Financials and maturity in startups

I read a couple posts (here and here) this morning about how GAAP standards in accounting can do more harm than good, particularly for startups trying understand their business and trying to interpret performance.

I also think this applies to early stage projects in both reporting and projecting financials. I find that helpful “compromises” in terms of presentation of numbers is important. Obviously, abiding by standards is important when you’re communicating to external audiences, and along the way when you’re reporting “official” statements.

However, spreadsheating financials is often done best not only quick and dirty but nuanced to your business as well.

Many first time entrepreneurs (whether “small business” or “startup” types) fixate on conforming to what is seen in textbooks. This tends to make the financial part of planning the business cumbersome while the entrepreneur is trying to bring a vision to reality.

I find it’s a more helpful exercise to simply try to express the vision with numbers naturally, try to understand that, refine, and repeat.

For example, most startups deal with cost of acquisition of some kind. Particularly with projections, a team’s ability to develop some model and understanding of how this works is crucial. While this is a metric that doesn’t naturally spill out in a financial statement, it’s way more important to understand for most startups than how to properly account for depreciation of fixed assets. Obviously that, too, becomes crucial as the business scales, but doesn’t do much for understanding and reporting on a startup.

I find it strange that engineers/software guys in startups tend to not spend too much time with financials and/or avoid those meetings/roles all together. Odd since these guys are generally good at math. They aren’t necessarily good at constructing a financial statement. Why? Because they were learning to hack when their business major peers were trying to keep themselves awake during intro to accounting courses.

This needn’t be. When I start a company or join a startup again, I will insist that anybody considered to be on the core founding team have a good understanding of the business from a dollars and cents perspective. Everybody should be able to, with a blank whiteboard or virgin spreadsheet, be able to crudely develop a model of the business and how it intends to make money.

To beat a dead horse, I think it’s a self-limiting behavior to avoid a core subject matter critical to your success. In a startup, this would be core subject matter, no matter your role. I also find it patronizing and bad for chemistry for “business-side” founders to limit financial discussions with the “tech-side.” Give me a break. This is often done in the name of “shielding” the tech team from unnecessary detail, when in reality it is more likely a power play. And for those developers who would tolerate or welcome such “shielding,” I would suggest that this is akin to standing outside the fire and a sign of problems to come.

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