Over the past decade, or more, founders have become experts at securing funding. Yet, many startups are unsuccessful. Studies show that nearly 90% of startups (even those funded to some extent in the beginning) fail. It’s a huge problem, and it opens the door to plenty of questions about what founders should be doing to see success. One of the primary questions: how much should a founder know about startup accounting?
Three Layers of Financial Understanding for Startup Accounting
While understanding each and every detail of your finances is not necessary, there are a few areas you can direct your focus to ensure your startup is successful from an accounting perspective:
- How money has come and gone
- How money will come and go
- How to use data to improve how money comes and goes
Once you understand each of these aspects, your overall view of your financial system will become much more clear, setting you up to make sound and informed business decisions backed by a strong financial foundation.
How Money Has Come and Gone
As previously mentioned, for many founders, securing funding is not the problem. They often have the funding but then fall subject to a negative or poor cash flow. To solve this problem, accurately tracking and comprehending cash flow is vital.
Proper cash flow reporting helps you understand:
- When you will reach a positive cash flow
- Your current expenses
- How much you need to bring in to cover monthly expenses
You can find the numbers behind each of these through basic reporting. You will get all of the information you need through reports like:
- Cash flow reports
- Budget and expense reports
- Closely related to budget and expense reports, budget variance can be helpful as well. It takes a closer look at your actuals compared to your budget and lets you know where you are off.
The comprehensive information you mine from each of these will give you a quick view of what is going on within your accounting.
How Money Will Come and Go
Founders have a knack for looking ahead in terms of their products/services. They can usually see where they want their business to go from a product standpoint, but tying financial performance to those aspirations adds an extra layer of difficulty. Howeveryou can analyze your target market(s) to see how they respond to new features or offerings with proper tracking.
As a founder, to help guide your new ideas forward with the help of financial performance, you should heavily rely on forecasts.
These are great tools for predicting future revenue, and the more details you include, the better. You’ll want to ensure that you accurately track your company’s performance, considering those figures will be used to create your forecasts.
Each of your forecasts should be complete with:
- Sales quotas/goals
- Marketing/ad spend
- Past performance (e.g. sales, expenses, etc.)
- Scenario planning (good economy, bad economy, neutral)
With multiple forecasts, you’ll be able to predict where your money will be coming in and going out.
How to Use Data to Improve How Money Comes and Goes
With all the tracking you’ll be doing to create forecasts, you’ll notice you are collecting plenty of data. However, it shouldn’t just be used for forecasting; it’s also beneficial for making real-time adjustments to improve your finances.
When collecting your data, take a step back and ask yourself what your marketing/sales data is telling you. Is there an area you can reduce spending? Or a sales channel that is doing well and deserves more attention?
Answering these questions will get you closer to providing your customers with your products in the best way possible.
By diving deep into your data, you’ll also be able to take a closer look at your expense reports and can ask yourself questions to improve (or justify) your spending:
- Can I bulk buy materials to reduce costs?
- Do I need to hire more employees?
- What kind of debt payoff plan can I put into place?
- Do I need another round of funding (i.e., Series A, B, etc.)?
Your data can play a massive role in driving and directing your startup. However, you need to know what data is important and how you can get the most value out of the data you are collecting.
The easiest way to do this is to work with a startup-focused accounting partner.
They can provide you with the reports and guidance you need, empowering you (the founder) to make better decisions and really drive growth.
Work with a Growth-Minded Accounting Partner
Having a successful startup goes beyond simply getting funding. It takes a basic understanding of the three layers of your finances:
- How money has come and gone, which dives into your cash flow, budget, and expenses.
- How money will come and go, which looks at your forecasts and where you see your startup heading.
- How to use data to improve how your money comes and goes, which requires an understanding of your numbers and what actions you can take to improve them.
Once you’ve gained a basic understanding of each of these layers of your business, you can take it one step further by working with a growth-minded accounting partner, like Founder’s CPA.Founder’s CPA provides all of the reporting and guidance necessary to empower founders to reach their business goals. Contact us today to learn more!