Podcast Summary
Managing Finances in Uncertain Times: A Roundtable Discussion: Understand and control your burn rate to extend your runway. Prioritize financial management and hygiene for long-term success.
Effective financial management is crucial for startups, especially during times of uncertainty. Ben Sidel, CEO of Neighborly, shared his experience of managing burn rate during the pandemic and how it saved his company. He emphasized the importance of understanding and controlling your burn rate to extend your runway. Little Rob, founder and CEO of Zendu, discussed the importance of maintaining the financial health of your company and encouraged founders to take an active role in managing their finances. The roundtable discussion emphasized that managing financials is as important as managing other aspects of a business and it's the founder's responsibility. So, startups should prioritize financial management and hygiene to ensure long-term success.
Determining the Right Burn Rate for Your Startup: Plan for about 24 months with a buffer for fundraising, or use a burn multiple framework to understand net burn and net new ARR for software-based startups.
There isn't a definitive answer to what the right burn rate is for a company, as it depends on various factors such as growth needs, the attractiveness of the investment opportunity, the type of business being built, and the durability of investments. Understanding the cost profile and the nature of expenditures is crucial in determining the appropriate burn rate. A good rule of thumb is to plan for about 24 months with a four to six month buffer for fundraising. However, this is just a guideline and should be adjusted based on the specific circumstances of the company. For a more quantitative approach, consider using a burn multiple framework, which divides net burn by net new ARR. This framework, as proposed by investor David Sachs, can provide a clearer understanding of what to expect for software-based startups. Ultimately, it's essential to consider all these factors and make informed decisions based on the unique situation of your business.
Managing Burn Rate for Software-to-Service Startups: Set growth goals, determine costs, maintain a rainy day fund, and regularly review finances to manage burn rate effectively. Upgrade to comprehensive systems like NetSuite for improved control over finances, HR, inventory, and productivity.
Understanding and managing your burn rate is crucial for the success of your software-to-service startup. A healthy burn rate is around 1-3 times your monthly burn multiple. Outdated software can hinder your business growth, so consider upgrading to a comprehensive system like NetSuite for improved productivity and control over finances, HR, inventory, and more. As a founder or CEO, it's essential to be engaged and proactive in managing your finances. Set growth goals, determine the cost to achieve them, and maintain a rainy day fund for unexpected expenses. Regularly review your financial situation and adjust accordingly. Remember, your cash balances are all part of the same pot, but having a separate savings account can help manage your cash more effectively.
Managing and Understanding Your Company's Burn Rate: CEOs and startup founders should engage in monthly reconciliation, review statements, and use fintech tools to manage and understand their company's burn rate, enabling quick adjustments to changing financial needs.
For startup founders and CEOs, actively managing and understanding your company's burn rate is crucial for the financial health and growth of your business. This involves being engaged in the monthly reconciliation and bookkeeping processes, reviewing bank and credit card statements, and utilizing fintech tools to help control team spending and gain higher visibility into company spending. Quickly adjusting to changes in your business is essential, as your company's financial needs can shift rapidly. When facing financial challenges, it's important to triage expenses and eliminate non-essential items immediately. These actions can help save your business during difficult times and set it up for success in the long run.
Prioritizing Expenses and Communicating with Creditors During Financial Challenges: During economic downturns, prioritize expenses, negotiate with creditors for relief, scrutinize every dollar spent, and implement a frugal culture for cost savings and growth opportunities.
During economic downturns or when facing financial challenges, it's crucial for businesses to prioritize their expenses and focus on their must-haves. Agreeing on these priorities with the team and negotiating with creditors can lead to significant cost savings. Transparency and proactive communication with creditors can result in relief and flexibility during difficult financial times. Additionally, scrutinizing every dollar spent and comparing the leaner business to the prior version can lead to increased profitability and creativity. Burn rate is a critical factor to pay close attention to, as funding disappears faster than expected. Implementing a frugal culture in the company, from the top down, can help turn the business around and create opportunities for growth.
Focus on building the best business with current funds as if they're the last: CEO Ben Fischman and Lil Roberts stressed the importance of financial self-reliance and effective management for startups, including choosing the right entity structure and maintaining financial health
Startups should not rely on the assumption that their current investors or future investments will always be available to them. Ben Fischman, the CEO of DTC Decoded, emphasized the importance of treating the current funds as the last funds, focusing on building the best business with the resources at hand. Lil Roberts, the CEO of Zendu, added to this by discussing the importance of financial health while scaling a startup. She outlined six steps to healthy financials, starting with the right structure, which includes choosing the appropriate entity type for legal protection. Both speakers emphasized the importance of self-reliance and effective financial management in the unpredictable world of startups.
Choosing the right tax structure and business model for your startup: Properly accounting for business models and tax structures is crucial for maximizing savings and avoiding unnecessary costs. LLCs with S-corp or C-corp taxation, SaaS companies using accrual method, physical product businesses managing inventory, and marketplaces recognizing revenue as commission or rake all require careful consideration.
Choosing the wrong tax structure and business model for your startup can lead to significant financial losses. When starting out, an LLC with taxed as an S-corp or C-corp may be suitable for tax savings and legal protection, but institutional investors may require a C-corp structure for added legal protections and investor rights. Regarding business models, SaaS companies should recognize deferred revenue using the accrual method, while physical product businesses must account for inventory as an asset and potential taxation. Marketplaces require recognizing revenue as a commission or rake, and understanding the role of the platform in the transaction. Proper accounting for these business models and tax structures is crucial for maximizing savings and avoiding unnecessary costs.
Effective financial management for e-commerce businesses: Understand unique challenges, choose appropriate accounting methods, and stay involved in finances to save money and navigate complexities for e-commerce businesses.
Accurately representing your business revenue and expenses is crucial for effective financial management. This is particularly important for e-commerce businesses, which have unique challenges such as cash flow issues due to large upfront costs and sales tax collection responsibilities. Additionally, e-commerce startups may need to invest in additional tech stack expenses for detailed visibility and compliance. When it comes to accounting methods, understanding the complexities of your business model and timing of revenue recognition can help determine whether accrual or modified accrual accounting is the best fit. Founders are encouraged to stay involved in their finances to save money and navigate these complexities.
Understanding Cash vs Accrual Accounting and Intellectual Property Protection: Accrual accounting offers a more accurate financial representation but requires more resources, while cash accounting records transactions when cash is exchanged. Protect intellectual property through trademark registration using tools like Brainbase File, and regularly review monthly financials for informed decision making and business performance tracking.
Understanding the difference between cash and accrual accounting is crucial for any business, and the choice between the two depends on the size and complexity of the business. Cash accounting records financial transactions when cash is exchanged, while accrual accounting records transactions when they occur, regardless of cash flow. Accrual accounting provides a more accurate representation of a business's financial position, but it requires more time and resources. Businesses with larger revenues and more complex operations may be required by law to use accrual accounting. Another important takeaway is the need to protect intellectual property through trademark registration. Tools like Brainbase File offer a simple and cost-effective solution for individuals and businesses to file trademarks and secure their IP. Lastly, it's essential for entrepreneurs and business owners to have a clear understanding of their monthly financials to make informed decisions and keep track of their business's performance. Monthly financials provide a snapshot of a business's financial situation, allowing for better financial planning and forecasting.
Monitoring Monthly Financials for Business Success: Regularly review monthly financial statements for insights, plan for future expenses and revenue with budgeting and forecasting, save time and resources by outsourcing financial management, streamline processes with cloud-based tools, and invest in a strong financial team for efficiency and accuracy.
Monitoring your monthly financials is crucial for the success and growth of your business. Monthly financial statements, including profit and loss, balance sheet, and cash flow reports, provide valuable insights into your business's financial health and profitability. These reports help you understand your revenue and expenses, identify trends, and make informed decisions about adjusting your business strategy. Budgeting and forecasting are also essential components of financial management. Budgets help you plan for future expenses and revenue, while forecasting allows you to make educated assumptions about future performance based on historical data. Outsourcing your bookkeeping, payroll, and financial management to experts can save you time and resources, allowing you to focus on growing your business. Using cloud-based tools and services can help streamline your financial processes and provide real-time access to your financial data. Investing in a strong financial team, including a bookkeeper, payroll provider, CPA, and CFO, can help ensure that your financial processes are efficient, accurate, and compliant with regulations. Regularly reviewing your financial statements and working with your financial team can help you stay on track, make informed decisions, and ultimately, achieve your business goals.
The Importance of a Strong Financial Team During Uncertain Times: Having a CPA for tax planning, compliance, and reporting, and a CFO for budgeting, forecasting, and optimizing financial performance, is crucial for businesses, especially during uncertain times.
Having a strong financial team, specifically a CPA and a CFO, is essential for any business, especially during uncertain times. A CPA focuses on tax planning, compliance, and reporting, ensuring business operations align with IRS regulations and investor expectations. They help navigate complex tax requirements and state filings. In contrast, a CFO looks forward, focusing on budgeting, forecasting, and adjusting expenses to optimize financial performance. Bringing in a CFO during a significant funding round can help tighten expenses and prepare for future reporting. Through the pandemic, maintaining control of financials and understanding their patterns was crucial for business survival and growth.
Navigating Financial Difficulties in Commercial Real Estate: Stay involved in financial details, believe in industry's potential shift, and be willing to make tough decisions for business success
Even during the most challenging times, maintaining a clear vision and personal commitment can help businesses not only survive but thrive. The speaker shared his experience of navigating through financial difficulties and the closure of similar businesses in the commercial real estate industry during the pandemic. He emphasized the importance of staying involved in the financial details and being intimately familiar with the business's expenses. Despite the setbacks, he believed in the potential of the industry's shift towards flexibility and tech-enabled experiences, which kept him committed to the business. The pandemic acted as a "slingshot," setting businesses back but ultimately leading to massive gains as demand for flexible commercial spaces increased. Founders should be willing to get divorced from their comfort zones and make tough decisions to ensure their companies' success.
Ensuring a 2-year runway for startups during fundraising: Aim for a 24-month runway, consider a line of credit, avoid expensive revenue-based loans, and seek affordable financing options to boost chances of success during fundraising
Startups should aim for having a runway of at least 24 months to ensure survival, especially when seeking a series A raise. Having a line of credit in place can strengthen a company's position during fundraising. However, be cautious of expensive revenue-based loans, which can carry high interest rates and potentially hinder a startup's growth. The old factoring model for businesses should be avoided due to its high costs. Startups should focus on finding more affordable financing options to sustain their operations and maximize their chances of success.
