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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 Essentials for Founders
Let’s do a quick crash course on startup accounting.
Accounting (and bookkeeping) are the pillars of financial success for any company. But what exactly do they mean, in simple terms?
What is accounting?
Accounting is about keeping track of every penny that comes in and out of your business.
That means:
- Recording every financial transaction
- Understanding what each of these numbers mean
- Putting the numbers into reports that show the financial health of your company.
What is bookkeeping?
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.
Why is accounting important for your startup?
- IRS Compliance: Rigorous accounting ensures that all financial records are accurate and compliant with tax laws. This is crucial for accurate tax filings, avoiding penalties, and facilitating smooth audits by the IRS.
- Fundraising: Investors will expect a detailed and real-time insight into your financial records and statements.
- Financial Health: A great accounting software gives you a real-time insight into your startup's financial status. This will allow you to accurately track your cash flow, manage expenses, burn rate, runway and identify trends.
- Foundation for Business Metrics: Accounting provides the necessary data to calculate key business metrics and financial ratios. You'll need these numbers to assess your startup’s performance, strategic direction and set growth targets.
- Investor updates: Regular financial reporting builds a strong relationship with your investors, giving them an insight into the health and progress of your company.
When should I set up accounting for my startup?
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.
Essential First Steps
- Open a Business Bank Account: Separate your personal and business finances. You need this clarity for managing your burn rate and simplifying tax preparations.
- Select the Right Tools: Choose an accounting software that doesn't just fit your current needs but has room to grow with you.
- Automate Receipt Capture: Do your team a favor and implement a tool that automates receipt management. Every expense over $75 needs to have a receipt automatically sent to your accounting software. Once tax season or an audit comes around, you'll want every receipt accounted for.
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.
Key Accounting Terms Founders Should Know
- General Ledger: Where all transactions, both incoming and outgoing, are logged.
- Income Statement: Shows earnings, costs, and net profit over time.
- Balance Sheet: Displays a company's assets, debts, and owner's equity at a specific date.
- Cash Flow Statement: Tracks cash movements from operations, investments, and financing, highlighting liquidity.
Metrics to track as your company grows
If you plan to grow fast, you’ll need to master your startup’s accounting early to avoid scaling issues.
Here are the key financial metrics you should be paying attention to:
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.
Top 10 things to know about your company’s finances
- Cash Flow Management
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.
- Accurate Expense Tracking
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.
- Do I need a bookkeeper/ CPA?
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.
- Cash vs Accrual Accounting
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.
- Tax Obligations
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.
- Equity and Cap Table Management
Keep accurate records of all equity issued, including founder shares, employee stock
options, and any equity granted to advisors or consultants.
- Financial Forecasting and Budgeting
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:
- Revenue: Setting realistic goals and planning for growth. Be optimistic but reasonably so.
- Expenses: Predicting future costs, both fixed and variable, for maintaining profitability or appropriate runway.
- Headcount: Anticipate staffing needs before they arise. Plan for recruitment and training costs, along with dynamic elements like salary adjustments.
- Investor Reporting
Establish a routine and transparent reporting system for investors and any other stakeholders you want to include.
- Financial Compliance and Regulatory Requirements
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.
- Risk Management and Mitigation
Regular risk assessments can help your company anticipate and respond to changes in the market or regulatory environment. Identify the risks specific to your venture; are we talking market volatility? Credit risks? Operational snafus?
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.
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