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The 3P's of Startup Financing

Here you are, happily crunching the new road of your startup. Your job is to give a bird’s-eye view of the business financial health and share that with other executives. The clearer you make this for them the sooner they understand things to need change. Because after all, we want profit numbers to become or stay green. Well, then use these 3 P’s to become a master of finance: Plan, Predict, and Prepare.

PLAN

First you need to plan your strategy. How are you going to tame this wild beast and stay on top of financing in your startup?. Create a flow where you follow the money:

Make sure you have good software that help you automate this flow. QuickBooks is a great piece of software that can help you automate the process of importing and tracking expenses, run payroll, pay taxes, and create reports.

No matter what you use, make sure it’s automated and then let it run by itself. Now you can spend your energy on these two questions: where is the money coming from? And where does it go to?

Where does money come from?

Knowing where the money comes from gives you a greater understanding of its value. Do investors fund your startup? Or doesn’t it need funding because it’s already profitable? You have to realize there’s a big difference between being funded or not because expectations differ depending on the amount of money involved. Investors always expect a higher growth rate, which makes sense because they want to see 10x, 50x, or 100x ROI (return on investment) within the next 5-10 years. The high ROI from investors may sound unnatural, but it’s not unusual in startup land.

If your startup is already profitable and doesn’t require extra funding, then you can focus more on natural growth as there is less pressure from external parties. That doesn’t mean you don’t have to grow fast, though. Anyhow, both can either lead to success or destruction. That brings us to our next question.

Where does the money go to?

Now here is when things get tricky. Let’s say there is capital available for either sales or funding. If the expenses are higher than the MRR (monthly recurring revenue), then clean up your desk and pack your backpack because your startup will die soon. If the burn rate of your venture capital is too high, then leave that bag and start running because the ‘angry investors apocalypse’ is about to happen. We need to have a deep understanding of where the money io. Make sure it’s well spent and then follow it carefully.

For most startups the monthly expenses looks a bit like this, from high to low:

  • Wages
  • Legal
  • Employee benefits
  • Taxes
  • Dues & Subscriptions
  • Rent or Lease
  • Office expenses
  • Other expenses

The order of these expenses depend on the stage your startup is in. Especially in the first period legal expenses can go sky-high so always ask for an estimation beforehand. The ‘other expenses’ item could be travel, insurance, meal and entertainment, or bank charges.

PREDICT

Instead of running behind the facts and panicking when expenses suddenly go up, try learning how to code so that you can create a more realistic forecast or budget. Even though software like QuickBooks allows you to crunch balance sheets and ledgers, it does not focus too much on that. If you are serious about analysing financial health, then you should consider using analysis software like Fathom or Microsoft’s Power BI. These two are crazy powerful, and they can import and automatically sync all your financial data from QuickBook, Excel, and more. Fathom allows you to set financial KPI’s (Key Performance Indicators) to show your financial health. You can then compare the KPI’s with targets set in your budget.

If you want a tool that gives you a beautiful visualization of your finances, then Power BI is your friend. It shows you an elegant dashboard filled with useful metrics and allows you to connect non-financial apps as well. All your data in one place.

PREPARE

Finally! You’re a financial mastermind now. You’ve planned your flow, predicted the future, and now you are crossing your fingers hoping things will go as planned. However, you always need to be prepared for unexpected events. Or as they say: hope for the best, prepare for the worst. A good way to do this is to do such activities part of your budget. You could make specific budgets larger or create dedicated resources for the unexpected. In either case tight is not right.

Always stay flexible in case of drastic changes, keep your eyes open for new products or services that help improve your workflow, and last but not least don’t get too comfortable! 💸

I'm based in Sweden and a Business Operations Lead at Mapillary. I've been working remotely since 2010 with great companies like Buffer, Automattic, and Lookback.

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