FINANCE GUIDE

Essential terms every startup CFO should know

February 25, 2020

A chief financial officer is responsible for ensuring that their company is spending wisely and following best financial practices. A CFO’s finance know-how is especially valuable in a startup, where labour is stretched thin and employees are often asked to play multiple roles.

Every startup CFO should be familiar with the most common finance terms and concepts, and be able to explain them to others when needed. A CFO who doesn’t know what a series A funding round is, for example, will have a tough time helping their team reach that milestone.

On top of that, startup CFOs in Singapore also tend to work closely with the tech and marketing team. After all, they’re the ones allocating the budget for advertisements and tech R&D, so they should understand the terms often used in these sectors.

We’ve compiled a list of the essential terms that we believe should be in every Singaporean startup CFO’s lexicon. How many of them are you familiar with?

P&L statement

A profit and loss statement summarizes a company’s revenues, costs, and expenses over a given period of time—usually a fiscal quarter or year. It’s also commonly referred to as an income statement. A CFO must be able to compare P&L statements from different accounting periods to see how their startup has grown or changed.

Balance sheet

A balance sheet reports a company's assets, liabilities, and total shareholder equity. It's possible to derive a debt-to-equity ratio from a balance sheet. These documents are used in conjunction with the P&L statement to calculate the company’s overall health.

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Cash flow statement

A cash flow statement summarizes the amount of cash and cash equivalents that enter and leave a company. It is especially useful for the CFO and investors, who have a vested interest in understanding where a company's money is coming from and how it is being spent. Cash may enter or leave a company due to operations, investments, or financing.

Capital

Simply put, “capital” is a term that refers to all assets a business needs to perform useful work.

Most people who hear the term often think about cold, hard cash—and it's true that in the startup world, capital is usually cash or easily-liquefied assets that are used for business expenditures. In some companies, capital may also include production facilities, storage facilities, and equipment.

Working capital

Working capital refers to all of the company’s liquid assets that are immediately available for day-to-day business expenses. It measures a company’s short-term liquidity and ability to pay its debts and obligations. Working capital is calculated through two main assessments:

  • Current Assets less Current Liabilities
  • (Accounts Receivable plus Inventory) less Accounts Payable

When thinking about capital, you can use the 4W-1H system:

  • Why do you need capital?
  • When do you need it?
  • Where will it be employed?
  • What will be the cost of raising it, and what results will it deliver?
  • How will you raise it?

Debt and equity

A company has many ways to raise the capital they need to produce value. In the bustling startup world, most companies eventually have a mix of equity and debt financing.

Equity financing

A company can acquire capital by offering ownership in the form of shares. The shareholders will gain an ownership interest: they will partially own your company. Equity financing can come from firms, investors, or from an IPO (initial public offering) on a stock exchange.

Venture capital

Venture capital is a type of equity financing offered to promising high-risk startups. These funds may come from dedicated investment companies (venture capital firms), wealthy individuals (angel investors), or other financial institutions. They often come with dedicated expertise and support from industry experts.

Young startups often find it difficult to gain access to loans, debt instruments, and capital markets. That’s why venture capital has become a highly popular alternative for SMEs who want to scale quickly.

Venture capital investments carry high risks, so most VCs spread their investments and only take minority stakes in a startup. Additionally, though venture capital is still profit-motivated, many VCs also invest out of a desire to create positive social impact and scientific/technological breakthroughs.

Private equity

Private equity is another type of equity financing. However, unlike venture capital, private equity firms invest in more established companies with the goal of achieving consistent returns. Private equity investments are made with the goal of achieving majority ownership (50% or more) in the target company.

Debt financing

Another way of acquiring capital is by assuming debt. Debt capital is usually a loan with interest from friends, family, financial institutions, peer-to-peer lenders, credit card companies, or federal loan programs. This method of financing requires regular repayment with interest, which will vary depending on the type of capital, amount, company’s track record, and credit score.

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Valuation

Because most startups aren’t yet profitable, we need to come up with another way to calculate how much a startup is worth. This calculated worth is called a company’s valuation, aka the amount that investors, founders, and shareholders decide the company is worth.

Valuation is usually calculated based by multiplying a share's value (current price) by the amount of shares in total.

Cap table

You’ll begin to hear this term more and more as you seek investor funding. “Cap table” is the colloquial term for a capitalization table—a spreadsheet that shows how equity is spread out in a company.

A cap table can include any of the following information:

  • Total and type of equity ownership capital

    • Common equity shares
    • Preferred equity shares
    • Warrants
    • Convertible Equity
  • Investor names or organizations
  • Current share prices
  • Potential funding sources
  • Upcoming or previous M&As
  • IPO information

These cap tables are usually only revealed to staff and investors to provide information on the company’s total market value.

Preferred vs. common stock

There are two types of stock that shareholders may own. Both types represent equity ownership, but offer different benefits.

Preferred

Preferred stockholders typically have a higher claim compared to common stockholders. In the event a startup goes bankrupt or gets acquired, they will receive their payouts first.

Preferred stockholders usually receive fixed, regular dividend payments for a pre-defined period of time as long as the company is able to pay. Preferred stock is callable, which means a company can buy it back at any time. It can also be converted into common stock, whereas common stock cannot be converted into preferred stock.

Common

Common stock is a type of equity that entitles shareholders to profit via dividends or capital appreciation. Unlike preferred stockholders, common stockholders are usually given voting rights directly proportional to the number of shares owned. Common stockholders are not guaranteed to receive dividend payments.

MRR

Monthly recurring revenue is arguably the most important metric of any subscription business. Any new deal closure results in recurring revenue for a period of time. MRR can be calculated by simply adding all of the monthly fees paid by all of your customers. You could also calculate it through ARPA (average revenue per account). First, you calculate the average revenue per account, then multiply that amount by the total number of customers you have.

Burn rate

The burn rate is the rate at which a company is losing money each month. CFOs should carefully track their company spending so that they can calculate how much venture capital they are losing and how far they have to go before they become profitable.

Gross burn is defined by a company’s total spend on operations per month. Net burn, on the other hand, is defined as the amount a company _loses _per month (calculated by revenue less operating costs).

A company that spends $30,000 on operations each month has a gross burn rate of $30,000, regardless of how much revenue it is making.

But say it’s making $20,000 in revenue each month. That means its net burn rate is $20,000 less $30,000, or just $10,000.

Net burn can provide CFOs with a more accurate runway estimate.

Runway

A startup’s runway is the amount of time a company has before it runs out of money. CFOs must be able to accurately estimate their remaining runway and seek more financing before their runway ends.

CFOs should be equipped with the right knowledge and the right tools

Leading a company and ensuring its financial health is no easy task. A startup CFO who wants to grow their business from the seed stage to a full-fledged corporation must be able to efficiently direct company expenditures while also sharing and gaining new knowledge.

Fortunately, CFOs are not alone on this journey. Aside from their C-suite partners, CFOs can also utilize modern financial technology, such as automated company spending cards and digital accounting software. These tools are designed to reduce the reporting burden and empower the CFO to spend more time on strategic planning and direction.

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