Every profitable traditional business is obsessed with accounting.
Yes. I mean the “regular” profit and loss ledger , i.e your usual accounting.
This also applies to startups too.
In fact, there is a subset of accounting that startups need to focus on.
It is called sunk cost.
What Is Sunk Cost......And How Does It Affect Your Startup?
Here’s one definition from Investopedia:
“A sunk cost is a cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the
A sunk cost can either be the money you paid to a developer to knock out version 1.0 of your product or it could be the entire money you spent on your startup if it is irrecoverable as a result of no revenue or tangible profit.
Unfortunately, there is no way to identify if an expense will be a sunk cost until the expected results are not seen.
A smart way to prevent this (or take meaningful action) and reduce your losses is by keeping financial records.
While you are obsessed about building a great product, you need to get your accounting right and track your expenses.
Here's one simple way to do it.
MINIMUM VIABLE PROCESS (MVP):
Have a simple process to keep your finances.
Just like your Minimum Viable Product, a Minimum Viable Process implies that you keep a record system for everything so that transactions come out of the right account.
You can do this by:
1. Opening a business account:
Differentiate your startup’s expenses from personal expenses early on.
Even though you are self-funding your startup, you should try to initiate transactions from a “business account” created for that purpose.
2. Operations and accounting management:
- Paying for some logo designs? Pay from business account.
- Placing some Facebook Ads? Pay from business account.
- Ordering your first business cards or marketing materials? Pay from your business account.
- Your customers want to make payment? Of course, they pay to your business account.
You get my general point ?
Let your business account be the default account for payment. This makes it easier for reconciliation and accounts preparation.
3. Keep Records:
The reason you need to keep records is because without doing so, it’s hard to build a picture of your true financial situation.
If you can’t comfortably know your expenses, revenue, debts etc. how can you confidently project the future?
Filing your receipts, invoices, payment of salaries, one-off payment, tax records and accounts filing etc. are important.
Other items that should be in your finance management records are metrics like ARR, CAC, Churn rate, burn rate and other accounting metrics like gross margin, operating margin, net income etc.
Tools I will Recommend:
Let’s face it.
You’re probably not an accountant.
But you don't need to be one to be successful at keeping your company’s account.
A good use of Microsoft Excel will help you to put your finances in order. There are also alternative tools online that are easier to use.
Most of these tools have free versions and are cloud based.
This means that you can try the free versions to be sure it suits your needs and also enjoy the convenience to connect with your data on-the-go.
The key feature you probably want in these tools is the ability to add expenses and generate invoices. This will help you to keep records and organize your financial records properly.
As a startup, these are the simple stuff that every startup you should implement from day one.
When you grow big enough, you can decide to shell out cash for paid and premium accounting tools, consider hiring an accountant, or outsource your finance functions and even possibly hire a CFO.
Remember that you will probably never get an investor’s attention if you don’t show proper record keeping and ability to track your finance.