So, you’re crazy enough to strike out on your own and pursue your dream by starting a new company. Why? Great! Here are some fundamental basics that you need to be aware of based on my experiences in helping early-stage technology companies build their systems, models and plans:
Budget: As your idea moves from concept to execution, you should map out an estimated monthly cash budget to highlight both your initial and recurring expenses (such as hardware/software, office overheard, legal fees, etc.) for the first full year. The aim is to create a realistic projection of just how much money it will take you to start and maintain the business-before you factor any (potential) revenues. While your likely to be in the red for awhile, the startup costs associated with software and web-based business are at an all time low-take advantage of it! As such, your biggest startup costs will likely be related to legal factors: make sure you’ve got your ducks in a row from the onset.
You can use simple accounting software packages such as QuickBooks Online, Freshbooks, or Outright (all of which have free versions) to track your actual expenses and compare them to your initial estimates. As you grow, pay close attention to your balance sheet and remember the basic formula: Assets = Liabilities + Shareholders’ Equity. Each of the three segments of the balance sheet will have many accounts within it that document the value of each (more on that later).
After 90 days of “real-world” experience, go back and tweak your budget. As a personal example, when I created my initial budget, I didn’t anticipate bringing on two part-time interns almost immediately. I quickly had to provide hardware and software to get them up and running, even though the cash outlays didn’t fit into my original budget. Get used to adjustments early and often. By the first 6-12 months, you should have most of the big budget surprises ironed out. Although change is consistent with growth, being budget conscious will allow you to think through and plan ahead to the greatest extent possible.
Burn Rate and Runway: “Burn rate” is simply the rate at which you are consuming more cash (spending more money) than taking in (negative cash flow). Burn rates are normal with tech startups and vary depending on the exact nature of the company. In between injections of cash into the business, burn rate becomes an important management measure since it provides a time measure to when the next injection needs to take place.
Similarly, your “runway” is the time you have left before you run out of money. Of course, the capital to start and advance your business must come from somewhere—and if your capital is nearly exhausted, you will either have to get to profitability quickly, invest additional capital or cease business altogether.
Cash flow should still be tracked once or twice per week and careful cash flow projections be revised on a regular basis. It’s commonly accepted that the CEO has one job only–not to run out of money!
All startups will also have non-financial metrics to track, particularly for your website:
Site Analytics: Startups with live sites will have simple metrics such as page views and unique visitors. Google Analytics, a free service, will tell you everything you need to know about these numbers. Other products, most of which have a free version like CrazyEgg, are fantastic at giving you behavioral information about what site visitors do on top of your Google Analytics data. Other comparable tools with free versions include:
Cost Per Acquistion: There will be costs to acquire your customer through search engine marketing, your affiliate program, display advertising, and email blasts. The rule is cost per acquisition must < life time value of your customer. The quicker that you as an entrepreneur can figure this equation out, the quicker you’ll make money. Hint: Most entrepreneurs take months to get this equation right, and you probably will too. Experiment ruthlessly!
Customer Conversion: How well you turn visitors into registered users and registered users into paid users is a sacred measurement that you should always know and always be optimizing. Web startups that bank on customers moving from a limited free version of its software to a paid subscription should be obsessed with the percentage of users that convert to the paid subscription. These conversion metrics, especially with a freemium model, will help you drive your decision-making in tweaking, changing, or flat out abandoning your revenue model or any marketing channels that are failing you.
Because the quicker you measure what isn’t working, the quicker you can focus on doing that which is working.
David L. Welliver, CPA, is President of WellAdvised, LLC. Founded in 2009, WellAdvised works with early-stage companies on developing financial systems, cashflow projections, financial reporting, and strategic business planning. He can be reached via email at David.Welliver@welladvisedllc.com