434: Money Management for Startups
Subscribe: iTunes | Android | RSS
In today’s episode of The Startup Chat, Steli and Hiten talk about startup money management.
In the startup world, it’s very common for founders to overlook the significance of how their money is managed. Properly managing your startup’s financing is super important and not doing so can have serious consequences for your startup.
In this week’s episode, Steli and Hiten talk about what money management means, why you should take money management seriously, how to deal with upfront revenue and much more.
Time Stamped Show Notes:
00:00 About today’s topic.
00:32 What money management means.
01:40 What money management is all about.
02:43 How to deal with upfront revenue.
04:11 The best money management advice for new startups.
05:53 Why you should take money management seriously.
07:15 How founders run into money management issues.
10:31 Our first sponsor.
10:46 Why you shouldn’t do your own accounting.
11:30 About Pilot.com.
3 Key Points:
- If someone pays you upfront for a year, how do you recognize that revenue?
- I will find a way to make it someone else’s problem.
- You can’t afford to completely ignore it.
Steli Efti: Hello everybody. This is Steli Efti.
Hiten Shah: And this is Hiten Shah.
Steli Efti: Today on the Startup Chat, we’re going to talk about startup money management. Ooh, what does that mean?
Hiten Shah: Yeah, this is the one we’ve been wanting to do for awhile. And this is one of those where like, “Ah, what’s this money management thing? That’s not the fun part of startups?” You know, and it’s like, well it’s what startups in business is all about. You make money, or maybe you don’t make any money yet, but you’re still managing money because it’s likely you’re spending money somewhere, right? Even if it’s with a bunch of software that you buy. So we wanted to talk about money management and why it’s important as a founder, and why it’s a skill that you need no matter what.
Steli Efti: So you said not sexy. So this is not about how do we take the money in the bank and invest it in other startups to get a faster ROI or higher ROI that we can. This not about any of that shit, right? This is about money’s coming in, money’s going out. You have to keep track of all of this. There’s taxes to be paid. We’ve heard many stories of founders and startups getting into real trouble. Maybe we should do a whole episode on how not to get in trouble with your taxes, because-
Hiten Shah: Oh that’s great.
Steli Efti: Right. Because this is such a big topic. It’s not sexy, but you know how many founders get in real trouble, because they mess up the bookkeeping, or the mess up their taxes, and boom, all of a sudden surprising big bill that comes from the government and there no money in the bank. And what the hell do we do? Like scramble, scramble, scramble, or you’re the case that’s like you get audited. Congratulations. Ever gotten audited before? It’s not a lot of fun.
Hiten Shah: Yeah we have. Yeah. It’s not a lot of fun. Another one is revenue recognition.
Steli Efti: What is that? Do I just look at my revenue and try to recognize it? Or what exactly did you mean?
Hiten Shah: If someone pays you upfront for a year, how do you recognize that revenue? [crosstalk] All at once? Or is it for the month that … Do you spread it out across the month that you actually are supposed to get it for, because they paid up front for a year. Which means that you’re supposed to amortize it as they say across the 12 months. You’re supposed to split it up by 12, and provide basically accounting in a way where you know that that’s how it impacted let’s say your MRR. Right? Because that’s monthly recurring revenue.
Steli Efti: Yeah, and you’re generating revenue for something you [inaudible] in the future, which is you have to service them the software and anything else that comes along with that. But at this point, I guarantee you this point, if we’re not already lost a good amount of listeners, people are probably pondering, “Oh God, this is a really adult episode. I’m not sure if I want to hear all this. This seems like you know the type of stuff I should know, but I really don’t, and it may or may not make me uncomfortable.” So I could already… I could sense some listeners getting nervous at this point of the episode. How do you learn all this stuff? How do you deal with this? Especially when you’re kind of early. Let’s say you don’t have a ton of experience when it comes to kind of money management, bookkeeping, taxes, accounting. So you’re not an expert yourself. You’ve never hired people before or not many. So you don’t have a ton of experience, you’ve never been audited before. It’s kind of, this all is new to you. If you had started kind of brand new at this point, and you would have to give your new, fresh, young entrepreneurial self advice on how to master the one on one of startup money management, how to approach it, how to think of it, what’s the advice? What is the guidance that we want to give people?
Hiten Shah: Well, what I did was I ignored it.
Steli Efti: What-
Hiten Shah: I just ignored it.
Steli Efti: Okay.
Hiten Shah: I didn’t think about it. I was so focused on the business, the product, the customer, making money. I didn’t really think about accounting, I didn’t think about bookkeeping. I didn’t think about taxes. Right. That’s what I did. And then at some point it hit me, and I had to worry about it, and then I had to scramble and figure out how I was gonna get taken care of. In my specific case I have, and by then I had, a wife who was willing to take care of it, because her mindset is on finances. She likes that stuff. She’s very detail oriented. And so we trust her with all the finances across many different companies, and she heads that up, and that’s one of the few things she does, but it’s one of the most important things to me, and that’s how I solved it. I found somebody who I trusted to solve it. That was part of the business in one way or another, and very close to me, my wife. And today though, if I were starting, regardless of her or anything like that, I would find a way just like I did back then to make it someone else’s problem.
Steli Efti: Yeah. Don’t buy a hundred books and try to get certified as an accountant, and do all this yourself. That’s not your core expertise. That shouldn’t be the majority of your focus and energy. But what it doesn’t mean is that you can afford to completely ignore it, because it is your responsibility.
Hiten Shah: You know, this is the thing.
Steli Efti: All Right.
Hiten Shah: Yeah, it’s cashflow. Like if you don’t do this right, you don’t know how much cash you have available to you to use. That’s a fundamental problem I see most companies get into, which is like they’re not managing their money. They don’t know how much money they have in the bank. And I’ve even seen countless folks like painstakingly try to figure this out. You know, they try to learn QuickBooks, and they try to figure out like how to get, you know, advice on this, and all that kind of stuff. But at the end of the day, it’s your money coming in, and you have to figure out kind of like how you want to, as easily as possible, know what’s happening with it. I mean this is money, right? Like, I mean, think about how many folks are like, not even great at personal finance. Business Finance is a whole nother game, right? Like there’s all these other rules, and all these things going on like that thing with like, you know, if you get money in for a year upfront, how do you account for it, and what do you do? There’s like, you know, so many complications like that. Especially when you get into taxes.
Steli Efti: Yeah. Maybe this episode, we could call it how not to run out of money, because then-
Hiten Shah: I like that.
Steli Efti: … You know how to always have lots of money. How not to run out of it.
Hiten Shah: Or know how much you have. Right?
Steli Efti: Yeah. If you don’t know how much you have, chances are very high you’re going to run out of it at some point, surprisingly. And-
Hiten Shah: That’s right.
Steli Efti: … The crazy thing about, like any company and any founder who has ever run into cashflow issues, they’re always surprised. It’s always a surprising thing. So it was like, “Everything is fine. Everything fine. Everything is fine. Oh God, everything is terrible. We don’t have any money, we’re going to be dead in a week.” Like it’s always that kind of a surprising quote unquote panic moment of like, “We have three more weeks to operate. How do we get cash? We have to scramble. We need to raise more money. We need to bridge financing. We’re…” And it’s like, wait a sec how did this happen so surprisingly? It happens so surprising because people that keep a good eye on their cashflow, they didn’t have a good sense for money management, and then you know, only a few knobs have to be turned and all of a sudden you are in a deep waters. We did an episode a while ago. I want to shout that out for people that want to go even deeper in this topic, and we’re going to talk about related subjects in a couple of episodes coming up, but in episode number 241 we talked about how to save money as a startup, so how to improve your cashflow just from a money going out point of view. 241 if you type into Google the Startup Chat, and 241 it’ll pop up as the first episode. Check that out if you want to find some simple ways to save money, but today what we really wanted to talk about, and have been, is more holistically how do you make sure you keep tabs on money in, money out, taxes? How do you keep a good sense for accounting? Now Hiten you have an amazing wife. She is very special in many, many ways, and I would not advice most founders out there to try to find a significant other that is an accounting tax and finance wizard that can work.
Hiten Shah: Yeah.
Steli Efti: It’s not a solid plan-
Hiten Shah: No.
Steli Efti: … To be like, “Oh, I’m going to go out this week and try to find myself a husband or wife that’s good at this.” So if I lack a significant other that’s already a ninja at this stuff, and you know, I don’t a ton of experience, now today there’s two things you can do. We’ll cover one of them in a future episode, which is like finding service provider probably, right?
Hiten Shah: Yes.
Steli Efti: An accountant, somebody that can do your bookkeeping, a bookkeeper, somebody that can advise you on tax matters, somebody that can advise you on cashflow matters. But the other side of the equation is it is 2019, this is a Startup Chat. Most of our listeners, many, many of our listeners are in the SAS or software business in one way or another. So what kind of software can we use today to make this happen? Here’s a big premiere for the Startup Chat. For those of you who have listened to us for almost 500 episodes. Now you know this is the only and first time you’ve ever heard us actually, you know, shout out a sponsor, and promote a company or product out there that we think, if you haven’t been listening for a long time and if you don’t have this topic already figured out, we’ve made a deal with a company with a software, with a product that we endorse and we want you to go and check it out, and sign up for it, and have them help you solve this problem. So big drum roll. All right. Silent, but big drum roll. Are you ready?
Hiten Shah: Yes.
Steli Efti: All right. Hiten hit them up with the company, and product, and what we have an offer for them.
Hiten Shah: The company is called Pilot, and the offer you will see if you go to pilot.com/startupchat, and it’s basically for the first hundred Startup Chat listeners, you’ll get 20% off of what their pilot core product is for six months. And you’re probably wondering by now what is Pilot? Well what Pilot does is they do your bookkeeping, and they do it with professional accountants, not folks that are outsourced. So these are in house bookkeepers. And one of my favorite parts about it is they do it right in QuickBooks online. So you’re not using a unknown tool or anything like that, and they make it extremely easy. And a lot of the problems that we just described, they solve, and that’s the whole point. If we were starting today, we both would look at options like this, and since we know them, and we’ve spent time with them, and they’re a sponsor, we would go use them. But you should check them out too, because they are the perfect fit for your early stage company, and they can grow with you, and they have all kinds of customers that are large and small and that they’ve grown with. And at the end of the day, this is the way, this is one way, this is a great way to solve that headache of bookkeeping, accounting, so you don’t have to worry about it.
Steli Efti: Yeah. So it make sure to go to pilot.com/startupchat. As we said, the first hundred Startup Chat listeners are going to get 20% discount off of their pilot core for six months. And Hiten and I are standing behind this offer. So if at any point, you know, if in the unlikely scenario that you didn’t get out of it what you wanted, or you weren’t happy, or you at any kind of challenge that they couldn’t help you? Hiten and I, you know, you can always get in touch with us. We’ll always, you know, put in our reputation on the line when we promote something. We know it’s great, and if you’re not sure about it, I wanted to underline that Hiten and I are personally going to step in help, with anything, any challenges, any questions, and make sure that you get tremendous amount of value out of the offer that we put forth. So if you are not planning to get married to an amazing accountant, bookkeeper. The next best option is to go to pilot.com/startupchat. You’ll see a ton of amazing companies that are using them. The team behind it is killer. We love the team. We love the product. We highly advise you, don’t do this yourself.
Hiten Shah: No.
Steli Efti: Don’t try to use a spreadsheet. Don’t go online and read three articles on how to do accounting, bookkeeping for your startup. Don’t waste your time and energy. Just use a killer software product and a killer company to take care of this so you never run into a problem. You never run into money management issues, and you can focus all your energy on what you want, and what you need to focus your energy on, which is growing your business.
Hiten Shah: There you go.
Steli Efti: That’s it from us for this episode of the Startup Chat. We’re looking forward to hear from you soon.
Hiten Shah: Later.