.png)
How to get your startup finances in order
Sasha Orloff
The founder's journey is hard.
I'm Sasha, the CEO of Puzzle. I scaled my last company to $100M+ ARR and raised about $1B of capital. I’ve made just about every mistake you can think of as a founder.
When I started fundraising for my first company, I was unprepared. After YC Demo Day, potential investors immediately started asking about our financials (cash, burn, runway, ARR, spend, etc.).
Investors I took calls with told me they looked for founders who were fluent in their metrics. I got our ship in order, and they were right – my talks with investors changed overnight.
That’s why I decided to build Puzzle as my next company. It gives founders real-time insights into their net cash, burn, runway, MRR, and ARR. It’s the single greatest way that I can help other founders.
With the right tools, it is easier than ever to master your company’s finances. I recommend saving this guide so that you can reference it when questions arise.
Accounting (and bookkeeping) are the pillars of financial success for any company. But what exactly do they mean, in simple terms?
Bookkeeping, a subset of accounting, involves the daily recording of transactions, ensuring accurate and complete financial records. At its core, bookkeeping tracks the money flowing in and out of your business, covering everything from sales and purchases to expenses and income.
Accurate bookkeeping is indispensable when it comes to preparing financial statements, such as balance sheets, income statements, and cash flow statements, which collectively give insights into your company's performance and liquidity. Bookkeeping also ensures compliance with tax laws by accurately documenting all transactions - something you'll be grateful for once tax season comes around.
If that sounds monotonous, don’t worry. Software tools can do most, if not all of the work for you.
Your company needs a robust accounting system from day one in order to succeed. Trying to make sense of disorganized records later on is not an efficient use of time for founders.
By treating accounting as a fundamental part of your startup from its inception, you establish a strong foundation for transparency, compliance, and strategic decision-making.
Key advantages of prioritizing accounting practices:
Regulatory Compliance and Tax Readiness: By staying ahead, you avoid the potential headaches of fines, audits, and the stress associated with these challenges.
Fundraising Preparation: Your financials act as your startup's resume. Clean, transparent books can make or break investor confidence and significantly influence the success of your funding efforts. It's all about turning potential scrutiny into solid investor trust.
Strategic Cash Flow Management: Accounting helps maintain a clear understanding of your startup's financial health at all times. You need these insights to navigate cash flow, make smart hiring decisions, and really understand what's making you money. It's about keeping your finger on the pulse, always.
From one founder to another, I know how vital it is to operate efficiently from the get-go. Kicking off your startup journey with accounting isn't just about keeping your books in order; it's about adopting a mindset that's geared towards sustainable growth.
If you plan to grow fast, you’ll need to master your startup’s accounting early to avoid scaling issues.
Cash Balance
This is the total amount of cash or cash equivalents that your company holds at any given time. It's a snapshot of your financial liquidity, offering a clear picture of what resources are immediately available to cover expenses and keep your company’s lights on.
Burn Rate
Your Burn Rate is the pace at which your startup consumes its cash reserves before generating positive cash flow from operations. It's a measure of sustainability, or for some, a countdown clock to zero. It's typically calculated on a monthly basis and is crucial for understanding how fast your startup is spending its capital.
Runway
Runway is a projection of how long your startup can operate until it runs out of cash, assuming current income and expenses remain constant. It’s your timeline to make your vision happen. Calculating your runway helps you plan for future funding rounds, adjust spending, and strategize for growth to avoid running out of cash. The longer your runway, the more time you have to make your startup profitable or secure additional funding.
Growth
Metrics such as revenue growth rate, customer acquisition growth, and market share expansion are the most important indicators of your startup's scalability and market acceptance. They’ll help you determine the effectiveness of any growth strategy and the potential for long-term sustainability.
Retention
Customer retention rate measures the percentage of customers who remain engaged with a startup's product or services over time. You're aiming for high retention rates - a clear sign that indicates customer satisfaction and loyalty.
Engagement
Engagement metrics provide insights into how actively customers interact with a startup's products or services. This is especially important for SaaS companies that offer free trials - having high engagement means the users will be more likely to sign up for a paid version of the service. Companies usually track daily active users (DAUs), monthly active users (MAUs), and session duration to better understand user behavior, preferences, and product value.
Sales Efficiency / Unit Economics
These metrics evaluate the cost-effectiveness of acquiring customers and the profitability of individual units sold. Customer Acquisition Cost (CAC) and Lifetime Value (LTV) ratio will give you insights into the balance between spending on customer acquisition and the revenue generated from each customer. This will help you budget for marketing and sales strategies.
Margins
Profit margins, including gross margin, operating margin, and net margin will help you understand the profitability of your startup.These metrics show how efficiently your company manages costs relative to your revenue.
Capital Efficiency
In simple terms, how much of your financial capital are you using to generate revenue? A high capital efficiency ratio suggests that the company is growing without needing proportional increases in capital investment, making your business model more sustainable.
Understand your burn rate (how fast you’re spending money) and runway (how long your current funding will last). Monitor cash flow closely to spot negative trends early. Make sure you can cover operational costs and are prepared for future funding rounds.
This is crucial for budgeting, financial planning, and tax purposes. Make sure you have access to your real-time data and you're not viewing your financial numbers from the previous month.
After setting up your accounting software, you may choose to hire a bookkeeper - they
will keep your accounting system up-to-date and make sure your financials are accurate.
Another role to consider hiring is a tax advisor, typically a Certified Public Accountant (CPA). They need to have experience in your specific industry to help you navigate the complexities of your unique financial landscape.
Ideally, the tools you use for accounting allow you to pull these people in as needed without having to actually hire one. Look for hybrid solutions like this that allow for flexibility.
These two methods help you track and manage financial transactions. Cash accounting is straightforward; it records transactions only when cash actually changes hands. This gives you a very clear view of your cash flow. In contrast, accrual accounting takes a more comprehensive approach and records earnings and expenses when they occur, not just when money changes hands.
Early-stage startups often benefit from various tax credits and incentives, research what is available to you.
Tip: check out these 2024 tax deadlines for startups.
Keep accurate records of all equity issued, including founder shares, employee stock
options, and any equity granted to advisors or consultants.
Develop and regularly update comprehensive financial forecasts and budgets across all your departments. Run a tight ship! Current and future investors will love it.
Forecasting serves as a roadmap for your businesses. It helps with financial planning
and management, data-driven strategic business decisions, and mitigating potential
risks. Puzzle is powering multiple great FP&A tools like Runway, Causal, Meow, and many others.
What to forecast:
Establish a routine and transparent reporting system for investors and any other stakeholders you want to include.
Your company will have to follow all industry standards, local, state, and federal laws concerning your business finances. This includes understanding regulations related to financial reporting, employee wages, and data security.
Develop a comprehensive risk management strategy that assesses the impact of these risks, and outlines steps to mitigate them. This might involve diversifying revenue streams, implementing strong internal controls, and having good insurance coverage.
Remember, the goal isn’t to avoid all risks—that’s impossible. The goal is to navigate them in a way that keeps you moving toward long-term success and sustainability.
Managing your company's finances is an ongoing journey that includes every aspect of your startup's growth and sustainability. Understanding and leveraging your financial metrics isn't just about survival; it's about setting the stage for growth and opportunity.
