As an early stage company there are lots of things that you could be doing, but only a few things that actually matter. One common trap is to care too much about things that make you seem like a Proper Business, at the expense of the things that help you become one.
Finance can be one of those things. Time spent setting up dashboards and building forecasts is time not spent building a product and talking to customers, but the reverse is also true: the startup graveyard is full of companies that didn’t care enough about finance (i.e. they ran out of money).
It’s hard to know how much to care about finance at Seed/Series A, and before the market downturn it was easy not to care at all — funding rounds were huge and the next raise was always round the corner. But not anymore — round sizes have come down and the bar to raise a Series A/B has gone up. Runway matters again.
We’ve written this all-in-one finance guide to help: what you should care about, what you can ignore, and straightforward practical advice based on our experience working with 100s of founders and ops/finance teams at early stage companies.
By the end of this guide you’ll have
Before you can do anything with your money, you need to a place to store it — a business bank account.
At the Seed stage you might have $1m–5m in the bank and at Series A this goes up to $5m–30m. Your priorities (in order) with this cash are:
- Storing it in a safe place
- Generating a low-risk return on it
Where to store your cash
You already know that you can store your cash in a bank account. But as the events of March 2023 demonstrated, a single account isn't enough — banks do sometimes fail, so you should spread the risk by having 2 accounts.
For US companies, we recommend Mercury as your primary bank account, and JP Morgan Chase as your secondary account. Your Mercury account will be insured by the FDIC (the US government, basically) up to $3m (Mercury distributes your money to 12 partner banks to make this possible), so if anything happens to Mercury or their partner banks, the government will have your back.
If something does happen, your money could be locked up for a few weeks while things resolve, so you should store 2 months of burn in your JP Morgan Chase account to let your company continue operating smoothly.
How to generate returns
Because of inflation, you don't want your cash to sit around and depreciate in value. It's a good idea to put idle cash into highly liquid (i.e. you can take your money out any time), ultra-low risk (i.e. you aren't going to lose your money) investments. These are generally going to be securities backed by the US government (i.e. lending money to the US government and receiving interest on it), and money-market funds provide the easiest way to invest in these securities.
We recommend Mercury's Treasury product, which lets you do this seamlessly.
Primary bank: Mercury (US), Starling (UK)
Secondary bank: JP Morgan Chase (US), Barclays (UK)
Treasury: Mercury Treasury (US)
Accounting involves 2 things:
- Recording all your financial transactions (“bookkeeping”)
- Summarising those transactions into a digestible format, known as “financial statements”
You’re legally obliged to maintain accounting records (“the books”) that adhere to certain standards. These are the ‘source of truth’ for your business’ financial data, and you’ll use them for reporting (keeping track of your financial performance) and for tax — calculating your tax bill at the end of the year.
50 years ago your accounts would have been in a physical book (left). Today, they’ll be in an online accounting system like QuickBooks or Xero.
Transactions are the raw data in your accounting system. If you paid $100 to Slack last month, it will be recorded in a transaction with an amount, a date, and some metadata.
Accounts keep track of how much money is coming in and out related to specific items. For example, to keep track of how much revenue is coming in, how much money you’re spending on software, and how much cash you have, you’ll have accounts called ‘Revenue’, ‘Software Expense’, and ‘Cash’. Your Slack transaction will increase the value of your ‘Software Expense’ account by $100 and decrease the value of your ‘Cash’ account by $100, and it won’t have any effect on your ‘Revenue’ account. You might have 50–100 accounts in total, some tracking expenses, some tracking income, and others tracking assets (e.g. Cash). The list of all your accounts is called the Chart of Accounts.
Financial statements take those accounts and group them together into summary tables. A financial statement might have 10–20 rows, known as line items. More on this later.
To track things at a more granular level, you can optionally create breakdowns within each account. For example, you might want to track the spending of each department (Sales vs Marketing vs Engineering, etc) separately. To do this you can add a ‘Department’ breakdown in your accounting system, along with a list of your company’s departments. These breakdowns are called classes in QuickBooks and tracking categories in Xero.
Your accountants will set up the Chart of Accounts and tracking categories, so you don't need to worry too much about them — your job will be to tell them what details you care about seeing in your financial data, and they'll figure out the rest.
Don't go overboard with detail in your Chart of Accounts, but don't just go with a generic template — it'll include accounts for things like Automobiles, which you probably don't have. If an extra level of detail won't help you make decisions day-to-day, then you can probably do without it. The more accounts and breakdowns you have, the more work your bookkeepers will have to do, and the greater chance of errors which you'll have to spot and correct.
Make sure your accountant has experience working with your type of business so they can guide you here.
There are 3 standard financial statements that your accounting system will generate:
- Profit-and-Loss Statement (P&L), also called an Income Statement
- Cashflow Statement
- Balance Sheet
Each of these looks at your company’s finances through a different lens:
- The P&L looks at revenue and expenses to determine profitability
- The Cashflow Statement shows how cash comes in and out (more on revenue vs cash later)
- The Balance Sheet shows what the company owns (assets, like cash and equipment) and what the company owes to others (liabilities, like debt)
The P&L is the main financial statement you need to know about — you can ignore the other 2 for now. Here’s an example of a P&L:
It’s broken up into 3 sections:
- Revenue (or Income)
- Cost of Goods Sold, COGS (or Cost of Sales)
- Operational Expenses, OPEX (or Selling, General & Administrative Expenses, SG&A)
P&L Section 1: Revenue
This section shows a breakdown of how much money you make.
P&L Section 2: Cost of Goods Sold
This section is for costs that are directly related to producing your product or service.
If you ran a bakery, then raw ingredients (flour, eggs, etc.) would be part of your COGS since every extra loaf of bread requires these ingredients. General overheads, like rent, wouldn’t be part of your COGS — you can produce an extra loaf without needing to spend more on rent.
Software is great because you can sell the same product over and over again — it doesn’t cost more to serve an extra customer (“zero marginal cost”). Okay, it does, but only a little. The main COGS for software companies are
- Payment processing fees: Stripe takes 2% + some change for every new customer
- Cloud costs: AWS/Google Cloud need to scale up alongside usage
P&L Section 3: Operational Expenses
This section is for costs that keep the business running day-to-day. The big ones are
- Marketing and advertising
- Rent, utilities, office supplies
The P&L calculates a few specific metrics based on these sections. They’re not super important at Seed/Series A, but you’ll hear people talk about them a lot so it’s worth knowing what they mean.
Gross Profit = Revenue - COGS
This is a good indicator of how feasible your business model is — if you lose most of your revenue to COGS, then you need to be at very large scale to make money (the Amazon approach). If you’re a software company, your COGS should be very low (< 20% of revenue).
Net Profit = Gross Profit - OPEX
This is a good measure of the profitability of your business. At Seed/Series A, this will likely be very negative and that’s fine. At later stages, particularly post-IPO, it becomes important.
(If you’re interested, read our post Financial Statements: A Beginner’s Guide to learn more more)
Outsourcing your accounting
At Seed/Series A, your accounting needs are very basic and it doesn’t make sense to hire an in-house accountant — you should use an outsourced accounting firm.
You’ll pay ~$500/month for bookkeeping services. This includes the initial setup of the accounting system and the ongoing work to classify transactions correctly and generate your financial statements.
You’ll need to pay separately for tax services, usually ~$2,500/year. This includes the various tax filings that your company is legally required to do.
You should also pay someone to file for R&D tax credits. These schemes let you get back a big chunk of your R&D spend, usually between 10% and 30%(!). Engineering and product salaries typically fall under R&D, so this will be a pretty big number. Firms generally charge ~2% of the tax credit amount that they manage to get you.
A basic understanding of the accounting terminology above will help you work with your accountants more easily and let you poke around your accounting system yourself if you ever need to, but you shouldn’t be spending much time or energy thinking about accounting day-to-day.
Accounting system: QuickBooks (US), Xero (UK)
Outsourced accountants: Pilot (US), Quantico (UK)
Reporting is the process of showing current and historical numbers to people who care. Some of these people will be internal (your team) and others will be external (your investors).
Reporting is for your team and investors to understand how your company is doing. At the early stage, it’s really nothing fancy — just a handful of metrics that are looked at regularly, answering the important questions about your company’s financial health.
With a decent accounting setup these questions are easy to answer, with the exception of the most important one: “how much money are we making?”.
Bookings vs Billings vs Collections vs Revenue
For SaaS companies, there are a few ways to interpret the question “how much money are we making?”:
- Bookings answers the question “how much did new customers this month commit to paying us?”
- Billings answers the question “how much did we charge customers this month?”
- Collections answers the question “how much money did customers pay us this month?”
- Revenue answers the question “what was the value of the services we provided this month?”
For self-serve SaaS products, these 4 metrics are often identical:
Suppose a customer signs up to a $100/month service using their credit card. You book $100 (they’re only committing to 1 month), you bill $100 and simultaneously collect $100 (payment is automatic via Stripe Checkout), and your revenue is $100 (you delivered $100 of service this month).
But things can be very different in enterprise SaaS — suppose you just sold a 2-year contract of your product for $96,000, and your customer negotiates to pay annually:
- Bookings are $96,000 — the customer has committed to paying you $48,000 over the next 2 years
- Billings are only $48,000 — the customer is paying annually, so you’ll charge them $48,000 today and $48,000 1 year from now
- Collections are probably $0 — you’ve just sent the customer an invoice (the “bill”) and their finance team will get round to paying it next month
- Revenue is $4,000 — the customer is paying $96,000 for 24 months, so this month you’re delivering 1/24th of the $96,000 service = $4,000
These contracts are great because you get a big cash payday before you’ve delivered what the customer is paying for. You can use this cash to run your business, so it’s worth trying to get your customers to commit to annual contracts (or longer), with up-front payments.
Because of this difference between cash and revenue, it’s possible to be cash-flow positive (your cash is going up each month) without being profitable (your revenue exceeds your costs each month). At Seed/Series A, either of these would be very impressive but being cash-flow positive is what makes you ‘default alive’.
You probably won’t report on all 4 of these metrics every month, but you should know their differences and understand their dynamics.
Calculating MRR and ARR
You already know that MRR stands for Monthly Recurring Revenue and if you multiply it by 12, you get ARR. But what does this ARR stand for? Hint: it’s not Annual Recurring Revenue.
Taking your MRR and multiplying it by 12 gets you your Annualised Run Rate. This is what most people mean by ‘ARR’. It’s a forward-looking metric that answers the question “how much money will we make from our current customers in 1 year?”. (This run-rate calculation is also done by non-subscription businesses).
Annual Recurring Revenue (also ARR) refers to revenue that actually recurs annually (i.e. 12+ month contracts). At Seed/Series A, you mostly don’t have to worry about this and you can stick to the run rate.
There are various nuances that go into calculating MRR — discounts, legacy products, paused subscriptions, delinquency, and so on — so you don't want to do this calculation manually. Stripe has its own way of calculating MRR, and other subscription management tools that sit on top of Stripe have their own slightly different ways. At Seed/Series A, the differences will be small so you should just pick a single source for your MRR number and consistently use that.
Which financial numbers should you share internally?
As a founder or finance lead, you should definitely know
- Your bank balance (cash)
- Your monthly outgoings (burn)
- Your revenue (or MRR for SaaS)
From these, you can calculate how fast you’re growing (growth rate) and forecast when you’ll run out of money (runway). More on this in the Planning section.
The next level of detail is to break out your expenses into these categories:
- Payroll (incl. benefits + taxes)
- Marketing spend (ads, sponsorships)
- Other (everything else grouped together)
You should check these numbers monthly, with the exception of revenue which you should pretty much know in real-time. Keep this list simple — the longer it is, the less you’ll pay attention to it.
This is what your financial summary might look like (interactive):
Sign up for Causal and connect to QuickBooks/Xero to get your own financial summary like this, in 2 minutes.
Who should have access to the financials?
Everyone in the company should know what your revenue is on a weekly/monthly basis, and your runway monthly/quarterly. This will help the team understand how the business is doing, and connect their work to actual business outcomes.
If you’re at $200k ARR and the engineers know that Feature X will help close a $20k deal (+10% revenue!), they’ll know to prioritise it over less impactful nice-to-haves. Likewise, if everyone knows that you have 12 months of runway, then they’ll be more likely to focus on the things that will get you to the next fundraising milestone, and to think proactively about what those things could be. Transparency also communicates trust between the leadership and the rest of the company, which is table-stakes for hiring and motivating strong talent.
Without revenue and runway transparency, it’s easy for teams to fall back on vanity metrics to measure progress — fundraising, headcount growth, Twitter hype — and lose sight of what actually matters: building a real business.
The leadership team should see the extra level of detail around burn and the expense breakdown — they should know the financial impact of their team’s operations and be thinking about how to maximise their team’s ROI.
When sharing financials with your team, add context to the numbers and provide an opportunity for Q&A to avoid misinterpretation. For example, it might seem obvious to you that your company will be un-profitable for a while, but if your team are new to startups, they might find this very alarming!
Investors don’t care too much about your detailed financials at Seed and Series A. To the extent they are interested, it is:
- To understand fundamentals about your business, like whether you have product-market fit
- To do their own internal reporting. Their investors (Limited Partners, or LPs) will want updates on how they're performing
Every month, you should send an investor update which includes the most relevant metrics for your business. On the finance side, this will be Cash, Runway, and Revenue.
Every quarter, your VCs will also send you an information request so that they can update their numbers for their own internal reporting.
Of course, if you’re trying to raise a Series A in the near future, this will require more information and more diligence, so check out our Minimum Viable Data Room for more detail on this.
Financial reporting: Causal
Planning & Forecasting
Once you've got a good accounting setup and reporting in place to understand your past and present numbers, it's time to think about the future: planning.
A plan is a path that can credibly get you to a goal. Planning is the process of
- Setting this goal
- Coming up with the path to get there
At Seed/Series A your goal is to find product-market fit (PMF) without running out of money. Revenue could be a proxy for this — if you get to $1m ARR with 50 highly engaged customers within a well-defined segment, you might conclude that you have PMF in that segment.
Once you have PMF your goals will be about scaling, without running out of money — hitting revenue milestones, maintaining good growth rates, and improving other metrics (Net Revenue Retention, margins, etc).
Your plan will involve some hiring (how many people to hire + when to hire them), sales/marketing (inbound lead conversion, outbound activities, sales cycle stages, etc.) and international operations (payroll expense, software spend, rent, etc.).
Why care about planning?
Even if you haven’t explicitly written down a plan (e.g. in a doc, or a spreadsheet), you are implicitly following one.
At the earliest stage, that implicit plan might be something like this:
Every day I’m going to send cold emails to get demos booked with potential customers. I’ll do each demo and then we’ll build whatever features we need to close the deal. Rinse and repeat until $500k ARR.
When the team is just the founders, you can keep that in your head and you know you’ll run out of motivation before you burn through your $500k pre-seed. But once you hire people, the equation changes:
- You have a team, so you need a clear, achievable goal to align them
- Your burn is higher, so you need to know how much runway you have, how many people you can afford to hire, and when to raise the next round
A simple financial plan lets you set an achievable revenue target, and forecast your runway based on your hiring plan, expenses, and revenue.
Setting revenue targets
Most early stage companies set revenue targets based on what investors will look for in the next funding round. Investors put a lot of weight on growth rates rather than absolute numbers, so here’s what most companies do:
- Look at growth rate benchmarks for good early stage companies
- Pick a revenue goal that meets those benchmarks
This “top-down” target is useful because it forces you to be ambitious about what’s possible (“If Asana managed it, why can’t we?”), and if you hit the target, it puts you in a good position for your next fundraise.
But while this top-down approach can spit out a target, it doesn’t help you actually hit it:
CEO: “We need to grow 20% per month to get to $1m ARR by the end of the year.”
IC: “Ok, what should I do about it?”
This is where a bottom-up plan (or ‘model’) comes in.
The ‘inputs’ of a bottom-up plan are things that you can directly influence. Once your plan is built, you should be able to credibly say something like this:
To get to $1m ARR by the end of the year, we need to reach out to 20,000 prospects, book meetings with 500 of them (2.5%), and convert 50 of those (10%) into paying customers at an average price point of $20k/year. [+ month-by-month breakdown of these numbers]
Different businesses are modelled differently and have different inputs and outputs. Here are some examples of each:
Once you’ve made your first hires you’ll likely be burning $50–100k/month, and after Series A, this might go up to $500k+/month.
These are not small numbers, and it’s surprisingly easy to accidentally run out of money 3–6 months sooner than you expect. Having a basic expense forecast in your plan will avoid this.
What are the biggest expenses to worry about?
The biggest expenses at Seed/Series A are:
- Payroll: salaries, benefits, taxes (70%)
- Marketing & advertising (10%)
- Software subscriptions (5%)
- Contractors (5%)
- Other (5%)
Given that the majority of your money will be going towards payroll, this is the item that you should plan/forecast at a granular level. This is typically called a ‘headcount’ or ‘hiring’ plan.
How to build a headcount plan
There are two parts to a headcount plan:
- Your current team
- Your planned hires
Your model should include a list of your current team, including their start date, salary, and department. With this list, your model should calculate how much is paid to each employee today, and how much will be paid to future employees once they join.
Putting this all together
You should combine the top-down and bottom-up approaches to set targets and come up with a plan:
- Top-down: figure out what “good” outputs look like 12 months from now
- Bottom-up: build a revenue plan based on inputs that you can directly influence, and forecast the expenses that you’ll incur along the way
- Play with the inputs in the plan until they produce those good outputs, without running out of money on the way
If you find that there are no realistic inputs that will get to the good outputs without running out of money, then this planning exercise was very successful because you’ve found a serious structural problem in your business that you need to solve. You might need to
- Change your product: figure out how to provide more value so that your current customers will pay 5–10x more
- Change your market: find a different customer segment that will pay 5–10x more for your product
- Get lean: figure out how to operate with fewer people, so that you don’t run out of money
Be brutally honest with yourself about your input assumptions: Do you have good reasons to believe that a new salesperson can hit a quota of $1m/year when you’re at $1m ARR? Can you actually send 5,000 cold emails per week without getting caught by spam filters? How are you going to find, interview, and onboard 1 salesperson a month unless you’re willing to spend a large proportion of your time on this?
Tracking performance vs plan
Once you’ve come up with a plan for the next 12 months, you should track your progress against that plan. This is known as variance analysis or budget-vs-actuals (BvA).
Every month, you should look at what you’d planned to generate in revenue and what you’d expected to spend on different expense items, and compare this against what your actual revenue and actual expenses turned out to be.
Here's what it might look like:
This session doesn’t need to be more than a 30-minute meeting between the founders and whoever is in charge of The Finances.
When it comes to revenue, there should be no surprises in this meeting — the CEO should be tracking this on a daily/weekly basis and should already know where revenue ended up vs the plan, and understand why things went well/poorly.
For expenses, if the difference between the plan and the actuals (the ‘variance’) is significant, e.g. 10%+, then you should figure out why. To do this, you should look through the actual transactions behind each number. For example, if you spent a lot more on contractors than expected, then you should check the list of contractor transactions from the month and make sure there’s nothing unexpected in there.
This might sound tedious, but it’s very common to find that you forgot to cancel a service that you’re no longer using, or that your free-for-all expenses policy that worked when you were 5 people is no longer sustainable at 20 people. It’s also common to find, a couple of months into the year, that some of your plan assumptions were wildly unrealistic and that things take longer to do and cost more money than you expected!
This monthly 30-minute meeting is well worth it — it will save your company 10s, possibly 100s of thousands of dollars per year, and will give you an intuitive sense of how resources are being allocated at your company that will help you make decisions during the rest of the month.
Producing the 'budget vs actuals' comparison every month and drilling into individual transactions is a very manual process in spreadsheets, so many companies don't bother doing it. We recommend using Causal to automate it.
Hiring an outsourced CFO
Also known as a "virtual CFO", "fractional CFO" or "contract CFO", an outsourced CFO is someone you can pay to spend a few hours every month helping with your company's finances holistically. This includes:
- Setting up and making updates to your financial model
- Putting together your annual plan/budget
- Producing the variance (budget-vs-actuals) analysis every month
- Actively managing your cash — finding ways to cut costs or earn more
- Managing your outsourced accountants, or doing the accounting/bookkeeping themselves
There are 2 good reasons why you might hire an outsourced CFO:
- No one on your team has the bandwidth to spend time on finance
- You lack the expertise in-house to maintain your financial plan and work with accountants
Our advice: try managing finance internally and seeing how that goes. If you run into the reasons above, then explore outsourced CFOs.
They aren't a silver bullet — you'll still have to spend some time working with them — but in the best cases, they can take a lot off your plate and even find new ways for you to save money or accelerate your business. In the worst cases, however, they can spend their (billable) time producing work that's overkill for your company stage, which you then have to spend time reviewing.
Financial planning + variance analysis: Causal
Outsourced CFO: StartupEdge
(This isn't a fundraising guide, so this section will be brief)
If you’re raising a pre-seed or seed round, investors won't care about your finances in much detail. If they do, then this might be a red flag that they're focusing on the wrong things and may not be good partners as you build your business.
At Series A investors will care more, but still at a pretty high level. Revenue and growth rate matter a lot, along with indicators that customers love your product (e.g. usage metrics) — these indicate product-market fit. Operational efficiency matters more than a couple of years ago — it's a bad idea to buy growth with high marketing spend and a bloated team — but you won't be expected to have a clear sense of your CAC or LTV yet.
If you’re raising a Series A, check out the “Minimum Viable Data Room” for a more in depth breakdown of what numbers investors care about seeing.
How much should you raise?
There are 2 key factors that decide how much you should raise:
- Runway: your fundraise should get you at least 3 years of runway (should be enough time to hit your next milestone)
- The market: round sizes and valuations are higher in a good market, and worse in a bad market
VC funds typically aim to get 15–20% ownership in a company at Seed/Series A. This constraint decides the ballpark in which your fundraise will land — if you set out to raise $3m, then you'll probably get a valuation of $15–20m post-money. If that's roughly what most seed rounds are valued at, then you're good. But i you set out to raise $6m in the same market, this would imply a valuation of $30–40m post-money, and you'll need to have a very compelling reason why your seed-stage company has a 2x premium over other seed-stage companies.
The AngelList 2022 State of Early-Stage Venture had this table of median valuations over the past 4 years, which might (or might not — given the correction) be helpful for benchmarking how much you might raise:
Why less is sometimes more
Conventional wisdom might be to max-out the capital raised and valuation, but there’s some reasons you might not want to do this, which Retool highlighted in their blog post announcing their Series C:
- Having a high valuation early on can hurt the exit-outcomes for later-stage employees.
If you had joined Uber five years before their IPO, and received $1M in stock, it would’ve been worth $2M at the IPO. But if you’d done the same at Coinbase , your stock would've been worth $57M! That’s because in the five years leading up to their respective IPOs, Uber’s valuation only doubled, whereas Coinbase’s valuation rose by ~57x. While both companies achieved similarly great IPOs, the latter resulted in much better returns for employees.
- Higher valuations make it more expensive for the later-stage employees to exercise their options.
- Maximising the money raised dilutes the early employees.
Investors typically have pro-rata rights to protect their ownership stake, but employees don’t. If you look at companies that consistently raise large amounts of capital, you’ll see that employee returns suffer, because their ownership stake will get diluted substantially from their initial ownership position.
Let's take Snowflake as an example…[t]heir Series C raised $80M at a $260M valuation (30% dilution), Series D raised $100M at a $500M valuation (~20% dilution), Series E raised $263M at a $1.5B valuation (18% dilution), Series F raised $450M at a $3.55B valuation (12% dilution)...approximately 60% dilution to get from a valuation of $260M to $3.55B.
For most Seed and Series A companies, finance should handled by the founders or a non-technical generalist (business operations, chief of staff, etc.), possibly with the addition of an outsourced CFO.
The right heuristic for deciding when to make the first in-house finance hire is: at what point does it make sense to pay (e.g.) $120k for a finance hire to optimise our spending? Usually the answer to this question is: “after a Series B”, because you’ve typically raised $20-30m and a finance person’s salary will be ~1% of your annual spend.
Here’s some salary data for typical FP&A compensation:
The Finance Stack
Until you make your first finance hire, smart use of software and outsourcing can give you and your team a lot of leverage. Here's a summary of our recommended products and services for your finance and HR needs:
Managing finances is a “necessary but not sufficient” part of building a great company, so you have to figure out the right amount of attention to dedicate to them. Care too little and the company goes under; care too much and the company goes nowhere.
This guide focuses on the set of things worth paying attention to in the earliest stages of a company, rather than the set of things you could plausibly do. Of course, each company will have its own unique aspects, but there’s a core layer of infrastructure which all companies should care about.
If you're an early-stage company, we've built Causal to be the quickest way for you to setup financial reporting and planning, and put it on autopilot so you can spend more time on your business. Sign up for free and use our finance wizard to generate a custom model for your company in 2 minutes based on live data from your accounting system.