Kirsty Nathoo - Managing Startup Finances

Understanding the Health of Your Company

In this section, Kirsty Nathu, CFO at Y Combinator, discusses the importance of understanding the financial health of your company. She highlights three key numbers that every business should know and how to use them to calculate burn rate, runway, growth rate and whether a company is default alive or dead.

Knowing What Numbers to Look At

• Every business should know their bank balance, money coming in and money going out.

• Using these three numbers you can calculate your burn rate which is purely money in - money out.

• Once you know your burn rate then you can start to look at what your runway is. This means how long do you have until you run out of money.

• You can also look at your growth rate which is just looking at two periods of time so your money in a month two minus your money in month one divided by your money in month one.

• The final number to consider is whether the company is default alive or dead.

Burn Rate

• Burn rate is calculated as purely money in - money out.

• If expenses are lumpy, average expenses over a period of time can be used instead.

Runway

• Runway is calculated by dividing existing bank balance by average burn rate.

• It's important to be honest with yourself when calculating runway.

Growth Rate

• Growth rate is calculated by looking at the rate that your revenue is increasing.

Default Alive or Dead

• This number helps you determine whether the company is default alive or dead.

Understanding Your Startup's Financials

In this section, the speaker discusses how to calculate your startup's monthly expenses and revenue, and how to determine when you become profitable.

Calculating Profitability

• Calculate your monthly expenses (red line) and monthly revenue starting point (green point).

• Change the gradient of the line to be your growth rate to determine when you become profitable.

• Knowing how much capital is needed is important for finding a path to profitability.

Importance of Profitability

• Being profitable gives you freedom and makes it easier to raise money from investors.

• It's important to know your numbers and have a safety net in case things go wrong.

Underestimating Expenses

• Undervaluing your own time can make customer acquisition costs look lower than they are. Hiring people also adds extra costs on top of their salary.

• Assuming paid acquisition costs remain constant is a mistake that many startups make in the early days.

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