Friday, February 21, 2014

Know where the money is going

Following up on a post from a few days ago (, I received some great comments discussing that in accounting in particular at an early-stage company, it's important to know where the money is going.

One friend even talked about how he did all his own accounting, just for this purpose.  

I couldn't agree more on the goal.  From a financial perspective, the money is expensive and it should be managed carefully.  Also, from a personal perspective, as an entrepreneur, you've given up huge amount of opportunity (e.g., higher paying job, unpaid time starting the company, etc.) and have probably also spent years teeing up the opportunity.  I know I've done that.  You've then sold much of the upside as equity to have this chance.  When you see the money go out the door unsuccessfully or poorly managed, it gnaws at you.  I've experienced the emotional reaction of seeing large checks go out the door for something that doesn't work.  Here, I like to make a distinction between well-spent money that doesn't work, vs. poorly spent money.

For example, at one company, we once used $50k on an ad campaign that brought on users for a $10/month product.  We obtained three users, or approximately $17k/user.  I called this the, "Buy them a Honda Civic" acquisition strategy.  

While this was very, very painful, it was ultimately a well thought out and managed campaign and given some constraints, we couldn't do a smaller test campaign.  I still believe it was well spent money, but expensive learning that something didn't work.  And it hurt  I still think of this when I see Honda Civics.

The even more painful time comes when you realize that you were careless and now have an invoice for something that could have or should have been avoided.  I remember signing a check for a monthly ad campaign that had stopped performing 60 days prior.  It has simply been overlooked as some other priorities had taken over  This prompted me to: 1) have a discussion and end the campaign immediately, and 2) change the way we did things going forward.  While it still was unpleasant, ultimately, the loss was minimized and avoided in the future, which is the best result possible at that point. 

Money out the door is a forcing function and moment of choice.  One of the simple steps that I always value and insist on is that someone involved in the fundraising process, and ideally the CEO (not a finance/accounting person), signs all the checks and approves all payrolls.  This ensures that every single dollar that leaves the account, is controlled and managed by one person with both financial and personal skin in the game.  (The only exception is an expense check to the person himself, as it's generally good to not have someone sign checks to himself)

While there are obviously downsides to this method (using checks, the occasional rush to find the CEO when he's out of the office when an urgent payment is needed, etc.), the upsides are substantial.  It's amazing how frequently simply signing a check makes you realize that you don't really need something (e.g., a software subscription you used to use and then moved off of with only legacy data, a contractor whose project hasn't performed well and you should make the call to end, etc.).  

Also, I always try to keep the overhead low on knowing where the cash is going, and put in place reasonable/minimal cash controls.  One of the easiest is having someone else enter the invoices into the accounting system and prepare the checks weekly.  This both: 1) reduces the time of truly administrative tasks, and 2) ensures a separation of the preparation of checks from signing, which is good cash control governance in any case.

Other parts of accounting like the exact definition of revenue, depreciation policies, differences between A/P liabilities and expenses, etc., are generally unimportant for start-ups as you focus entirely on cash and do not make different decisions based upon these differences.  Don't focus on them.  One of the best things to always challenge an accountant with is, "Does this matter?  Is it material?  Will we make different decisions based upon it?"  

Know where the money is going.


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