The Financial Evolution of a Startup

From checking it twice to predicting your future, these are the five stages of a startup’s finances.

Stage One: The Lone Wolf

In the beginning of the evolution of a startup, 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: CEO, CTO, marketing, HR, 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 while 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, don’t 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 Check-Up

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

Awesome Accounting Advice:

If you haven’t already, be sure to set up a separate checking account and credit card for all business matters. Then, make sure you solely use these accounts during the year to pay business expenses. You will thank yourself later as this makes it easier for your tax accountant to balance your books and prepare your tax return at year-end.

Stage Three: A Shoulder to Lean On

The third stage in the evolution of a startup is reached when the company has the capacity to hire a consistent bookkeeper. The founder now has the ability to see timely financial data. The founder can assess the company’s Profit and Loss Statements each month and can 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 backward and forward during this stage in the company’s evolution. This is an exciting time for our founder. This is when he or she can begin to forecast into the future. Using the historical data and a solid understanding of the company’s future prospects, our founder can now plan the optimal ways to scale the business based on solid 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 than comparing backwards to a stale budget ever will.

Stage Five: Analyze, Strategize, Scale

The founder is now beginning to use financial metrics to lead them in best business performance. Key Performance Indicators (KPI’s) 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 “startup” evolve into something else completely, a thriving, growing, self-sustaining business.

Awesome Accounting Advice:

Now the fun part:  Accounting is backward-looking by nature. But with a good accounting foundation in place, you can start tracking KPI’s that are leading indicators to future financial results. Be sure to use cohort analysis whenever possible so that you can isolate the main drivers behind an improving KPI.

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

Now that we’re part of one of Chicago’s most prestigious CPA firms, Ostrow Reisin Berk & Abrams, Ltd, you’ll also find us online at www.orba.com.  With our ORBA colleagues, we’re positioned to offer you an expanded array of state-of-the-art services. 

Get the Granite Scoop

Subscribe to have all the icy cool details delivered directly to your inbox.

Read more of our blog posts…