Startup fundamentals: Finance for Non-Financial Managers

I am an entrepreneur who thought of an idea and executed. We are growing and now I am realizing basic challenges that all business face when it comes to operations, employees and financial management. I do not have a strong financial background, no MBA, and have learned the basics to running my business through trial and error and learning from others. I feel that my lack of finance (understanding balance sheet, cash flow statement, P&L, income statement, basic accounting/bookkeeping, valuation) is hindering me. It hinders me primarily for two reasons: a) I don't have a true understanding of the financial health of the company and cannot measure with understanding our progress, challenges or opportunities b) ultimately if there is an exit, or need to report to the future board I need to know what I am talking about and answer the hard questions posed.

If you are a non-financial manager or have similar background where you were lacking finance knowledge:

1. where did you gain your knowledge/experience to managing basic company financials?
2. what was your greatest learning curve in the area of company finances?

Does anyone address this for startups? Thanks,
@gesco

Good answers all around. There is one thing I'd like to highlight: IMHO you do not need to understand accounting to the point where you can create a financial report yourself, you just need understanding to the point where you can read and understand.

(I agree that doing can be a good way to learn, as proposed by others in this thread.)

You'll never be able to have the full set of skills required to run a company, so you will have to hire help, and place trust in employees. Accounting / CFO is one of the areas that founders often don't cover themselves.

a) I don't have a true understanding of the financial health of the company and cannot measure with understanding our progress, challenges or opportunities

Unless your business is in a really slow and dull sector, you wouldn't measure "challenges" and "opportunities" by financial reports. The only truly essential kind of financial report is the cash flow forecast, because you must not run out of cash (as that can kill your company).

Next after that, if you have external investors then the quarterly and annual financial reports become important, because the investors want to see growth and profit. But realize that financial reports are only a proxy for the realities of the company, i.e. the real situation with your customers and your products is more important -- and financial reports won't help you manage that.

"progress" and "opportunities" should be measured in some other way, and more real-time and up to date. Sadly I haven't gotten around to reading Jarie's book yet, but it seems to be a good starting point for tracking progress on technical development. For opportunities I like the Lean Startup Methodology; but there are many opinions on how to do business development (and needs will vary greatly, depending on the stage the company is in).

b) ultimately if there is an exit, or need to report to the future board I need to know what I am talking about and answer the hard questions posed.

No. You need someone in the room to answer these questions, but it need not be you. In other words, you could hire a good CFO (part time / full time).

I learned about finance while getting my MBA. Even with that basic knowledge, it's a struggle to understand it all. The best experience I had was actually doing the books for a company and talking to our finance guys. They taught me a lot about what is important, etc.

The greatest learning curve is company evaluations. I still struggle understanding it all but thankfully, I know people who are really good at it.

I have not seen anyone address this directly for startups. There is a ton of resources out there that you can learn from but the best advice I can give you is to find a friend that knows finance and have them teach you. You can also hire a part-time CFO type to get your books in order as well. That will be well worth the money.

I went through this many years ago. I had actually had an accounting course in college and thought I knew the basics but when I was faced with actually setting up the accounting at our company I found out how little I really understood.

The formula I found that worked for me was:

• Don't skip the details. If the company is small, get QuickBooks and actually setup some accounts and do some data entry. Start with as few accounts as you can possibly get away with and understand how transactions flow through them. Only add more accounts when you figure out that you need them to understand something about your business.
• Once you're done that, plan a budget. I found that I really got a solid understanding of a P&L when I tried to budget for the next year and had to figure out where the money was going to go. All of a sudden I understood why I would want certain accounts vs. others in my P&L
• Once you have a complete understanding then it's easier to start figuring out how it ties to the balance sheet.

In general you'll find that accounting is pretty straightforward if you start from scratch. What makes it complicated if when you want into a huge chart of accounts where you can't easily follow transactions around.

Understanding finance is a must for an owner or CEO. Decisions ultimately have a money value, so everything comes down to finance. Also, even if you have an accountant (and I'd bet you have one), always keep your own copy of the books, even simplified, so you always have a clear view of what's happening and where money go and come from.

I'm lucky because I had some economics and business management courses at university, even if I studied Computer Science Engineering.

gesco, I recommend you to read The ten day MBA.
If not the whole book, at least the financial chapter. It helped me to start understanding the finances, I'm also not an MBA nor financial-guy, since it is well written, everyone can easily understand it.

Asking a knowledgeable friend to teach you in exchange for something is an alternative. But very few of us actually have that option. The next best thing is to do a lot of reading. I’ve got a lot to learn myself, and have found my local library to be a great resource.

Also, try LinkedIn answers. You might find a local bookkeeper or accountant willing to work with you.

My experience includes being an accountant, a software engineering manager and an owner of a non-medical senior care company, so my answer is colored by that background

You're really asking about two different things:

1. The immediate, day-to-day practical need to keep accurate books, to know whether or not you're making a profit and to know where you stand financially.
2. The longer-term questions of valuation, etc.

Do you have someone working for you, or with you, who is doing the bookkeeping, payroll, etc?