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2017
Nov 21

Financial Evolution of a Start-Up

From checking it twice to predicting your future, these are the five stages of a start-up’s finances:

Stage One: The Lone Wolf Transaction
In the beginning of the evolution of a start-up, it is likely that the founder is in a lone wolf scenario. He or she is grinding away to get the business off the ground. As a result, the owner is wearing a lot of hats, such as CEO, CTO, marketing, HR or accounting manager. You name it and the founder probably has his or her hands in it. They are living in keeping overhead low land.

  • Awesome Accounting Advice
    At this stage, all you care about is minimizing your cash burn and maximizing your product market fit. You should know how much cash you are burning each month and how many months of cash you have as a safety net. However, do not forgo getting good financial and tax advice early, or you will likely spend more time and energy fixing problems that could have easily been avoided.

Stage Two: A Periodic Checkup
Once the business starts to gain traction, getting periodic assistance from an accountant to take care of compliance issues and keep the books accurate will free up the owner’s time to work on the business and provide more accurate financial information.

  • Awesome Accounting Advice
    If you have not already done so, be sure to set up a separate checking account and credit card for all business matters. Then, make sure you solely use these accounts to pay business expenses during the year. You will thank yourself later as this makes it easier for your tax accountant to balance your books and prepare your tax return at the end of the year.

Stage Three: A Shoulder to Lean On
The third stage in the evolution of a start-up is reached when the company has the capacity to hire a consistent bookkeeper. The founder now has the ability to see timely financial data and can assess the company’s profit and loss statements each month. They can now begin to see where they are able to make improvements to their operations.

  • Awesome Accounting Advice
    Having accurate and reliable historical accounting information will help you identify the financial strengths and weaknesses of your business. To be truly helpful, this information must be kept current and timely. Best practice is to close your books every month by the 15th of the following month. This will give you timely information that you can then act on immediately.

Stage Four: The Time Traveler
The growing business can begin to look forward during this stage in the company’s evolution. This is an exciting time for the founder and this is when he or she can begin to forecast into the future.

Using historical data and a solid understanding of the company’s future prospects, the founder can now plan the optimal methods to scale the business based on predictions from their cash flow forecasts.

  • Awesome Accounting Advice
    Forecasting is more than just budgeting once a year. You should update your forward-looking forecasts during the year so that you are always reaching toward an attainable goal. Business is unpredictable, which means your budget is usually not helpful by the end of Q1. Comparing actual results to an updated forecast will give you greater insight into why you hit or missed your goals, rather than comparing backwards to a stale budget.

Stage Five: Analyze, Strategize and Scale
The founder is now beginning to use financial metrics to lead them in best business performance. Key Performance Indicators (KPIs) can be utilized to increase sales and profitability. It becomes routine to perform financial health checks to measure profitability. It is at this stage when we see the start-up evolve into something else completely—a thriving, growing and self-sustaining business.

  • Awesome Accounting Advice
    Now the fun part: Accounting is backward-looking by nature. However, with a good accounting foundation in place, you can start tracking KPIs to help indicate future financial results. Be sure to use cohort analysis whenever possible in order to isolate the main drivers behind an improving KPI.

Has your start-up reached stage four in its evolution? If so, you might be ready for a little more advice in your life. Contact us to see how we can help you evolve from making improvements to strategizing for growth.

For more information, contact Chris Arndt at chris@redgranitellc.com or call him at 312.670.6235. Visit orba.com to learn more about our Cloud Services Group.
©2017

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