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Startups - The CEO Must Understand Operations

3/7/2014

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As entrepreneurs, it's easy to focus on our new technologies, the market, management of our talented team, and communicating the vision we have to make our company a success.  These are the things that most entrepreneurs love to do.  Give us a challenge in any of these areas and we'll charge ahead, resolving problems, creating new opportunities and inspiring others. 

But the truth is, in running a successful business, operations is just as important.  A business makes and spends money.  In a software company and many other high-tech companies, salaries and benefits will be our biggest expenses.  We'll have vendors, whether for office supplies, software development tools, rent, utilities, computers, phones, the list is long.  We'll have other expenses too: travel, subscriptions, legal fees, and more.

If we have employees, we'll need to do payroll, will have to pay payroll taxes and manage benefit programs. 

With luck, we'll also have revenues from our products and services.  These too may fall into a variety of categories. 

By law, we need to track all of these sources of income and expense. 

While it may be tempting to leave this to a contract or in-house bookkeeper or to your head of finance/administration, as CEO, you need to understand where your money is coming from and where it's going.  I didn't do this in my first company, trusting my CFO completely.  I had no visibility into the books.  I relied on his conclusions.  I later regretted that I hadn't taken the time to understand details of the financial side of the business.  Results of that particular mistake are chronicled in one part of my first novel, The Silicon Lathe.

You should hire a professional bookkeeper/accountant to set up your books.  Most small businesses use QuickBooks which I've found to be an excellent tool.  It's available as software you can run on a local computer or you can subscribe to an online version. 

The bookkeeper/accountant can help you set up your Chart of Accounts. This is a list of income and expense accounts that your books will track.  As CEO, you should have some input on what you think you need to see in terms of financial information about your business.  You can rely on the bookkeeper/accountant to guide you through the basics, make suggestions, and work with you on things that are unique to your business or way of doing business.  Getting the Chart of Accounts right will facilitate tracking and retrieval of critical information. 

While I'm not suggesting that you become an accountant, there are things you need to understand and track on a regular basis.  QuickBooks and other similar tools generate standard and custom reports that allow you to drill down from a summary level to details of individual transactions (e.g. checks written, invoices sent).  Of particular interest are:
  • Profit and Loss Statement - a report of your income and expenses for a given period with the results (profit and loss). 
  • Balance sheet - a statement of assets, liabilities and equity of in the company. 
  • Statement of Cash Flows

With these reports, you and your investors can get a good snapshot of the state of the company.  Note that as good programmers know, garbage in yields garbage out, so for the information to be useful, your books need to be kept accurately and up to date.  Again, I strongly suggest having an in-house or external bookkeeper do this. 

Note also that these standard reports may not be enough. They may be all your banks or investors ask for, but you may need more reports to manage your business.  My favorite was a cash flow projection.  I had my head of finance keep a daily log of monies in and out along with a projection for the next 90 to 180 days.  If I saw negative numbers in the future, I knew we needed to step up receivables collection, generate new business quickly, or delay expenses to ensure we had adequate cash. 

Good books are not enough.  As CEO, you need to be able to interpret them.  You need to understand what others will see when looking at these reports.  This is critical as you negotiate customer deals, banking relationships, loans, and outside investment.  Anyone entering a significant relationship with your company will want to see your books to be assured that your business is viable.  So, at the very least, you need to understand:

  • Accounts Receivable, especially aging
  • Accounts Payable (and aging)
  • Quick Ratios
  • Debt to Equity Ratios
  • Payroll tax obligations
  • Basic tax law as it applies to your business

I'm not going to do an accounting tutorial in this post; there are countless websites available that teach the basics and classes in most adult education programs.  

Taking the time to learn basic accounting may seem like a step down for the CEO of the next greatest startup, but understanding operations is critical to the success of your business. 


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    Steve Jackowski

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