Minimum Viable Finance Setup

“Can you please tell me the minimum I need to know?” I am often tempted to ask people I seek advice from. Ever since I started my own company, I have less time than ever - straightforward guidance is great; anything else is harder to justify spending time on, time that can be used for serving my customers and working on my product.

Similarly, I am often asked - what’s the minimum “finance stuff” I need to know as a founder? Where do I start?

This is my attempt to answer this the way I like my answers when it’s me doing the asking. Consider this your “minimum viable finance setup”, if you run an early stage startup or a small company with annual revenue up to a few hundred thousand dollars.

1. What’s the whole point of finance for me?

Know that there are two goals here. Maximize the upside - make the company more valuable over time; and minimize the risk (ultimately, the risk of going out of business). So whenever you’re dealing with anything finance-y, prioritize the tasks that have the biggest impact on either of these two things. Anything else is probably less important.

Tasks that can maximize the upside include strategic decisions, such as which markets to enter, which products to launch and how to price them, how to finance growth, whether to acquire other companies or be acquired, and financial planning and forecasting, as that underpins most of the above and gives you a financial roadmap to where you want to take your business.

Tasks that can minimize the risk of going bust are primarily managing your cash runway and staying out of serious legal or regulatory trouble.

Everything else is second priority.

2. Know when to start thinking about finance

If you’re just considering starting a business, this is not yet the time to focus on this topic. Instead, direct your attention to figuring out the problem you’re solving - the numbers can wait for later. There is no finance checklist at the idea stage.

Once you’re revenue-generating or funded, you need to do a few things: incorporate an entity; get a business bank account; hire an accountant; and choose your financial year. These are pretty straightforward, but they’re worth mentioning, as every now and then, I meet a founder who mixes personal and business finances or procrastinates setting up an entity for too long. This is basic hygiene, and if you’re serious about whatever you’re building, get these things out of the way.

And then, as soon as you want to start selling, you need to start pricing your products or services. While it’s generally best to experiment with prices, doing some quick maths on whether the prices you have in mind make sense from a unit economics standpoint is worthwhile. That way, you don’t end up losing money on every sale you make - or if you do (sometimes that can be a deliberate decision), at least you will be aware of that being the case.

3. Make a basic P&L and cash forecast for the next 12 months

Once you’re up and running, it’s time for some basic financial planning. Make a simple P&L and cash forecast for the next 12 months, so that you have a financial roadmap to where the company’s headed in the near future. Model out the revenue you expect to generate, see what the main drivers of that revenue are, and have a go at forecasting your cost base - both costs that move in lockstep with revenue, and everything else that you need to run the business. See how profitable or loss-making the company will be if all goes to plan, and then see how it translates into your expected bank balance over the next year.

If you’re from a corporate background, you may be used to 5-year forecasts done annually or quarterly. For an early stage startup, you typically need to forecast monthly, and a year or so out would do - no point obsessing about margins in year 5, as things will change massively between where you are now and then. (Once you hit your stride, forecasting the current financial year + one more financial year is a good idea. You may be asked for an extra year at around Series A; and from there, the bigger you get, the more there will be an expectation of predictable growth and forecasts that will increasingly resemble those 5-year projections done by big companies. At that point, you’ll long have a CFO to take this off your plate.)

4. Review and manage your finances (at least) monthly

A huge mistake I see many founders make is not looking at their finances for many months, and only asking their accountant to update the books when submitting annual returns. If you do this, there will inevitably be surprises coming your way - and in finance, we don’t like surprises, even the ones caused by things going well (hello a massive unexpected corporate tax bill, because we’re now profitable and didn’t realize!). To avoid this, switch to a monthly financial rhythm, so that you have a solid understanding of what happened in any given month as soon as that month is over. 

Now, this works for most companies. However, if your financials are changing rapidly every day - whether for better or worse - you may need to engage with the figures more frequently. That means weekly, or in rare cases, such as running out of cash soon, even daily.

5. Switch from cash-based to accrual-based accounting

Cash-based accounting only tracks cash coming in and out of your business, is simplified, and in many countries only legal up to a certain revenue threshold. In many countries, accrual-based accounting is basically its grown up counterpart, which allows you to track revenue “properly” - when it’s earned, rather than only looking at when the cash comes in. Some accountants offer cheaper plans for cash-based accounting, but it’s worth the extra cost to do this the right way. 

Are you falling asleep reading this? Don’t - this has huge practical implications. For example, if your SaaS business sells an annual subscription paid upfront, 1/12 of the revenue should be recognized (meaning, show up on your P&L) in each of the 12 months of the subscription, rather than having 100% of it recognized whenever you receive the payment. If this is not done properly, you may end up with revenue booked in incorrect financial years, which makes your P&L pretty much wrong and it’s also unhelpful from a managerial perspective - it doesn’t represent what’s going on and doesn’t give you the right intel. Plus, mixing up your revenue numbers is one of those things that don’t make you look great in the eyes of potential investors.

6. Automate time-consuming finance ops

There are three broad categories of finance tasks in a company: those that have the potential to make the company substantially more valuable, like strategic planning; those that enable better managerial control and compliance even if they’re a bit less game-changing, such as producing monthly management accounts and setting and monitoring your key performance indicators; and finally, those that frankly just need to happen.

While you can automate some aspects of the more value-adding tasks, they will always require some thinking done by real humans, whether that’s you or your future CFO and eventually whole teams. That third bucket though is truly ripe for automation.

Invoicing, cash collection, expense claims, payroll processing, anything that has employees copying and pasting data from one place to another, it should all be as automated as possible. Recommended “finance stack” varies from company to company. To figure it out for yours, just follow the pain. What is currently taking most time each month? Is there a tool that can take care of this? Start automating there.

7. Engage with value-adding finance topics

At this point, you have a basic setup nailed down, your accounting is producing some helpful things to look at, you’re not spending your time on basic finance ops as those are automated, and you have a rough idea of what your finances may look like in the next 12 months.

So what now? Engage with the most important stuff.

Set a monthly finance power hour, review your last month’s figures, update your forecasts with actuals, and investigate anything that didn’t quite go as planned. Reforecast as needed. Keep an eye on your cash runway. But don’t stop there.

Think about the big picture. Can this company be 10X bigger than what you currently have in mind? Is it time to be more ambitious? What would that look like, numbers-wise?

You’ve got this.

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Jana is a Founder of Tiny CFO, bringing actionable and empowering finance content to early stage entrepreneurs who don’t have a CFO yet.