know your numbers
DESCRIPTION
We know you’re a genius. You’re building a phenomenal company, one that may change the world, but you never took or don’t remember what you learned in that Accounting Class. Often entrepreneurs drown in paperwork and receipts as they try to flush our their business plan. It’s important to keep your books straight from the beginning and keep track of the most important thing: the money. In this hands on workshop, we will take you back to basics, covering the fundamental metrics and financial accounting principles that will make or break your startup. Expert: Dan Allred – Silicon Valley Bank www.thecapitalnetwork.orgTRANSCRIPT
Know Your Numbers The Capital Network
12/5/13
Dan Allred Silicon Valley Bank [email protected] TwiDer: @dgallred
hDp://danallred.tumblr.com
Financial maDers are oIen confusing.
It is a lot like learning a language.
You need to learn key phrases yourself...
…and can rely on translators for the rest.
Today we will cover:
• Key financial metrics
• Financial statements
• When & how to leverage CFOs & others
Key metric: bookings
• The financial value of business that you have under contract – i.e. “we booked a deal with Amazon for $240k over the next 2 years.”
• Not a financial statement item, but oIen a key “dashboard” item.
• Total Contract Value (TCV) vs. Annual Contract Value (ACV).
Key metric: revenue
• The accoun^ng value of a sale during a specific ^me period.
• You will hear accountants say “rev rec”, “recognized revenue”, “scored revenue”, etc.
• A sale typically becomes revenue when the product has been delivered and payment terms are defined and agreed to.
• Example from prior slide.
Key metric: COGS
• COGS = cost of good sold. • The costs to produce the goods being sold (i.e. direct product costs, hos^ng, etc.) and to execute on the sale (commissions, revenue share, etc.).
Key metric: gross margin
• Revenue minus COGS = Gross Profit (a hard dollar number)
• Gross Profit divided by Revenue = Gross Margin (a percentage)
Key metric: expenses
• Costs to run your business – Sales & Marke^ng expenses
– Research & Development expenses – General & Administra^ve expenses
Key metric: bo5om line
• Revenue minus COGS minus expenses. – Net Profit (or Net Loss) includes interest, taxes, deprecia^on and amor^za^on expenses (most of you do not need to worry about this for now)
– EBITDA = Earnings Before Interest, Taxes, Deprecia^on & Amor^za^on (i.e. all the stuff you don’t need to worry much about at your stage).
Key metric: sources & uses of cash
• Sources: – Trade Receivables (A/R) – Deferred Revenue (D/R) – Debt – Equity
• Uses: – Trade Payables (A/P) – Salaries/Wages Payable
– Debt
Key metric: runway
• Cash divided by cash burn. • Cash burn does not necessarily equal EBITDA – depends on ^ming of cash receipts vs. bookings vs. revenue.
Key metric: milestones
• Events that drive value in the company: – Commercial milestones: distribu^on agreements, customers, bookings, revenue, etc.
– Market milestones: users, working business model, etc.
– Technical milestones: proof of concept, working prototype, etc.
Dashboards
• Typically one page used to communicate progress to key stakeholders (investors, employees, etc.)
• Time based representa^on of how company is tracking against key financial goals (and perhaps other ^me bound goals as well).
• Not a financial statement (i.e. not an income statement, “P&L” or balance sheet).
Dashboard exercise
• Ques^ons to ask yourself: – What drives value in the business (bookings, gross margin, technical progress, distribu^on deals)?
– What resources do you need to drive this value (people, ^me, money, etc.)?
• Your dashboard will: – Track the value you are building in the business. – Track the resources you are consuming as you build value.
Financial Statements
• Income Statement – A movie.
– Tells the financial story of a company over a span of 8me.
• Balance Sheet – A picture. – Indicates the financial health of a company at a point in 8me.
Income Statement
• Over a period of ^me: – Revenue (“top line”) – Minus COGS – Equals Gross Profit – Minus Expenses
– Equals EBITDA (“boDom line”)
Balance Sheet
• Assets – Cash – Receivables – Inventory – Fixed Assets – Goodwill & Intangible Assets
• Liabili^es – Salaries, wages – Payables – Deferred Revenue – Debt
• Equity – Paid-‐in Capital – Retained Earnings (Loss)
Assets = Liabili^es plus Equity
What do founders need to do?
• As much as you are comfortable doing… • At a minimum: – Ar^culate how value is built in your business in financial terms.
– Speak to financial resources required to build value in your business.
– Represent this in terms of ^me and progress (i.e. dashboards), using financial language that is readily understood or simply conveyed by you.
What can you hire CFOs to do?
• Prepare forward looking financial statements (budgets, projec^ons, etc.)
• Close the books every month and prepare historical financial statements.
• Manage billing & collec^ng.
• Manage revenue recogni^on & educate stakeholders (including you) on complexi^es.
• Reality check your expense assump^ons.
Ques^ons?
Dan Allred Silicon Valley Bank [email protected] TwiDer: @dgallred
hDp://danallred.tumblr.com