Dominate these fundamental concepts of startup finance Accrual vs cash basisĪccrual basis or accrual accounting is when you record your income when you earn it, and an expense when you incur it. Some concepts that we see inside the balance sheet and that we'll talk about below are cash position, total debt, and operating working capital. Now, you can use the balance sheet to go one step further and assess the health of your business. Then, you used the cash flow statement to assess you runway. You used the income statement to assess profitability. Which means: Total assets = total liabilities + total equity Stuff you have to pay, and what's left for the shareholders. On your right, you have both your liabilities and your equity. ![]() On your left, you have your assets, also known as the stuff that you own. The balance sheet is the statement that people know the most. While yeah, life is good, you also start to wonder: could your startup be using that excess money to grow at a faster rate and invest in initiatives that could bear fruits in the long-term? 3. ![]() But what if my business is actually cash flow positive? Well, you have a double-edged sword in your hands. You might be wondering: we're talking about runway considering my startup's burn rate. If your startup just got a US$ 1 million Pre Seed round, but also burns US$ 100k every month, you only have 10 months left if you don't change your cash burn.Ī final observation here. Take how much cash you have and divide it by your current or projected burn. (If you haven't noticed yet, that's very important. Now you can use your cash flow statement to check your startup's runway, or how many months do you have left considering how much you're burning per month. You used the income statement to check your startup's profitability. Your cash flow can be positive or negative. That's basically the variation in the amount of money in your bank account: how much you've earned or burned at the end of the period analyzed in the statement, such as a month or a quarter. The net income must go through some adjustments, such as capex (money spent on things like equipment and properties) and debt repayment, to get to the last line of the statement: free cash flow. Cash flow statementĪ cash flow statement starts where the income statement ends: at the net income of your company. Use the income statement to review financial indicators such as contribution margin of your company – we'll talk more about it in a minute. The important thing to know about an income statement is that you use it when you need to analyze the profitability of your startup. At the end of the statement, you reach the net income (also known as net earnings or net profit/loss). Each line you go down in the income statement, more expenses are taken from your sales. The income statement starts with how much money you made from sales (also known as gross revenues). First, understand the big three financial statements 1. Here are the basics of finance needed to build a strong defense – and win the match. At the first Latitud Nights, I walked founders through what they need to know to not kill their startups. We don't want your startup to face that same risk either right now, or when it becomes a unicorn. When they grow and even become unicorns, the lack of foundation becomes more visible, and the risk of the whole building falling apart only increases. I found out that a lot of startups don't consider basic finances from the start. The finance team is the necessary foundation so that the stars can shine and the whole team is able to achieve victory. Whenever you think they're overreacting, remember: you can't win a game if you suffer too many goals. You know, the defenders who are always trying to control the game. The marketing, sales, and product teams are the stars, the ones who score goal after goal. Have cash predictability by applying fourpractices to keep your finances in order when scaling your startup.Ī startup is like a soccer team. ![]() Dominate financial concepts such as accrual vs cash basis, contributing margin, LTV, CAC, working capital, and burn multiple 3. Understand the big three financial statements: income statement, cash flow statement, and balance sheet 2. TL DR: Felipe Mansano, from EquitasVC, shared the minimum that you should know to be able to focus on growing your business, while not letting finance be a problem now and in the future: 1.
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