Accounting & Finances

Every organization deals with accounting and finance matters. This section breaks down the basic concepts and provides resources that reflect on these areas from a startup perspective.


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Accounting & Finances

Fred Wilson 

Earnings Before Interest Taxes Depreciation and Amortization. The way I like to think about EBITDA is the pre-tax cash earning power of the business. It is not much different than the notion of Operating Income which is revenue minus cost of goods sold and operating expenses. But it takes out the two big non-cash items in an income statement, depreciation and amortization.

Fred Wilson 

When you think about the various ways you can make money, two ways predominate. You can provide services to others and get paid for those services. That is ordinary income. And you can invest in something; shares of stock, a building, a domain, and then sell it later for more. That is a capital gain. The distinction is important, at least in the US, because these two kinds of income are taxed differently.

 

Fred Wilson 

I like to focus on "gross margin" because I think it tells you a lot about the scalability of a business (as I detailed in last week's post). But operating margin which is gross margin less all the operating costs is another really important metric.

 

Fred Wilson 

Margin is the amount of money you make on each incremental sale or unit of revenue before factoring in the "fixed costs" of your business. Fixed costs would be things like the rent on your office, your administrative team, and the people who do your accounting/bookeeping work for you. The key concept to wrap your head around is some costs rise and fall based on how much revenue you have and some costs are fixed and are the "cost of keeping the doors open."

 

Fred Wilson 

When a customer commits to spend money with your company, that is a “booking”. A booking is often tied to some form of contract between your company and the customer. The contract can be simple or very complicated. And some bookings do happen without a contract. Examples of these contracts with customers include an insertion order in advertising, a license agreement in enterprise software, and a subscription agreement in “software as a service” businesses. Revenue happens when the service is actually provided.