A good financial model is like a startup seat belt. Existential risk mitigation.

Many choose not to wear one. They lose track of expenses, make overly optimistic forecasts, ultimately run out of money before they achieve sustainable cash flows.

Many fall down this path. I realized I was one of them when we launched Babbl Labs and raised real venture capital. Investors would ask questions that I didn’t have answers for.

Then I happened upon an episode of the Founders Podcast about James J Hill (the MN railroad magnate) which attributed his success to simply having the best grasp on his finances of anyone in the business.

It inspired me to get good at this isht. So I made it a priority over the past two months to create the best possible financial model I could.

And it made all the difference - enabled us to close a $500K round, launch to our first clients, and create a strong roadmap for the next 18 months. One investor said it’s the best Seed-stage model they’ve seen.

Here’s the exact process I followed, I encourage you to steal it:

Taking Startup Finances Seriously

(First, the wrong way) for context here’s what ‘finance management’ consisted of with my first startup before taking it seriously:

• Basic excel spreadsheet to calculate rough costs and revenue (see below)

• Wave for accounting software and running payroll

• Glance at monthly bank statements to make sure we still have money

• Hire an accountant once a year to do taxes for us

This just wasn’t enough to have a good grasp, and led to many of the symptoms that I mentioned up top (losing track of expenses, overoptimistic revenue forecasts, running out of money)

5 Steps to a Kick-Ass Financial Model

(Now, the right way) In summary, here’s the 5 things we did to go from good to great:

1. Hire a bookkeeper (outsource the tedious parts and keep yourself honest)

2. Software stack: Quickbooks for accounting, Gusto for payroll, Ramp for cards

3. Financial Model: Google Sheet that pulls general ledger from Quickbooks

4. Monthly review: audit spending, update forecasts, track variance religiously

5. Auto send weekly Slack message with latest numbers for more visibiltiy

1. Hire A Bookkeeper

Something I wish I did sooner. Something that successful founder friends have all said they wish they’d done sooner.

I put it off early on because it felt frivolous - and tbh you probably can do much of it yourself; but having a professional do it for you will free you up to focus less on the minutia, more on the big picture. Specifically we hired a bookkeeper with the following arrangement:

• They ‘own’ the accounting (manage QuickBooks, taxes, etc)

• We meet monthly for 1 hour to review all expenses

• They have a dedicated slack channel (#accounting) for all other async comm’s

• We pay them ~$500 month

Looking back it’s one of the best investments we’ve made. It really is existential risk mitigation. Having an unbiased third party to make sure things are ‘accounted’ for and ultimately keep you honest.

2. Use the Right Software Stack

There are many many accounting and finance tools a startup can choose to use. I’ve tried many of the cheaper, more campy, more startupy ones and found that these are simply the ones that work best:

Quickbooks for Accounting software - QB is just the OG. It’s the common language every accountant can understand, and it just works for the core things you’d need out of an accounting software - chart of accounts, bill pay, reporting, integrations (exception is payroll, don’t use QB for payroll)

• Within Quickbooks, first thing you should do is have your bookkeeper help you create a robust chart of accounts - essentially a numbered set of categories and subcategories to track each of your distinct expense buckets (see below)

• Have your accountant set-up rules to autocode expenses from each vendor into their account categories

• Add any major / repeat vendors in bill pay so you can easily pay them when they invoice you (ie. your attorney, your cloud compute provider)

Gusto for Payroll - this is the best payroll software I’ve ever used; the onboarding is incredible simple, it takes care of all the tedious state tax, unemployment, insurance stuff for you, and makes it so easy to pay employees, contractors (foreign+domestic) and run most of your HR function

Ramp for Cards - all startups should have a credit card, and Ramp is the best one. Super intuitive user experience, easy to issue and mange virtual cards and expenses to individual team members. Spin up a virtual card for all major subscriptions and expense categories, turn them off if you stop using them.

JP Morgan for Bank Account - I’ve tried Mercury and some of the more startupy neo-banks - they have good looking UIs, but their customer support is garbage and they aren’t even real banks. JP Morgan is refreshingly good at the important things; I know my banker personally, they have good perks, and can even do cap table management for you

3. Create Financial Model Spreadsheet

Once you have your softwares set-up such that you can reliably auto-categorize all your revenues and expenses, you’re ready to build the model.

I use Google Sheets to do this because it’s live, easily shareable, and easily integrateable with QuickBooks to auto-update transactions directly into the model:

Our model has these core components:

General Ledger: a tab that automatically connects to our General Ledger from QuickBooks (using the G-Accon extension) to pull in all of our categorized expenses once per day (bookkeeper set this up)

P&L Actuals: Takes the categorized transactions from the General Ledger tab and aggregates them into a proper monthly Profit & Loss statement

P&L Forecasts: Same exact format as the P&L Actuals tab, except with forecasted amounts for each category (having this separate allows us to compare actuals vs forecasts retrospectively)

Acquisition Model: Modeling the revenue portion of the P&L is especially tricky. For this we have a dedicated “Acquisition Model” tab that takes assumptions about leads, conversion rates, and pricing to give us an even more granular view of future revenues (you can just as well put this on your Forecasts tab, but I find it better to keep separate, see below)

P&L Summary: Finally, the P&L Summary tab takes the actuals and forecasts and combines them into a hybrid view (see above) with actuals and their variance vs historical forecasts for previous months, and projections for future months

4. Review it all Monthly with Bookkeeper

Once you have your financial model hooked up and ready to go, it’s only useful if you review and use it to continuously re-center your assumptions for the future.

I have a standing one-hour meeting the first Friday of each month with our bookkeeper and entire executive team to:

• Categorize any new or unknown transactions

• Review expenses, audit any categories that were particularly high vs forecasts

• Update the next two months’ projections based on variance vs forecasts and any material changes

I also have an advisor that reviews the projections specifically on the acquisition side to help us adjust our go-to-market strategies base on how we are converting, how many leads we’re generating, etc.

5. Auto-send Weekly Slack Updates

To take visibility to an even higher level, we hooked up the financial model to a dedicated #accounting slack channel (via Zapier) to send a weekly on our financial standing

Our bookkeeper and entire team is added to the channel so everyone has a view into exactly where we’re at financially.

Accountant can monitor here and we can send them any async questions, tasks, ideas (seems to work better vs. email or constant meetings)

Anyways, that’s how we do it. And again it’s made all the difference.

Happy to elaborate on some of the specifics or maybe even follow-up with a more indepth post about this if there’s interest.

If you gleam anything, hopefully it’s that taking finances seriously is important for a business at any stage, but especially as an early stage startup.

Done correctly it can even be… fun

Peace,
Ramsey