Josh Aharonoff
Mar 16, 2023
Welcome to the second edition of CFO Insights!
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This week Your CFO Guy shared on:
The Collapse of SVB 📉
Everything you need to know about EBITDA 👇
24 Startup KPIs 👇
10 Example of Double Entry Accounting (with Debits & Credits) 👇
The Most Important Concept in Accounting 👇
Without futher ado, here are the top posts from my LinkedIn!
The Collapse of SVB 📉
➡️ What happened?
Silicon Valley Bank (SVB) was officially closed down on Friday by the Fed and placed into receivership with the FDIC
➡️ Who is SVB, and why is this important?
SVB is the 16th largest US bank…but that’s not why they are so important
It’s estimated that over 50% of venture-backed startups bank with SVB
These startups now have their funds frozen, until Monday when they will be able to access up to $250k of their capital
➡️ How did this happen?
It ultimately happened as a result of a bank run
Where many depositors try to withdraw their cash in a short amount of time, causing the bank to quickly become insolvent and unable to meet the demands
➡️Why was there a bank run?
It started when SVB announced to shareholders on Wednesday that they sold substantially all of their Available for Sale (AFS) Securities, and were now raising capital
This sale represented a 1.8B post-tax loss for SVB
This spread panic amongst many VCs and startups
➡️ Why did SVB sell its AFS securities at a loss?
While there’s no exact answer on what may have driven this, there were 2 factors
1️⃣ Startups deposits have been on the large decline for quite some time now
2️⃣ The value of many of these AFS securities went down due to the Fed raising interest rates
➡️ How are startups affected?
According to the FDIC, all insured depositors will have full access to up to $250k by Monday morning, March 13, 2023.
Customers with accounts in excess of $250k should contact the FDIC at 1-866-799-0959.
This means that while startups will get access to up to $250k in their deposits on Monday, what happens to the rest of their funds and by when is yet to be determined
This is going to place a HUGE strain on startups to manage their cash expenditure needs (payroll being a large one)
➡️ What is the outcome?
No one knows for sure
The best outcome is a 1:1 return of capital, most likely through an acquisition of SVBs assets and liabilities (similar to JP Morgan’s acquisition of WAMU in 2008)
According to a few sources, an auction is taking place RIGHT NOW, with the final bids due today, and results posted by tonight
➡️ What to do if you are affected
1️⃣ Get very familiar with your cash needs
It’s here more than ever that you NEED to understand your cash needs, what you’re spending on, and when you’ll need to spend money
2️⃣ Be LEAN
Remember, it’s not just you who is affected
It’s your customers
Your ability to raise capital
Your partners
Be very careful and vigilant about what you are spending money on
3️⃣ Stay INFORMED
A large number of startups were able to pull their money out before the bank closed down
A much larger number didn't
Stay up to date with everything that’s happening and be ready to take action fast if needed
That’s my take on what’s happening with SVB in 3,000 characters…there’s so much more to share
Click the image below to view the complete guide with the breakdown
Everything you need to know about EBITDA 👇
EBITDA just may be the 6 most notorious letters in Finance & Accounting
There is so much emphasis on this metric, yet it is so often misunderstood
Let's start with:
➡ What is EBITDA?
EBITDA's literal definition is
Earnings
Before
Interest
Taxes
Depreciation
Amortization
➡ How is EBITDA calculated?
Like the name implies..
Take your net income
[+] Interest Expenses
[-] Interest Income
[+] Taxes
[+] Depreciation & Amortization
➡ Why is EBITDA so important?
Well.. a number of reasons...the 2 biggest being:
1️⃣ EBITDA is commonly used to value businesses
2️⃣ EBITDA is commonly referenced on a number of ratios
➡️ What are some common misconceptions with EBITDA?
1️⃣ EBITDA is not a GAAP metric
That’s right…for that reason, you won’t find it on a profit and loss
2️⃣ EBITDA does not equate to cash flows
Your cash flows can wildly differ from period to another when compared to EBITDA, depending on how things like accounts receivable / payable, and fixed assets come into the mix (to name a few)
3️⃣ EBITDA is not the same as net operating income
While in many cases these 2 items may be the same, for some companies, it can differ
An example can be if a Fixed Asset is necessary in order to carry our revenue, in which case Depreciation would be included in cost of goods sold
Those are just a few things to note about EBITDA - there is so much more to it
24 Startup KPIs 👇
1️⃣ Gross Margin → Gross Profit / Revenue
2️⃣ Cash Burn → Cash consumed, not factoring in financing activities
3️⃣ Churn → Lost revenue / customers who are no longer active
4️⃣ EBITDA Margin → EBITDA / Revenue
5️⃣ Customer Acquisition Cost → Cost to acquire a customer
6️⃣ Customer Lifetime Value → Total expected revenue from a customer over their lifetime
7️⃣ EBITDA → Net Income + Interest + Taxes + Depreciation + Amortization
8️⃣ Monthly Recurring Revenue → Revenue from customers subscribed to monthly recurring plans
9️⃣ Net Dollar Retention → Net revenue / opening MRR
🔟 Annual Recurring Revenue → Revenue from customers subscribed to Annual recurring plans
1️⃣ 1️⃣ CAC Payback → Period of time till you make back your Customer Acquisition Cost
1️⃣ 2️⃣ Sales Attainment → % of quota attained by sales team
1️⃣ 3️⃣ Average Contract Value → Total Revenue / # of Contracts (B2B)
1️⃣ 4️⃣ Expansion Revenue → Added Revenue from recurring customers
1️⃣ 5️⃣ Contraction revenue → Reduced revenue from recurring customers
1️⃣ 6️⃣ Budget Attainment → % of your budget achieved
1️⃣ 7️⃣ Average Revenue per User →Total Revenue / # of Users (B2C)
1️⃣ 8️⃣ Net Promoter Score → Used to measure customer loyalty based off of likelihood to refer
1️⃣ 9️⃣ Runway → How many months till you run out of cash
2️⃣0️⃣ Revenue run rate → This months revenue * 12
2️⃣1️⃣ Gross Profit → Revenue - COGS
2️⃣2️⃣ Cash out date → Date in which you run out of cash
2️⃣3️⃣ Net Income → Revenue - COGS - Operating Expenses + Other Income - Other Expenses
2️⃣4️⃣ Operating Expenses → Company Expenses not related to your Cost of Goods Sold, or Other Expenses
10 Example of Double Entry Accounting (with Debits & Credits) 👇
➡️ What is Double Entry Accounting?
Pretty much the foundation of Accounting - it shows how every transaction affects a business in 2 areas
This is often times summarized via Debits & Credits, which are used to explain increases / decreases across different accounts
➡️ What are 10 examples?
1️⃣ Investing money in a business
Debit Cash (Asset) ⬆️
Credit Common / Preferred Stock (Equity) ⬆️
2️⃣ Generating a sale - cash basis
Debit Cash (Asset) ⬆️
Credit Sales ( Revenue) ⬆️
3️⃣ Generating a sale - accrual basis
When cash is collected:
Debit Cash (Asset) ⬆️
Credit Deferred Revenue (Liability) ⬆️
When product / services are rendered:
Debit Deferred Revenue (Liability) ⬇️
Credit Income (Revenue) ⬆️
4️⃣ Purchasing legal services via AP
Debit Legal Expense ⬆️
Credit Accounts Payable ⬆️
5️⃣ Purchasing a 12 month subscription
Debit Prepaid Expenses (Asset) ⬆️
Credit Cash (Asset) ⬇️
6️⃣ Converting inventory to COGS
Debit Cost of Goods Sold ⬆️
Credit Inventory ⬇️
7️⃣ Recording an accrued expense
Debit expense account ⬆️
Credit Accrued Expenses ⬆️
8️⃣ Depreciating a fixed asset
Debit Depreciation (Expense) ⬆️
Credit Accumulated Depreciation (Contra-asset) ⬆️
9️⃣ Paying off debt
Debit Debt (Liabilities) ⬇️
Credit Cash (Asset) ⬇️
🔟 Paying employees
Debit Payroll accounts (Expense) ⬆️
Credit Cash (Asset) ⬇️
The Most Important Concept in Accounting 👇
ASSETS = LIABILITIES + OWNERS EQUITY
I remember this as one of the first things I learned in my accounting 101 course…
But it wasn’t until recently that I REALLY understood what this meant
Let’s start with a few definitions…
➡️ What are Assets?
Assets represent items of economic value that the business owns / has a right to.
These can be both physical (cash, machinery) and intangible (goodwill).
It can also represent a future right to cash, like Accounts Receivable
➡️ What are Liabilities?
Liabilities are what the company OWES, specifically with a capped amount
Examples can be :
Accounts Payable / Credit Cards (owed to vendors)
Line of credit (owed to creditors)
Deferred Revenue (owed to customers)
Accrued payroll (owed to employees)
➡️ What is Owners Equity?
Owners Equity represents the uncapped owners right to the business…
IE the “Owners Equity”
This can be items that were personally invested by the owners
Examples can be
Common stock
Preferred stock
Additional paid in capital
..and can also represent historical earnings of the business (called Retained Earnings) that has yet to be paid out to the owners
This can eventually be paid out to owners, typically in the form of dividends... but can also be an owners draw
Here’s what recently clicked for me…
Liabilities & Owners Equity are in essence the SAME THING
The difference is that Liabilities are CAPPED —> they are owed at a specific amount
While Owners equity is UNCAPPED —> it is owed at an amount with no limit
The sum of both of these items are what contributed to your Assets…
Put another way, your Assets came into existence by either:
💰 Amounts contributed by creditors / customers / employees (IE expenses not yet paid out to employees)
OR
💰 Amounts contributed by owners (which include historical profits)
That's my take on the accounting equation
Thank you for reading through this edition of CFO Insights. I hope you found the featured posts informative and thought-provoking in enhancing your financial knowledge and skills.
Your input is valuable in helping me improve and provide relevant content that meets your needs. Please feel free to leave a comment on my LinkedIn or send me a direct message with your thoughts.
Catch you next week!