We know you’re a genius. You’re building a phenomenal company, one that may change the world, but you never took or don’t remember what you learned in that Accounting Class. Often entrepreneurs drown in paperwork and receipts as they try to flush our their business plan. It’s important to keep your books straight from the beginning and keep track of the most important thing: the money. In this hands on workshop, we will take you back to basics, covering the fundamental metrics and financial accounting principles that will make or break your startup. Expert: Dan Allred – Silicon Valley Bank www.thecapitalnetwork.org

1. Know
Your
Numbers
The
Capital
Network
12/5/13
Dan
Allred
Silicon
Valley
Bank
dallred@svb.com
TwiDer:
@dgallred
hDp://danallred.tumblr.com

2. Financial
maDers
are
oIen
confusing.

3. It
is
a
lot
like
learning
a
language.

4. You
need
to
learn
key
phrases
yourself...

5. …and
can
rely
on
translators
for
the
rest.

6. Today
we
will
cover:
• Key
financial
metrics
• Financial
statements
• When
&
how
to
leverage
CFOs
&
others

7. Key
metric:
bookings
• The
financial
value
of
business
that
you
have
under
contract
–
i.e.
“we
booked
a
deal
with
Amazon
for
$240k
over
the
next
2
years.”
• Not
a
financial
statement
item,
but
oIen
a
key
“dashboard”
item.
• Total
Contract
Value
(TCV)
vs.
Annual
Contract
Value
(ACV).

8. Key
metric:
revenue
• The
accoun^ng
value
of
a
sale
during
a
specific
^me
period.
• You
will
hear
accountants
say
“rev
rec”,
“recognized
revenue”,
“scored
revenue”,
etc.
• A
sale
typically
becomes
revenue
when
the
product
has
been
delivered
and
payment
terms
are
defined
and
agreed
to.
• Example
from
prior
slide.

9. Key
metric:
COGS
• COGS
=
cost
of
good
sold.
• The
costs
to
produce
the
goods
being
sold
(i.e.
direct
product
costs,
hos^ng,
etc.)
and
to
execute
on
the
sale
(commissions,
revenue
share,
etc.).

10. Key
metric:
gross
margin
• Revenue
minus
COGS
=
Gross
Profit
(a
hard
dollar
number)
• Gross
Profit
divided
by
Revenue
=
Gross
Margin
(a
percentage)

11. Key
metric:
expenses
• Costs
to
run
your
business
– Sales
&
Marke^ng
expenses
– Research
&
Development
expenses
– General
&
Administra^ve
expenses

12. Key
metric:
bo5om
line
• Revenue
minus
COGS
minus
expenses.
– Net
Profit
(or
Net
Loss)
includes
interest,
taxes,
deprecia^on
and
amor^za^on
expenses
(most
of
you
do
not
need
to
worry
about
this
for
now)
– EBITDA
=
Earnings
Before
Interest,
Taxes,
Deprecia^on
&
Amor^za^on
(i.e.
all
the
stuff
you
don’t
need
to
worry
much
about
at
your
stage).

13. Key
metric:
sources
&
uses
of
cash
• Sources:
– Trade
Receivables
(A/R)
– Deferred
Revenue
(D/R)
– Debt
– Equity
• Uses:
– Trade
Payables
(A/P)
– Salaries/Wages
Payable
– Debt

14. Key
metric:
runway
• Cash
divided
by
cash
burn.
• Cash
burn
does
not
necessarily
equal
EBITDA
–
depends
on
^ming
of
cash
receipts
vs.
bookings
vs.
revenue.

15. Key
metric:
milestones
• Events
that
drive
value
in
the
company:
– Commercial
milestones:
distribu^on
agreements,
customers,
bookings,
revenue,
etc.
– Market
milestones:
users,
working
business
model,
etc.
– Technical
milestones:
proof
of
concept,
working
prototype,
etc.

16. Dashboards
• Typically
one
page
used
to
communicate
progress
to
key
stakeholders
(investors,
employees,
etc.)
• Time
based
representa^on
of
how
company
is
tracking
against
key
financial
goals
(and
perhaps
other
^me
bound
goals
as
well).
• Not
a
financial
statement
(i.e.
not
an
income
statement,
“P&L”
or
balance
sheet).

17. Dashboard
exercise
• Ques^ons
to
ask
yourself:
– What
drives
value
in
the
business
(bookings,
gross
margin,
technical
progress,
distribu^on
deals)?
–
What
resources
do
you
need
to
drive
this
value
(people,
^me,
money,
etc.)?
• Your
dashboard
will:
– Track
the
value
you
are
building
in
the
business.
– Track
the
resources
you
are
consuming
as
you
build
value.

18. Financial
Statements
• Income
Statement
– A
movie.
– Tells
the
financial
story
of
a
company
over
a
span
of
8me.
• Balance
Sheet
– A
picture.
– Indicates
the
financial
health
of
a
company
at
a
point
in
8me.

19. Income
Statement
• Over
a
period
of
^me:
– Revenue
(“top
line”)
– Minus
COGS
– Equals
Gross
Profit
– Minus
Expenses
– Equals
EBITDA
(“boDom
line”)

20. Balance
Sheet
• Assets
• Liabili^es
– Cash
– Receivables
– Inventory
– Fixed
Assets
– Goodwill
&
Intangible
Assets
– Salaries,
wages
– Payables
– Deferred
Revenue
– Debt
• Equity
– Paid-­‐in
Capital
– Retained
Earnings
(Loss)
Assets
=
Liabili^es
plus
Equity

21. What
do
founders
need
to
do?
• As
much
as
you
are
comfortable
doing…
• At
a
minimum:
– Ar^culate
how
value
is
built
in
your
business
in
financial
terms.
– Speak
to
financial
resources
required
to
build
value
in
your
business.
– Represent
this
in
terms
of
^me
and
progress
(i.e.
dashboards),
using
financial
language
that
is
readily
understood
or
simply
conveyed
by
you.

22. What
can
you
hire
CFOs
to
do?
• Prepare
forward
looking
financial
statements
(budgets,
projec^ons,
etc.)
• Close
the
books
every
month
and
prepare
historical
financial
statements.
• Manage
billing
&
collec^ng.
• Manage
revenue
recogni^on
&
educate
stakeholders
(including
you)
on
complexi^es.
• Reality
check
your
expense
assump^ons.

23. Ques^ons?
Dan
Allred
Silicon
Valley
Bank
dallred@svb.com
TwiDer:
@dgallred
hDp://danallred.tumblr.com