As a startup or small business owner, you should live or die by the strength of your accounting practices. A US Bank study found that 90% of startups (and 82% of businesses in general) implode for one simple reason. They lack cash flow. 

It doesn’t matter if you’re a large or small business, starting capital, or live by that shoestring startup philosophy if your startup or small business accounting isn’t generating cash flow.

That said, many get into business without some basic knowledge accounting for startups making managing finances harder than it has to be. So, in this post, we’ll outline startup accounting basics. We’ll get you up to speed on how startup accountants use these basics to generate cash flow.

Financial Modeling

They say the “numbers don’t lie”. But in good accounting, “seeing is believing”.

Unless you live and breathe “the numbers”, too many can obscure your vision rather than illuminate the path forward.

To make matters worse, as a startup owner, your mindset is “let’s do this” and see what works. That optimism could cause you to overestimate your performance. 

For these reasons, financial modeling supports wise, data-driven decisions. It can reveal the best path forward. Think of it as a visual representation of your financial health.

It reveals business performance over time. And through it, you can see undeniably where you’re headed based on where you’ve been.

Cohort Analysis

A cohort analysis sounds like some fancy financial-speak used by a startup accountant–and it is! As a startup, this isn’t a startup accounting basic you can afford to ignore.

Far too many startups are late to the game when they discover what a cohort analysis is and why they need one.

A cohort is another word for a group. This powerful customer behavioral analytics tool divides your customers into groups with similar qualities.

This allows you to glean valuable insights on each group. Those insights may influence which group (or groups) you choose to target as a business. Plus, accounting analytics tools can also help you predict outcomes if you shift your focus to a higher ROI customer base.

Who are your high ROI customers?

It’s no secret in marketing that when you target your best prospective customers, you cut customer acquisition and retention costs while increasing revenues. That translates to higher profits and more cash flow to reinvest in growth and expansion.

The bottom line is when you work with an online CFO, they help you home in on your high-value customers so that you can work smarter, not harder.

Financial Valuation 

Knowing your financial valuation is vital to raising venture capital and maintaining shareholder confidence. It may be needed for capital raising, legal disputes, M&A, tax reporting—and eventually, your SEC filings. 

A financial valuation involves assessing the value of your assets or the company as a whole. And this isn’t just about knowing what your company’s worth.

You need ironclad documentation to support this valuation. The stronger your documentation, the more confidence others will have during negotiations.

Your startup CFO understands what stakeholders need to see to feel certain that your financial reports reflect accurate information. Give your outsourced CFO what they need to succeed, and they can help you succeed. 

Financial Planning & Forecasting

When you know where you’re going, you’ll make better decisions today. You’ll lead your team of 5 (or 50) more effectively because you’re all working toward the same goals.

They’re confident in the direction you’re steering this ship. Because of it, they’re willing to give it their all.

Say your financial statements are forecasting a great cash flow statement one year from now. Increased cash flow is good. But astronomical cash flow usually means you’re hoarding cash rather than investing to grow. 

Knowing a year in advance when it will be “grow time” gives you time to plan now. How best can you reinvest that money in new opportunities such as:

• Vertical expansion
• New local markets
• New geographic regions
• Workforce expansion

Our startup CFO services can offer financial planning and forecasting to help you plan ahead. Take advantage of the opportunities that await you as our startup CFO services help you increase cash flow. 

You can escape the fate of many startups shown in the US bank study. Leave the starting line and grow your company by investing in outsourced accounting.

Budgeting 

Face it, it doesn’t matter if you have the invention of the century or all the startup capital in the world; you have to have a plan for your money.

In business, your money is supposed to work for you.  And If you don’t “have enough”, this is often a budget (or lack thereof) issue, not a “cash flow” issue. 

Fix the budget; solve the cash flow issues.

Why is budgeting so powerful? As any startup accountant worth what you’re paying them will tell you, budgeting gives you a break-even.  

It cuts through the BS, holding many founders and their startup CFO back.

When you know your break-even, you can start to cut costs to increase profit margins. There are different accounting methods (cash basis accounting, accrual accounting, etc.) and first, you need to choose which accounting method is right for your business.

Let’s look at what other financial information and accounting methods go into a startup budget:

1. Get your tools together. No shame in using an Excel spreadsheet here. Freelance CFO services professionals use it too—among other more powerful startup accounting software. Use accounting automation  or an accounting system when you can.
2. Write out your startup expenses.
3. List your fixed costs. These are costs that don’t budge a lot or often. (e.g., rent, Internet, business insurance, payroll, web hosting).
4. Estimate variable costs. This is a data-informed best guess, not a shot in the dark. Use past financial records, like credit card and bank account statements, to guesstimate when possible. If unavailable, do some online research. (e.g., utilities, shipping costs, material invoices, customer acquisition costs, travel).
5. Get your monthly revenue estimates. Look at past income statements and put that financial forecast you created to work!
6. Determine your break-even.
7. Build your budget.
8. Perform a regular budget analysis and adapt for optimal financial health.

How Startup Accounting Services Can Help

Your startup has the potential to grow and thrive. But as it stands, you’re strapped for cash or need to figure out how long startup capital will last. Too many companies (even those with robust fundraising efforts) have failed because they couldn’t generate cash flow. 

Many business owners find themselves between a rock and a hard place when it comes to accounting for startups. You’ve outgrown your basic in-house or outsourced bookkeeping services but can’t afford a full-time startup CFO or in-house startup accounting services to support your success. Aquifer is your plug-in startup finance department with all the outsourced accounting solutions you need to improve your company’s financial health and position yourself for growth. Get started today.