MODULE 1: BUDGET SHEETS 101
At any stage of your company, it is crucial to have a budget sheet prepared as a tool to help you determine how much money you will need to prepare you for the upcoming months in order for your company to survive. Using your budget sheet is also important to determine areas where resources are being allocated efficiently or not, as well as determining whether your projected spending and earning is on the right track.To get started:1. Determine the tool or platform you would like to utilize for inputting in your data for your budget. This could be a Google Sheets or another budgeting platform.2. Start listing out your essential startup costs, two main categories of these costs will include:
Startup Assets: These are one time purchases of liquid and non-liquid assets like inventory, computers, furniture, vehicles, property etc. Startup Expenses: These are fixed or variable expenses that you will be paying (rent, payroll, etc.)
You’ll want to break down these expenses into their own categories as much as possible. For example, instead of lumping everything under “Office Expenses” you can break it down into stationary, printer ink refills etc.
- Determine your fixed costs
Fixed costs or overhead costs are expenses that remain largely the same throughout each month, these could include:
Rent or mortgage Payroll insurance internet / phone services
- Determine your variable costs
Variable costs are anything that typically don’t have similar or monthly costs and they can go up and down.
raw materials advertising spend utilities equipment transportation shipping costs
- Calculate your monthly revenue
In the case where you already have several months of revenue, its best to calculate the average out of the previous months to determine this number. Being realistic in this number will help you create a better projection and provide more accurate insights down the road.
- Input all this data into your Excel/Budget Sheet, it should start to look something like this:
The Income Statement: Understanding Your Startup’s Financial Performance
The Income Statement, also known as the Profit and Loss (P&L) Statement, provides a comprehensive view of your company’s financial performance over a specific period, typically a month, quarter, or year. It summarizes revenues, expenses, and ultimately, the net profit or loss generated during that time.
Why is this important to your company and potential investors?
The Income Statement plays a critical role in understanding your startup’s financial health and growth potential. Here is why it matters:
Evaluating Performance: Investors will look at the P&L during due diligence to perform their analysis as the statement shows several performance metrics such as gross margin (difference between revenues and direct cost of sales/goods), net income/loss margins, and EBITDA (earnings before interest, taxes, depreciation and amortization). It provides potential investors insight on the operational performance and allows them to compare performance and efficiency against other companies.
Identifying Trends: Investors will also analyze trends between different periods for revenues, expenses, and other key performance metrics. For a SaaS company, both founders and investors will want to analyze gross margins over periods to help make decisions to optimize operations, boost profitability, and even help determine customer acquisition costs as the company is scaling up. VC’s will dig into trends such as gross margins to see how they stack up to industry norms or if the Company is trending towards that target.
Making Strategic Decisions: Understanding your startup’s financial performance allows you to make data-driven strategic decisions. As your company is scaling up, expanding into new markets, determining customer acquisition costs, or improving margins, the the P&L provides insight to guide decision making.
Breaking Down The Income Statement:
To make sense of the Income Statement, let’s explore its key components:
Revenues (Sales): This is the total income generates from selling your product or services. It includes the revenues from all your customers, whether they pay in cash or credit.
Cost of Goods Sold/Services (COGS): This represents the direct costs associated with producing your product or delivering your services. It includes expenses like raw materials, manufacturing costs, or direct labour and commissions paid to sales reps when selling a software service subscription.
Gross Profit: Gross Profit is calculated by subtracting your COGS from your revenues. It reflects the profitability of your core business operations before considering other expenses.
Operating Expenses: These are costs incurred to run your business day-to-day. Operating expenses include items like salaries, rent, utilities, and marketing expenses.
Net Profit/Loss: This is the final figure that indicates how much your startup has earned or lost during the period covered by the Income Statement. It’s calculated by subtracting the total operating expenses and COGS from revenues.
Creating the Income Statement:
To prepare an accurate Income Statement, you will be putting together your bookkeeping transactions and do the following:
Calculate Revenues: Sum up all the income generated from your product or services during the specific. It is important to recognize revenue in the correct period. In the case of a software subscription, let’s say a customer pays 12,000 of the payment is considered revenue in Year 1, or $1,000/month, and the remainder in Year 2. This example for a SaaS company shows the importance of differentiating between bookings vs billings vs revenues, as potential investors will assess the company on the accuracy of revenues during due diligence. Calculate COGS: Determine the direct costs associated with producing or delivering your product/services. It is important to differentiate between direct costs that go into COGS and general operating expenses. Calculate Gross Profit. List Operating Expenses: Identify and cateogrize all operating expenses incurred during the period. Determine Net Income/Loss: This is the final calculation, at the bottom of your Income Statement.
It should look something like this:
Understanding the Balance Sheet: A Financial Snapshot
The Balance Sheet provides a snapshot of your company’s financial health at a specific point in time such as when your business is in the startup phase, or at a specific month, quarter, or the year end of the company. It gives you a clear overview of three key elements:
Assets: These are everything your company owns or controls that have value. For example, cash in hand, money owed to you by customers (accounts receivables), inventory, equipment, patents, and other intangible assets like software developed in-house. Liabilities: These represent the debts and obligations your company owes to others. It includes loans, credit card debts, money owed to vendors (accounts payable), and any other outstanding payable expenses such as payroll liabilities. Shareholders’ Equity: This is the value remaining in the company after deducting liabilities from assets. It represents the initial investments by founders and shareholders and any accumulated earnings over time.
The Balancing Act:
The Balance Sheet gets its name from the fundamental accounting equation:
Assets = Liabilities + Shareholders’ Equity.
This equation demonstrates that everything the company owns (assets) is either funded by debts (liabilities) or investments and earnings over time (shareholders’ equity)
Why is the Balance Sheet crucial during your next raise?
As your company is preparing to look for potential investors and raising capital, a clean and accurate balance sheet will instill confidence in investors as it reflects your company’s financial stability and management.
The balance sheet will be closely examined during due diligence, specifically investors will be assessing where your company has utilized its funds and how the company has been financed to date.
Investors will do a deep dive into both liabilities and shareholders’ equity for items such as: shareholder loans, bank debt, SAFE notes, equity investments from friends and family, and founder investment to date. This will allow them to assess the financial structure and sustainability of your business.
Creating your Balance Sheet:
As your bookkeeping is being completed, you will be able to generate a balance sheet at a point in time and will be prepared as:
List Your Assets: Gather all the items your company owns, including cash and items noted above defined as assets. They are typically presented in the left column of the Balance Sheet. Record your Liabilities: Make a comprehensive list of all debt and obligations your company owns. This goes in the right column of the Balance Sheet. Calculate Shareholders’ Equity: This is the difference between your assets and liabilities and consists of the initial equity investments into the company and accumulated earnings to date. This signifies the value of your company.
It should look something like this:
As your startup grows, maintaining accurate and up-to-date records will allow you to make informed decisions and an invaluable tool when seeking investors.
The Cash Flow Statement - What Really Matters:
One of the most important tools and statements as your startup grows, the Cash Flow Statement is a financial report that provides a clear and concise overview of the cash inflows and outflows within your startup during a specific period.
Unlike the Income Statement which includes non-cash items such as depreciation of assets, the Cash Flow Statement focuses solely on cash transactions, making it a significant tool for understanding your startup’s liquidity and financial health.
It is useful for founders to prepare the Cash Flow Statement on a quarterly and annual basis, however a monthly breakdown will allow you to drill into your data to check the financial health of your company and make informed decisions.
Before diving into how to prepare the statement, let’s dig into the three key components that make up the statement:
Operating Activities: This section captures the cash flow resulting from your startup’s core business operations. It includes cash received from customers for sales and services, as well as cash paid to suppliers or employees for operating expenses. Investing Activities: Here you’ll find the cash flow related to your startup’s investments in assets. It includes cash outflows for purchasing new equipment, money spent towards building your software or IP, as well as cash inflows from selling any assets. Financing Activities: This section accounts for the cash flows related to your startup’s financing activities. It includes cash received from potential investors when completing a capital raise via equity or debt, cash received from lenders, or any cash repayments to debt obligations.
Preparing the Cash Flow Statement:
To begin, you start with your cash balance at the opening period of your statement. For example if you are preparing a cash flow statement for your year end December 31, 2022, you take the closing cash balance as at December 31, 2021.
With that, we breakdown the statement to the three components above:
Operating Activities: Summarize all cash received from operations (revenues), and cash paid out for operating expenses. It would be useful to break it down between revenues, cost of sales, and operating expenses, to give stronger insight for readers. Investing Activities: Account for cash flows related to your startup’s investments. FInancing activities: Record all cash flows connecting to financing your startup, such as inflows from capital raises or debt received/paid back. Calculate Net Cash Flow: Sum up the cash flows from the three components to determine your net change in cash in the period.
Lastly, the sum of your net cash flow and your starting balance will result in your ending cash balance for the period, which will tie into the cash balance on your Balance Sheet as of the closing date.
See below for a cash flow statement:
Why is the Cash Flow Statement an Essential Tool?
The Cash Flow Statement offers invaluable insights into your startup’s financial performance and sustainability. It is also an important financial statement to have prepared for startups looking to raise capital from potential investors.
Here is why:
Assessing Cash Position: Cash is king for startups from inception to scale up. The Cash Flow Statement enables you to gauge whether your startup has enough cash to cover day-to-day expenses and meet financial obligations such as any debt servicing or upcoming payments to vendors or employees. Identifying Cash Flow Trends: Both founders and potential investors can analyze the cash flow from different periods to help plan for future cash needs, identify potential cash shortages, as well as to determine where costs are the primary cause of outflows Evaluating Operational Efficiency: Understanding the cash flows from operating activities reveals how well your startup manages its core business operations. Insights on costs associated with financing operations and the revenue level that must be brought in to achieve profitability.
A few metrics that investors will utilize the Cash Flow Statement for will be to analyze the startup’s burn rate as well as the cash runway. As a founder, keeping track of this will ensure the survivability of the company as well as planning out when the company will need to fundraise.
The burn rate refers to the rate at which a startup is spending its cash to cover operating expenses and investment. Using the Cash Flow Statement, you can determine your burn rate on a monthly and annual basis to determine your burn rate.
Cash Runway is the estimated length of time your startup’s existing cash reserves can sustain its operations without additional funding.
For a startup, these two metrics will be analyzed hand in hand using The Cash FLow Statement by potential investors for several reasons:
Financial Viability: VCs want to invest in startups with a clear path to financial sustainability. A reasonable burn rate couple with sufficient cash runway reassures investors that your startup can weather challenges and make meaningful progress. Milestone Achievement: VCs look for startups that can achieve important milestones with their cash runway. This can be revenue or customer targets that can be achieved with the current burn rate and cash runway. Mitigating Investment Risks: Startups with a longer cash runway reduce the risk of failure due to sudden cash shortages. Strategic Planning: Understanding your burn rate and cash runway enables you to plan your business strategy more effectively. IT can help guide decisions on how much cash to burn to achieve certain growth milestones and ensure proper allocation of resources. Since it could take several years for startups to turn a profit, the burn rate and cash runway provides critical insights as to how much funding a startup will need, as well when it will need that funding.
Both founders and investors look to strike a balance between cash burn and growth. With high levels of cash burn, there should be positive signals which support the spending, such as high user growth or R&D to improve the product to lead to stronger monetization or gross margins.
As an entrepreneur, the Cash Flow Statement can significantly impact your startup’s journey to success both for operations as well as when beginning to plan our capital raises. It can assist in assessing the company’s financial health, potential for growth, and ability to manage resources and navigate challenges.
Taxes 101: What to Know
In this module we will go over some of the basics of Canadian taxes that will be useful to know, however given the complications with tax, speaking with a professional accountant will be important.
In Canada, the Canada Revenue Agency is the government body that administers Federal and most provincial tax filings. Let’s go over some of the filings you may have to deal with as a startup in Canada:
Year End Taxes:
Corporate Tax Return:
As a Canadian corporation, you are required to file a corporate year end tax return, also known as a T2. The T2 must be filed six months after your corporation’s year end.
Importantly, if there are any taxes owing, this must be paid three months (or two for Canadian-Controlled Private Corporations) after year-end or there would be penalties or interest charges.
Companies that are profitable and have owed tax in previous years are expected to make monthly tax instalments to the CRA - which are calculated by CRA based on previous year’s income.
What is a Canadian-Controlled Private Corporation (CCPC)?
There are various benefits to being a CCPC. To be CCPC you must check off the following:
Must not be controlled by non–residents of Canada Must not be controlled by public corporations
Benefits include but not limited to the following:
Small business deduction for taxes Taxes due three months after year end vs two Potential for lifetime capital gains exemption - applicable when you’re selling your company Eligible for high rate SR&ED credits Beneficial treatment for employee stock option
Government Incentives:
There are various government incentives that may apply to your company. Typical ones applicable for startups include:
Scientific Research and Experimental Development Tax Credit (SR&ED): Provided to companies conducting research and development 35% federal and 10% provincial refundable credit for eligible expenditures for CCPCs BC Interactive Digital Media Tax Credit (BC IDMTC) Provided for developing interactive digital media products 17.5% of eligible salaries Industrial Research Assistance Program (IRAP) Provided for having the objective to develop innovative, technology driving products, services or processes or hiring under IRAP’s youth programs Customized funding amounts
Sales Taxes
All Canadian based companies must collect sales taxes on most goods and services provided. This is either Goods and Services Tax (GST) at 5%, or, if Ontario based, Harmonized Sales Tax (HST) at 13%. When filing your GST/HST return, you will be reporting the total sales taxes you’ve collected.
An exception to collecting sales taxes applies to companies who generate less than $30,000 in taxable sales in a year.
As part of your sales tax return, you will also report the amount of GST/HST the company has paid from purchases of supplies and services. This portion will be deducted against the GST/HST the company has charged for its own goods and services and will result in the net sales taxes owed to remit to the CRA.
GST filings are typically done annually three months after year end for taxable sales up to $1.5 million, however it varies depending on where your company is at. Speaking with a tax accountant will give you the right information needed for filing.
In certain provinces, a company must collect provincial sales taxes on most goods and some services. The relevant provinces are:
PST: 7% in BC, 6% in SK RST: 7% in MB QST: 9.975% in QC
These taxes are remitted to the provincial tax authority. Unlike GST, these PST/RST paid on purchases cannot be recovered.
Filing frequency for provincial sales tax is based on the amount collectible per year:
Annual for 3,000 to 6,000 to 12,000
Payroll Taxes:
Companies that have employees are required to make payroll withholdings and filings. Typical withholdings required on salary paid employees include:
Employment Insurance (EI) Canada Pension Plan (CPP) Income Tax
Payroll taxes and filings are highly dependent on company specific circumstances. If you expect to have employees, it will be important to register your company with the CRA for payroll and then speak with an accountant on what is required.
Annual filings for payroll, known as the T4 in Canada, are based on the calendar year and must be filed by February 28 of the subsequent year.
Employees vs Contractors:
One major factor to keep in mind is if someone in your company is considered an employee or a contractor as the implications are different.
Typically, having an employee results in withholdings and taxes such as EI, CPP, and general cost of administration. As such, if the CRA determines that a potential contractor is technically an employee under their definition, the company could be liable for these costs that would otherwise have not been paid.
The CRA gives guidelines on how they determine this relationship:
Intention - The CRA looks to see if the two parties intended to enter into contract of service (employee relationship) or contract for services (business relationship) Relationship Level of control - does the company have the ability to exercise control over a worker in which work is done. Provision of tools and equipment - contractors typically would bring in their own equipment. Ability to subcontract or hire assistants - contractors typically have full autonomy on being allowed to use subcontractors or assistants. Degree of financial risk - typically a contractor pays for their own costs and expenses to get the job done. Degree of capital investment and management - contractors have their own capital investment and manage their own staff. Opportunity for profit - contractors have the chance of profit or risk loss in their jobs.
Stock Options:
As a startup, a common scenario seen is issuing stock options as part of a compensation package. Stock options have tax implications to note:
Stock options issued to an employee: Generally no immediate income inclusion for the employee upon receipt Taxation of stock option benefit is deferred, the benefit is taxed when shares are disposed Stock options issued to a contractor: FMV of the options reported as business income upon receipt
Generally stock options are not deductible to the corporation and payroll withholdings could apply. When dealing with stock options, talk with your accountant to ensure proper reporting and filing.
Suggested Prompts
How can implementing a detailed budgeting process improve a startup’s ability to make strategic financial decisions?
In what ways do the components of financial statements like the income statement, balance sheet, and cash flow statement interrelate to give a comprehensive view of a company’s financial health?
What are the key considerations for a startup when choosing between different tax incentive programs and ensuring compliance with Canadian tax regulations?
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