Financials

Money is the blood of your business.

Tips / Organize yourself around:

• Carefully track all spending
• Set up regular reports - You should be using some kind of accounting software to keep your finances in check, so ensure that you’re getting regular reports on your cash flow situation. If you have someone in charge of finances, they can produce them, or you can task another employee with learning the ropes. With at-a-glance confirmation of where you stand, you’ll have an easier time determining what (if anything) needs to change.
• Build a culture of frugality - Wasteful spending is a huge problem for growing businesses, particularly when employees have spending power without knowing the necessary context of the company’s broader financial situation. Train your staff to keep business costs down — find freeware alternatives to expensive software tools, stop ordering unnecessary office products, negotiate stronger deals, etc.

General Guides

Predictability

Predictability is important for a startup from a financial point-of-view because it allows the company to plan and budget for future expenses and revenue. Without predictability, it can be difficult for a startup to secure funding from investors or lenders, as they will be less likely to invest in a company that cannot demonstrate a clear path to profitability. Additionally, predictable revenue streams can help a startup to better manage cash flow and avoid financial instability. In short, predictability is important for a startup to be able to plan for the future, secure funding, and maintain financial stability.

Basic Concepts

Fixed vs. Variable Costs

In a traditional view:

Fixed costs are expenses that do not change regardless of the level of production or sales. Examples include rent for a factory or office, salaries for management and administrative staff, and insurance. Variable costs, on the other hand, are expenses that vary directly with the level of production or sales. Examples include the cost of raw materials, wages for production workers, and packaging materials.

In the context of SaaS Companies:

SaaS (Software as a Service) companies typically have a different cost structure than traditional manufacturing or retail companies, but the concepts of fixed and variable costs still apply.

For SaaS companies, fixed costs may include expenses such as rent for office space, salaries for management and administrative staff, and cloud hosting fees. Variable costs may include the cost of acquiring new customers through advertising or sales commissions, and the cost of providing support to existing customers.

For example, a SaaS company may have a fixed cost of the salary of its CEO, while the variable cost would be the cost of acquiring new customers through advertising campaigns.

Additionally, SaaS companies typically have a recurring revenue model, where customers pay a monthly or annual subscription fee. In this case, the variable costs would also include the cost of developing and maintaining the software, and any costs associated with scaling the service to accommodate more customers.

OPEX and CAPEX

In a traditional view:

OPEX (operating expenses) and CAPEX (capital expenditures) are two different types of expenses that a company incurs. OPEX refers to the ongoing costs of running a business, such as salaries, utilities, and rent. CAPEX, on the other hand, refers to the one-time costs of acquiring or upgrading physical assets, such as buildings, equipment, or land. These investments are made to generate revenue in the future. In short, OPEX is the cost of running a business and CAPEX is the cost of growing a business.

In the context of Startups:

In the case of startups, OPEX and CAPEX can play important roles in the company’s growth and development.

OPEX for startups is typically focused on keeping the business running on a day-to-day basis. This includes expenses such as rent, salaries, marketing, and other operational expenses. These costs must be managed effectively in order for the startup to remain viable and achieve profitability.

CAPEX, on the other hand, is often focused on investments that will drive future growth. For example, a startup may choose to invest in new equipment or technology in order to increase production capacity or improve product quality. Additionally, startups may invest in property or equipment in order to expand their operations. These investments are typically made with the expectation that they will generate future revenue and help the company grow.

In summary, startups must balance the need to manage OPEX and invest in CAPEX in order to achieve growth and profitability. Startups typically have limited resources and need to manage these expenses carefully to ensure that they are able to survive and grow in the long run.

Account Plan

An account plan is a financial management tool used to organize and track a company’s financial performance. It typically includes a detailed breakdown of income and expenses, as well as projections for future financial performance. The plan may also include information on budgeting, cash flow management, and risk management. The purpose of an account plan is to help a company make informed financial decisions and achieve its financial goals.

Financial Statements

Unit Economics

Unit Economics is the attempt to simplify a business economics by focusing in calculating the profits of selling one unit. So every cost the company has needs to be simplified to a per unit basis (infrastructure, customer service, and so on).

Example of Unit Economics:

• User (most common in SaaS Apps)
• Product (most common in e-commerce)
• Taxi Ride (Uber, Lyft)
• Delivery (Uber Eats)

Customer Acquisition Cost

Customer Acquisition Cost (CAC) is how much you need to invest in marketing to acquire a new customer.

$$ CAC = Marketing Costs / Acquired Customers $$

• Marketing Costs: Every marketing expenditure related to acquiring customers (expenditure for Retention does not apply)
• Acquired Customers: Number of Acquired Customers in the same period as the expenditures

Lifetime Value

Customer Lifetime Value (CLV) or simply Lifetime Value (LTV) is the total revenue the company gets from a customer over the whole period of their relationship.

$$ CV = Avg Purchase Value * Avg Number Purchases $$ $$ CLV = CV * Avg Customer Lifespan $$

• CV = Customer Value

In a SaaS Subscription based business it is simpler

$$ CLV = Avg Subscription Value * Avg Customer Lifespan $$

• Average Customer Lifespan = Average Number of Months before Churn
• Avg Customer Lifespan in months

The trick point here is that you have no idea in the beginning of the Customer Lifespan because it depends on starting to have churn. So you you will have to treat that at hypothesis and validate it along the way.

Reference: How to Calculate Customer Lifetime Value (by Hubspot)

LTV / CAC Ratio

This ratio compares the value of a customer overtime to the cost of acquisition.

$$ LTV / CAC $$

• If ratio < 1, it means that you are destroying value
• If ratio > 1, you might be creating value, but since CAC does not include all involved costs it required further analysis

After some time, and according to real case scenarios, the market realized that a comfortable ratio is > 3.

Financial Metrics

Aside from the ones mentioned in the Chapter about Metrics we have some very important KPIs that you should start following close as the company grows.

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