Accounting isn’t the sexiest part of running a startup. But without clear visibility into your financials you’re putting yourself and your company at risk. Paul Graham generally has excellent advice for startups, an example of which is to “not die”. As soon as the cash starts flowing (customers start paying or you start providing paychecks), you’ll have a hard time not dying if you don’t keep your eye on a few metrics.
I’ll leave more advanced matters for future posts but let’s get started with a couple of things you can’t afford not to track.
Cash flow is probably at the top of the list of failures for startups. It represents the total amount of cash that enters and exits your company. Having a clear idea of where you’ll land in the next few months helps you make better decisions across the startup, from recruitment, to contract negotiation, to when to buy the newest MacBook Airs.
I keep the following in mind when preparing a cash forecast:
The Profit & Loss statement provides an overview of revenue, costs, and expenses over a specified period of time. It is commonly used to know how profitable a business is and its ability to cut down costs.
There are many KPIs you could be looking at, depending on what you do and what you’re aiming for. That being said, there are a few important questions you should always try to answer:
Small businesses tend to overlook financial metrics, preferring to focus on activities that have the potential for generating profit. In the case of startups, it usually means working directly on the product. With that being said, a proper understanding of your cash flow and P&L is key to managing your growth and gives you key insights as to what your options are at any time.