As you scale your startup and refine your business model to start conversations with investors, having your Key Performance Indicators (KPIs) and cash flow measurements ready to go can help speed up the path to a seed round. Business modeling can help paint a clearer picture to outside investors of where you’ve been, your current growth rate and future revenue and projected growth.
Brad Ebenhoeh, who serves as managing partner at startup-focused accounting firm Accountfully, shares that founders often rely on their accountants to gather this information. However, he says that no one knows your startup better than you do.
“A lot of times founders expect accountants to be able to do it all,” says Ebenhoeh. “But we can’t really — you understand the ins and the outs better than we do. The best way to help your accountant support you through this is to understand their role in the process: to help provide a format/structure to input information and ask questions to poke holes in the data you’ve provided.”
Ebenhoeh shares more about what to keep track of to ensure a good business model is in place and what mistakes to avoid when putting together a customized investor-ready plan.
Stay on top of your cash flow — both in and out
Your accountant, especially if they’re not in-house, can keep track and forecast only as accurately as the data you provide. Stay on top of major influxes of cash like funding from friends and family and early revenue — understand what they are and the timeline they come in, if more than one time.
Outflows of cash such as one-time costs for app development or office furniture aren’t recurring — alert your accountant of these purchases and know where those services rendered are going. One last metric is operating expenses, including overhead space, outside talent sourcing, taxes and other monthly expenses. Help your accountant keep up with your overall budget and explain the thought process behind those purchases.
Understand the expected revenue trajectory
“We need to understand the expected revenue and the assumptions that you’re making about that projected revenue — pricing, projected customers at a specific rate per month and more. Provide details to help us extrapolate the money that’s coming in for expected revenue,” says Ebenhoeh. Then, your investor report can highlight the next 18 months and if requested, model years two and three.
Make your budget dynamic if needed
“Throughout the year, if you put a budget/model in place, your accountant will put it into software to report month-over-month on budget updates. That’s a standard model,” says Ebenhoeh. “However, things may change a few months in and you need to overhaul your model. You’re able to keep the first budget as a base and then employ a dynamic budget that gets updated monthly due to various circumstances.”
This is how you can stay agile as a startup founder and adjust to what’s going on with your business, plus stay on top of how your cash works within the model.
Stay realistic on long-term models
With two-year and three-year models, investors want to understand when they’re getting their money back or have an idea of where the company is going. However, for day-to-day operations standpoint and management, it’s not relevant. Don’t obsess over predictions past the first 18 months, as it might affect your daily operations and make you miss the mark on what you’re doing right now. There’s a fine line of how realistic you should remain on projected growth and know what’s tangible and possible from a business standpoint.
“If this doesn’t grow as fast or grows faster than expected, you need a backup plan in place or a dynamic model to adjust accordingly,” says Ebenhoeh.