Download - Know your numbers
Know Your Numbers The Capital Network
12/5/13
Dan Allred Silicon Valley Bank [email protected] TwiDer: @dgallred
hDp://danallred.tumblr.com
Financial maDers are oIen confusing.
It is a lot like learning a language.
You need to learn key phrases yourself...
…and can rely on translators for the rest.
Today we will cover:
• Key financial metrics
• Financial statements
• When & how to leverage CFOs & others
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).
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.
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.).
Key metric: gross margin
• Revenue minus COGS = Gross Profit (a hard dollar number)
• Gross Profit divided by Revenue = Gross Margin (a percentage)
Key metric: expenses
• Costs to run your business – Sales & Marke^ng expenses
– Research & Development expenses – General & Administra^ve expenses
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).
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
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.
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.
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).
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.
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.
Income Statement
• Over a period of ^me: – Revenue (“top line”) – Minus COGS – Equals Gross Profit – Minus Expenses
– Equals EBITDA (“boDom line”)
Balance Sheet
• Assets – Cash – Receivables – Inventory – Fixed Assets – Goodwill & Intangible Assets
• Liabili^es – Salaries, wages – Payables – Deferred Revenue – Debt
• Equity – Paid-‐in Capital – Retained Earnings (Loss)
Assets = Liabili^es plus Equity
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.
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.
Ques^ons?
Dan Allred Silicon Valley Bank [email protected] TwiDer: @dgallred
hDp://danallred.tumblr.com