The First Cut Is The Deepest (Controlling Startup Expenses)

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"A good company never lets its Sales, Marketing and General Operating Expenses (SG&A) get too big." By Teresa Dentino (Founder & CEO, The Financial 411)

Whether it’s “cutting edge”, “leading edge”, “bleeding edge” or “burn rate”, the terms we hear volleyed around deal-making may sound straight out of an Grey’s Anatomy episode, but it all comes down to this equation to the ears of your third-party funding sources: New Technology = How much Cash Needs to Burn + How Long it will Last before the Bleeding Edge Technology is Profitable.

So to get you on the right edge, where you’re not only fluent with the terms, but aware of how to maximize your breakthrough concept’s financials, let’s talk numbers that really count.

Initially you have a lot of R&D (Research and Development) expenses, but you need to learn about keeping an eye on another key category of expenses called SG&A (Sales, Marketing and General Operating Expenses relates to all costs that aren’t specific to product production). In other words, in addition to things like advertising, it includes rent, utilities, salaries, etc.

Hint: If your personal expenses tend to be out of control, it’s especially important to learn to pay close attention to these business expenses. It’s the first thing third-party funding sources want to see… after hearing about your great idea.

Sage Advice from a Shining Example

Recently I had the opportunity to chat with Nola Masterson, a barn-burner serial entrepreneur in the biotech arena. With a slew of “firsts” to her credit, including having taken her startup through a successful public offering and having been the first biotech analyst on Wall Street, Nola currently serves as Chairman of a public company board and is engaged in various venture funding activities.

When I asked her to share some wisdom on the “lines” (as in “lines" on a financial sheet) that founders should be familiar with, here’s what she had to say:

“In most startups the amount of money going into research and development (R&D) greatly outweighs the amount of money going into Sales, Marketing and General Operating Expenses (SG&A).

This ratio changes as the company gets a product to market and has to grow, but a good company never lets its SG&A get too big. These are core 'line' items all women should be able to relate to if they are reading a financial sheet.

When I first started Sequenom and needed financial projections I asked the large firm of E&Y (Ernst & Young) to help me build a credible financial projection model. We started with the numbers of employees and what they would cost, and we built from there.

When you work to create a model, then it is easier to sell your project; plus, you learn by doing. Now, as an investor, I also ask for a daily, weekly and monthly spread sheet as the company grows, to look at each expense and see if the money is being used to forward the progress of the product, otherwise it is often misused.

Once you start to make this a habit it is easy to see money in and money out, and the results of those expenditures."

Reading Between the Lines

No matter what stage your project is in, those are invaluable insights to live by. Now here’s some tactical advice on getting familiar with your spending lines: Start with a thorough 12-month look back in every category of spending. Once you have your annual total per category, then calculate your 12-month average spend figure in each of your categories. You may groan and whine initially, but this exercise is pivotal, as it provides multiple benefits for developing your financial mastery mindset:

  1. It takes finances from a nebulous, hazy awareness to a very concrete, no-denial level.
  2. You can triage from here i.e. see where you may need to cut back, establish spending priorities, etc.
  3. You can then use this baseline to project what next year’s expenses will be e.g. by adding on 5-10% for cost increases, other milestones, etc.

If you already have revenues (sales), then the next step is to compare your total SG&A number to total sales. (Now you have a calculated a key financial ratio.)

Congratulations.

Congratulations if you have made it this far (and followed these steps).

You’ve just performed one of the most powerful, and eye-opening, exercises for gaining immediate familiarity with the lines. And, the next time someone asks you about your SG&A, you can smile, instead of frown, because you’ll be down with the numbers.

Editor's note: Got a question for our guest blogger? Leave a message in the comments below. About the guest blogger: Teresa Dentino is the Founder and CEO of The Financial 411, the first financial literacy platform to be exclusively women-centric. Working with select private clients and financial institutions, she provides strategic advice and independent educational programs that bridge the gap between women and the financial world. Teresa teaches Managerial Finance Fundamentals in the University of California academic system. Follow her on Twitter at @thefinancial411.