I have written about my philosophy that “What gets measured gets done!”, financial management is a critical piece in the development of a company. Call me a bean counter but if you don’t have the discipline to manage your finances you will go broke. Believe me I know I have seen it happen right in front of, it is like watching a train wreak in slow motion. So, how does one do financial management in a startup? Brad Feld is writing a new book about it, I am eager to read it when it comes out. I am sure he and Jason are going to talk a lot about user metrics, usage metrics and financial metrics. Tracking finances in an established company is easier because there is a simple method to account for what comes in i.e. Income vs what goes out i.e. Expenses, what the company Owes i.e. Liabilities and what the company Owns i.e Assets. Of course today all companies are required to establish bank accounts which seem to do a good job of keeping track of Cash in the business and how it moves in and out of the accounts i.e. Cash Flow. I have just referred to the 3 basic statements that are used by every financial professional to check the vital statistics of a company:
If you don’t know how to read these statements it is a good life skill to learn for everyone. Analyzing these statements is another thing and there is a science and discipline behind it but it has become harder because many companies try to do shenanigans to hide what really goes on in a company, so it takes skill to see the problems, we will not go into that in this post. I think it is one of those challenges and The second challenge with Financial Statements is that they are more the end result rather than the predictor of how a company is performing. I would like to focus on why we need to look at metrics, for me metrics tell a story. Lets consider a startup, if you have a customer willing to pay you for whatever you do then you have solved one of the biggest challenges in building a company. The rest is pure and simple discipline of managing sales, marketing and making sure you have enough cash to get to sustainability. What are the metrics that measure you have a customer? I like how Sarah Prevette described this in her presentation during Startup Iceland 2012 Conference,
A Customer is someone who gives you Money! if you have 100,000 users who are on your website and they are not paying you money for it you don’t have a business you have an expensive hobby
Her talk can be found here. There are 6 things that she talked about metrics and you can live and die by these metrics:
- Committed Monthly Recurring Revenue
- Cash Flow
- Customer Pipeline
- Customer Acquisition Cost
- Customer Lifetime Value
All of these are easy to measure and it is not rocket science but harder in a startup. If you are not doing this in your startup, take a time-out and sit with your team and figure this out. It could be the difference between having a failed startup vs a on-going startup.
- How to build a business – Finance and Ratios (wouterhasekampqhuba.wordpress.com)
- Key Business Metrics and Milestones (johnrchildress.com)
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