instance, if Product 1 has $100,000 of revenue in October, $10,000 in refunds and $2,000 in chargebacks we will add $100,000 to the Product 1 revenue row, -$10,000 to the refunds row (contra-revenue), and -$2,000 to the chargebacks row (contra-revenue).

This will result in Product 1 showing $88,000 in net top-line revenue for the month. The amount of $88,000 will filter into total top-line revenue, along with the net revenue of the other products. Note, we will repeat the above process for all products.

Invoices/Checks

Some clients may not want or be able to pay us via credit card so it is crucial to properly track and record. If we send a client an invoice for $15,000 and they mail us a check for the amount - when we receive that check we need to record the $15,000 of revenue in our income statement. This would go in the revenue tab under checks received.

Likewise, if a client requests a refund and we send them a check for that amount - we would record the refund under the checks received section of the revenue tab. Sometimes during the chaos of the month these transactions can be lost in the shuffle, so we need to make special note of them!

Cash

It may be rare this day in age, but a customer may pay with cash. All cash transactions can be added to the revenue tab under “other sources.” If a client hands us $50 physical cash for a service - we can record that transaction there. Conversely, if we need to refund a client $100 with physical cash for a service - we can subtract -100 from the other sources section as contra revenue.

As stated in the COGS section of forecasting - COGS entail direct and variable costs of physical goods. At the end of the month we will want to ascertain these final values and assign them to the appropriate sections of the COGS tab. These final costs will appear in month end bank and credit card statements. For example, if our monthly rent was $1,000 for a production facility we would record this cost under variable costs. Likewise, if we sell 100 units and our direct cost is $180 per unit then under direct costs we would record 100 and $180 - which would generate total direct unit costs of $18,000.

One of the more dynamic costs of our business will be staffing costs. Staffing costs includes: the gross pay to the employee – for instance $4,000/month if the employee is salaried at $48,000 per year. Also, don't forget, our silent partner the government gets their cut on the federal, state, and local level through payroll taxes. Finally, we want to be mindful of benefits cost. With all that being said, it is important to note the cost of an employee goes beyond stated salary and can be inflated by a number of additional costs.

W2 Staff

Each individual employee will appear in our payroll processor’s monthly report. From this report, we can pull the stated final amount for each individual and add it to the staffing tab for their specific name or role. For example, the CEO being paid a gross salary of $5,000 per month would be added from this report. Giving each individual their own line item allows us to see that first and foremost we compensated everyone correctly - it also allows us to better track costs.

1099 Staff

Each 1099 we contract during the month will also show up in our payroll processor’s monthly report. The difference with these employees is that we will not have benefits or payroll tax costs attributed to them. It is beneficial to input each 1099 and the amount paid to better track their final costs and to elucidate where we are spending. Hence, the web designer for $1,000 per month would have their own line item in the staffing tab of the income statement.

Payroll Taxes

This part is important, and we need to make sure we are accounting for payroll taxes! As stated above, the government is our silent partner. However, the government requires being paid regardless of how the business is doing. We want to keep the government happy and avoid any payroll tax penalties.

Luckily, payroll administrators like Intuit, Gusto, and others pay the government for us and make note of these payments in our month-end payroll reports. This most likely will come under a field called “Employer Taxes.” Typically, employer taxes come out to 7% to 8% of gross payroll expense. That is, if our monthly payroll expense is $25,000 for 5 employees, then we can expect to pay approximately $1,750 to $2,000 in payroll taxes. This payment will be its own monthly line item in our staffing tab.

Benefits

Health benefits are worthy of a course within itself, but long story short, we need to track and record this cost if we offer it to our employees. Our payroll processor will integrate our health benefits cost into our payroll report for us. For example, if we use a provider like United Healthcare, the month-end payroll report will include a section for employer and employee contributions to benefits. Employer contributions will be our expense. We need to take total employer contributions and input this monthly expense into the benefits section of the staffing tab.

Miscellaneous Expenses

Perhaps one of the more overlooked, but still an extremely important part of expenditure recognition is the miscellaneous section. In our profit and loss statement our miscellaneous tab will include the following sections: site support, office support, card processing fees, SaaS, and miscellaneous.

These expenditures will be sourced from our month-end credit card and bank statements. It will be helpful to export these files and dump the data into a “To Be Determined” tab in the profit and loss statement. Basically, a place where we can pool all the monthly expenditures and sort them into the appropriate miscellaneous tab sections.

Office Services

Our business will have monthly office expenditures even if we operate from home! This could include things like a lease, insurance, coffee for the staff, cleaning services, and office supplies, among others.

SaaS Vendors

Our monthly software subscriptions are important to track because they can add up quickly and represent the tools needed to operate our business. For example, this section could include things like a LinkedIn subscription, Microsoft office tools, payroll processor service payments, or even something as simple as an office Spotify account.

Miscellaneous

This will include one-off expenditures, such as an employee using the corporate credit card for lunch, a one-time update to the office (i.e., new wall decorations), a one time UPS mailing charge, an Amazon purchase, and anything else that may arise. It is important to keep this section for costs that will most likely arise once or unpredictably in the future. Any new costs that will be periodical should find their homes in the above sections.

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?”

The Income Statement is our scoreboard toward making every possible adjustment in the business. It’s not just about whether we made money. It’s about how all of the decisions we made, from staffing to marketing to how much we spent at the company party – need to be adjusted.

Check the Math

Before we respond to the data – let’s make sure it’s correct! A general rule of thumb once we’ve finished up 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 isn’t including one extra cell or row. It happens a lot.

A good way to keep track of our math is 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.

Revisit those Assumptions

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 assumptions might be around things like Cost per Acquisition and Average Order Value and compare them to actuals.

With that, it’s also a good time to adjust our forward-looking assumptions now that we have another round of concrete data. The assumptions should always be changing, but that should work right in line with the new data that we’re taking in each month. This is also the part 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.

Reassess Every Cost

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.

Tweak Net Income

All of this really comes down to one thing – did we make any money? The “Net Income” line should become our entire focus month in, month out. All of our planning going into each month should be calibrated toward how close we can get to break 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 have to constantly modify our approach based on the never-yielding “Net Income” line.

A Ton of Little Tweaks

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, 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 that 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 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 - wil@startups.com.

Enjoy friends!

Wil Schroter
Founder + CEO (oh, and CFO)
Startups.com