Finance Fridays

Last week I expressed my frustration with the current lack of financial literacy that I see all around me. In the spirit of Fred Wilson’s awesome blog series MBA Mondays, I’ve decided to write a series of posts about this and asked for suggestions. I got a bunch, but one that stood out was from a group of incoming MBA students at the University of Chicago Booth. Their suggestion was to write a series of posts that follows the development of an imaginary startup as the company navigates various events, focusing on how each event will impact not only the P&L, but also the Balance Sheet and Cash Flow Statement.

I thought this was a great idea, so I engaged Jonathan, Simon, Kevin, and Kevin (you can meet them below) to help out. They are going to help me prepare the posts each week, which will include developing excel spreadsheets that we will upload to complement the posts. They suggested we call this “Finance Fridays” to bookend Fred’s MBA Monday’s – I checked with Fred to see if he was ok with this and his response was “Hell yes. The more the merrier.”

We would love to get your suggestions in the comments section for (1) the type of company that we should follow, and (2) the types of issues that the company might encounter (reminder: the goal is to illustrate common difficulties entrepreneurs face when it comes to understanding their financials). At this point we are planning to use a consumer Internet company as an example, but we are also considering using a SaaS-based software company.

As a special bonus for me, I get to work with four students on a project. I love working with and mentoring students, and am especially thrilled when they proactively reach out to me.

Our first substantive post will be up next Friday. In the mean time, please meet the Finance Fridays team:

Jonathan Wolter has been a lead consultant and software engineer at ThoughtWorks working for clients in Silicon Valley, Texas, Chicago, and India. Now he is slated to enter Booth at the University of Chicago in the fall. On the side, he started a company selling accounting training to landlords. Previously he was at FeedBurner, and has never met a side project he did not love.

Kevin O’Leary has spent the past year working as an independent financial consultant to start-ups in the healthcare, telecom and nonprofit industries on projects both domestically and internationally. Prior to that, he was an investment banking analyst in the Medical Devices group at Piper Jaffray. He will be entering Booth as an MBA Candidate this fall.

Simon Zhang spent three years as a financial and tax consultant at Deloitte Canada with a focus on businesses in mining, financial services and technology sectors. He is a Canadian Chartered Accountant. He also lectured an undergraduate tax course at Simon Fraser University and frequently facilitated professional education courses with Canadian Institute of Chartered Accountants. With a strong interest in entrepreneurship and technology, he subsequently joined a technology start up project at Orbis Investment Management Ltd, an asset management firm with over USD $25 billion under management. His focus was to incubate an internal start-up which is built on state-of-the-art technology, novel business model and innovative products. He will be entering Chicago Booth to complete this MBA with a focus on entrepreneurship and finance in the Fall 2011.

Kevin McCaffrey left his job as a strategy consultant in the Chicago office of McKinsey & Company to found Dot-to-Dot Children’s Books, a nonprofit social enterprise that works with children around the world to develop children’s books that are marketed to raise funding and awareness for the authors’ communities. Dot-to-Dot relies entirely on earned income and employs a unique cause-related marketing strategy designed to establish a successful position in the competitive children’s lit market. Kids from eight countries, including Cambodia, Eastern DR Congo, and Afghanistan, have participated in Dot-to-Dot projects. Kevin’s experience with Dot-to-Dot has him hooked on entrepreneurship, which will be his focus at Chicago Booth.

  • Would definitely love to see both sides of the coin – the consumer based startup and the SaaS.

  • Leah Yomtovian Roush

    It would be great to have your insight on how to project growth in the most rational way such that potential investors won’t just write us off as being too optimistic.  I look forward to this tutorial!

    • Thanks. Good suggestion.

  • Pete Griffiths

    Terrific idea.  Downloadable spreadsheets will be particularly helpful.  Can never have too many such examples!

  • Amazing. Please add cap table to the list of P&L, Balance Sheet and Cash Flow Statement. Several times entrepreneurs do not understand how the cap table evolves as the startup goes from one financing event to another.

  • Anonymous

    I recently had the pleasure of being in a meeting about realizing revenue of virtual currency for a game company with a microtransaction business model. The pleasure was watching the faces of the other engineering talent in the room as they came to realize the problems involved with prepaid cards, stored value, and virtual currency. I’m one of those oddball software engineers who understand how business works so that I can make better engineering decisions, so I already knew about the relevant accounting complexities.
    I believe Apple messed this up once and had to charge $1 for an iPod OS update. Rumor has it that Facebook’s “engineer-driven”, “agile” culture resulted in Facebook Credits being implemented in such a way that it was unauditable and revenue could only be recognized when Credits were purchased.

    I’m not suggesting that you have to handle stored value and revenue recognition in particular, just pointing out how many small finance details can explode into major product decisions. Finance Fridays isn’t just for people who need to look at financial sheets. It will benefit anyone making major business decisions.

  • Hi, nice post. I have been pondering this topic,so thanks for sharing. I’ll definitely be coming back to your blog.

  • Great idea. It sounds like, once it’s done, it could be easily converted to a great book! 🙂

  • Benjaminjstein

    I’d like to learn how a company should approach its pre-money valuation before engaging investors. Is it a multiple of last years revenue, forward revenue, or based on a pecentage of the market opportunity? If the company is pre revenue or the revenue is immaterial but there is significant IP how does that affect your pre-money?

  • Brad, great idea to organize Fin Fridays following a startup’s progress.  I suggest beginning with the presentation of the income statement and balance sheet (chart of accounts, in accounting speak).  Startups invariably organize these wrong, doing what’s convenient for the CPA or bookkeeper rather than for what business managers and investors need. 

    The right way is logical groupings of expenses.  ‘Development,’ ‘Marketing,’ and ‘Administrative’ type categorizations work best.  Sub-categories underneath add granularity as needed.  (‘Compensation,’ ‘Rent & Facilities,’ etc. groupings can also work, though it’s best to handle these in another dimention; ‘Class’ if using QuickBooks).  The WRONG way is for the bookkeeper to create expense, asset, and liability accounts based on tax classification or randomly as they come along.  Leads to mass confusion financials every time, with line items like ‘Rent’, ‘Salary’, ‘Gas’, ‘Phone’, ‘Utilities’, ‘Light bill’, ‘Office’, ‘Bob’s expenses’, etc.  Reporting becomes an inconsistent pile of numbers rather than a simple, logical presentation of the past results of the business and its operations. 

  • Anonymous

    Great. I am looking forward for this series.

  • Ulf

    Type of company: Some sort of software that turns things up a notch in helping us keep records that are useful in tracking our physical fitness, something beyond what say Garmin does, and beyond what sites such as offer. Some kind of creative engagement with fitness and the numbers.

  • David A Lukas

    Use a model company that has both up-front and recurring revenue components.  The two have different dynamics as they feed through the other financial statements (actual and projected), and also a different relationship with other metrics like bookings and run rate.

  • To paraphrase Battlestar Galactica, “This has all been blogged about before and will all be blogged about again.”  😉  

    In addition to blog posts I created a bunch of spreadsheets that can be used to calculate and value ventures quickly and do “What If” analysis.  They even make pretty graphs.  I recently updated to MS Office 2011 and they all still work, feel free to use them.

  • Thats  really rare article!Good news if finacial sphere as for me!)Thanks Brad!

  • Sunil111

    Great idea! How about a software services company also? You can highlight the differences in possibly positive cash flow earlier and also why venture capital may not make sense for them and vice versa. On the other hand there may be events like acquiring other companies to grow, debt obligations and most importantly how it might be a people asset based business than ip based.

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  • rnschmidt

    I would love to see this for a SaaS-based company with upfront charges as well as recurring charges.

  • CSchmahl

    Great idea, looking forward to reading the series. It would be even greater if the company could be consumer based with a non-tech/internet product. There are tons of blogs, websites, books etc out there about tech startups, but few info or help for the rest of the world!

  • Adrian Chenault

    This is going to be a great series! In addition to the up-front and recurring revenue components, it would be helpful to talk about usage based revenue models as well. This can add an extra layer of complexity in the P&L. Thanks for doing this

  • Great idea, Brad.

    Types of companies: 

    I’m going to buck the trend and suggest that in addition to consumer internet and SaaS companies, that we also include a start-up that sells something tangible, say computers or joysticks.  I used to teach accounting, and found that it was easier for students to grasp important concepts such as gross margins, revenue recognition, and matching expenses/revenues if I used a consumer products company as the baseline example before moving onto the more complex issues for consumer internet & SaaS tech companies.  (I teach MBA students, and I typically would use a company that distributes beer as my basic example.)

    What issues to explore?
    Here are some thoughts:
    (1) Revenue recognition.  WHEN do we get to count what we have sold as revenues…  can we recognize all the revenue up front, or do we have to wait?  HOW MUCH revenue can we recognize (e.g., does Priceline get to recogize the full amount they collect on an airline ticket, or just the fee they earn?)
    (2) Cash versus accrual accounting.
    Start-ups typically will start by just recognizing everything on a cash basis, but entreprenuers need to understand the difference between cash versus accrual accounting.
    (3) Matching revenues and expenses
    One of the basic (accrual) accounting principals is to try to match the revenues that a company earns with the costs the company needs to incur to generate those revenues.
    (4) Gross margins.
    Why is gross margin important?  Which costs should get deducted from revenues in calculating gross margins.
    (5) Burn rate.  How to calculate and display this to investors.

    Also, I wonder if it makes sense to include ‘key metrics’ for the business, and a dashboard, in this discussion.  Or, at least the key metrics that tie into the financial statements.

    Ira Weiss

    • Thanks, these are helpful suggestions. There is a tremendous amount of content that we could cover. Looking forward to more comments from you Ira.

  • Megan

    I’m really looking forward to this. It would be helpful to see the following:
    –  approach to putting together the financials for the first time (e.g. first budget, first cash flow model, etc.). Do you build your models from scratch? Use templates? 
    – capital raise
    – grant funding
    – equipment purchases
    – debt financing

  • Here is a spreadsheet I did that models and connects a recurring revenue business.

    Does Balance Sheet, Cash Flow, Income Statement and in addition ties in hiring forecasts and revenue models.

  • if it’s not too much work, I suggest you offer two streams:consumer internet company and a SaaS-based software company. The financial impact of both strategic and operational issues are likely to be very different or different enough to justify two streams. Those who are primarily interested in consumer businesses can follow one stream; those interested in SaaS type companies can follow the other one. 

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