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Building solid financial statements starts with digging through all of the financial transactions in all of our accounts. In our example, we'll do this with a spreadsheet but you can use your accounting software to comb through your financial records and do the same thing.

Once you've done a little bit of startup accounting you'll realize that keeping good financial records is just about process. You don't need complicated accounting software or a finance background, just a dead simple accounting system you can repeat monthly.

What we use at Startups.com

In our own business at Startups.com, we've managed the company's financial position for over a decade using the same basic accounting methods for an 8-figure growing company. We use a basic fi...

Founders don't get lucky — that's how lottery winners make their money.

From the outside, though, it often looks the same. People read about a company going public or hear about some Founder they know getting their startup acquired and think "Wow, what good luck they've had!"

They view our windfall as some stroke of luck, and as importantly they view our proceeds as something that should be doled out to everyone. In the worst case, they may even try to make us feel guilty about such great fortune — if we haven't already done that to ourselves.

It wasn't "Good Luck" it was "Good Fortune"

In order for a Founder to exit they couldn't rely on luck. Luck is what happens when we're at the blackjack table and you get dealt an ace and a king. Luck is w...

Now that we know how to set up our income statement and what the major parts of our financial statements look like, let's create a little monthly accounting system to manage the financial records of your own business.

This is where most people freak out and shout “Good God! It’s Accccounnttttinnnnng!”

Yes, friends, it is indeed the sneaky devil that we call "business accounting". But guess what? Accounting for startups, or just keeping track of basic financial health isn't that hard because initially it'sj ust basic bookkeeping. Our bank accounts aren't exactly processing "millions" (yet!) so we can stick to some startup business accounting that's easy.

A Simple Accounting Method

We like to keep startup accounting easy, so that as the business ...

Now that we have most of our assumptions in place, the fun begins. We can start modifying our assumptions that drive sales revenue or fixed costs that will begin to calculate net operating income.

When we forecast an income statement all of these variables work in tandem to support our net operating income formula. Once we line net operating income up with our assumptions, we can move the conversation with potential investors toward what the assumptions are versus debating the whole income statement.

How to Wrap up Income Statements Easily

We've already captured most of our indirect costs, capital expenditures, and other costs incurred within our Fixed Items and Assumptions, so most of the work is done already. We can calculate net income by s...

Startup Founders are not entitled to success, yet we sure act like it.

When we're sitting in a room full of Founders or pouring through social media, we're inclined to think everyone is "killing it" but us. We hear of these meteoric rises, huge funding rounds, and big exits and invariably wonder when all that goodness will happen to us.

What we form is an "entitlement to success." We believe that because we see so much of it happening elsewhere, by virtue of that, it's only a matter of time until it happens to us.

What we miss when creating that entitlement is just how flawed the foundation of that premise is and what a house of cards we create with our own expectations.

"I Deserve to be Funded"

In the early days of our formation, when we'r...

"Nearly every startup that goes IPO raises capital — doesn't that say it all?" — Every VC

Whenever I get into a debate with a Founder or Investor over whether startups need to raise capital, the discussion inevitability leads to that "trump card" of finality. The thinking goes that if every single super-successful startup has raised capital (by IPO standards) then it's impossible to overlook that data — or disagree.

While there's nothing wrong with raising capital (we run Fundable.com, a fundraising platform!) I think the default reasoning requires a bit more examination. This isn't so much a case for not raising capital — it's a challenge to some broken assumptions that matter.

"All the Best Companies Raise Capital"

By definition, the comp...

The business startup costs that are the least complicated for startups tend to be our "fixed costs" like office space, utility bills, or software expenses incurred. While these start-up costs grow with any new business, they don't scale the way our variable cost projections do when starting a business.

Fixed Costs vs. Variable Costs

The reason we separate our fixed costs versus our variable costs is that we want to isolate our startup cost categories to focus on what will truly drive our business plan. Things like scaling our advertising costs will have an exponential effect on our revenue, for example.

But our fixed costs don't have nearly this impact.

Our fixed expenses do "grow" over time, but not exponentially. Therefore we tend to separate...

All startup financial projections are based on a few key assumptions about how we feel the business will perform.

In this section, we're going to explain what key assumptions drive our financial forecasts and how to adjust them to create a financial model that works.

Download our Income Statement Template here to get started and follow along.

What’s the Goal Here?

The Assumptions tab in our income statement template gives us a worksheet to help determine what the right values will be to populate in our projected income statement. The tab itself is just a worksheet that drives things like our revenue projections, cost assumptions, and ultimately net income.

We’ll walk through each of the assumptions in this worksheet one by one to give a little m...

The beauty of the startup game is that you only have to be right once.

The frustrating part is you never know when that one time might be! While we all love to hear Founders regale us with origin stories of their massive successes, what we miss most often is the part where they had many misses along the way.

We write those misses off as incidental — they aren't. Every one of those misses started with that very same Founder thinking that was going to be the time they got it right.

How Many Shots Do We Have?

What we tend to misunderstand, most often early in our careers, is that there's rarely one single moment where it's all “make or break.” It's kinda like when we were in High School and we thought what happened at that moment was going ...

Startups create financial projections in the form of a "Pro Forma Income Statement" — which simply means a financial forecast. Early-stage startups are still building their financial models with assumptions, forecasting everything from sales revenue to marketing costs to a basic cash flow projection.

We're going to explain exactly how to build financial projections for your startup even if you have no idea where to start!

Financial Projections are just Assumptions

Most businesses that have been around a while have historical financial statements that detail how operating expenses, direct costs, fixed costs, and their sales forecast have worked all along — startups have none of this.

Therefore instead of working from real-world data to build our...