Finance Tips for Startups
Summer Venture Program advisor Michelle Hipwood recently hosted a lunch and learn, explaining some basic financial information that every startup should be familiar with.
First is the standard statement of cash flows, which is prepared by accountants under Generally Accepted Accounting Principles (GAAP). This statement explains changes in the cash balance and is complementary to the income statement. Cash inflows and outflows include operating, investing, and financing activities. Understanding this document is vital for keeping track of your money!
According to Michelle, every potential investor will ask what your cash burn is. This the rate at which your company uses its cash reserves. Calculate the burn rate for a selected period of time using this formula:
The answer you receive is a monthly value, and the lower it is, the better! Also be familiar with your cash runway, or how long your cash will last at the current burn rate. Calculate this with the following formula:
The 13 week cash flow model is an alternative commonly used by companies in financial distress. This tool allows you to see the “big picture” and analyze the amount of cash you will need in the future. It is different from other financial forecasting tools because it is cash-based rather than accrual-based, which means that cash is measured only when it is available for use.
Something else to remember is that you must file a 1099 for any consultants you hire. This is done by the company or a bookkeeper, and is due by January 31 of each year. Corporate taxes are also due annually by March 15.
We hope you find this helpful as you embark on your entrepreneurial journey!
Hear from the 2016 Summer Venture Program Wellesley cohort on Thursday, July 28 at the Summer Venture Showcase!