How Using an Expense and Revenue Spreadsheet Can Fuel Your Business Grow?
Recently I read an interesting article on Gusto by Jeff Haden a small business consultant, titled “How 1 Spreadsheet Turned a Small Business Into a $100 Million Company” where he told a story about a startup called Optimove to uses one spreadsheet to manage their AI-driven management platform business. Now, most small businesses may enjoy the tasks of booking sales and revenue, but when it comes to logging expenses, calculating depreciation, creating reports, preparing for tax season… this all seems a little more tedious. And many other accounting financial reporting functions such as balance sheets, profit and loss statements, and so on, only record and examine what has already happened in your business.
And the author Jeff Haden states that “while understanding the past is undoubtedly important when you’re running a business, you need tools that allow you to make smart decisions about the future.” He also suggests paying attention to four numbers that will better help track and predict your company’s future. Early on the founders of the startup Optimove were working other jobs while building this company and reinvesting money into it to fuel its growth. And one of the cofounder’s named Pini Yakuel said “we had a plan in place for making money, but our business was growing and changing rapidly. Creating an annual forecast or measuring estimated versus actual spending wouldn’t have told us much about our business.”
The company set up a spreadsheet to track four key numbers:
- Costs by month: Rent, supplies, salaries—every cost
- Revenue by month: Services, products sold, subscriptions, etc.
- Revenue gap: The difference, positive or negative, between costs and revenues
- Cash buffer: Money in the bank
The writer Mr. Haden mentions that these all might seem like typical accounting metrics, that they did something that more crucial, that the startup was not only logging expenses and revenue after it occurred but also before! As an example, if the company signed a new contract that would start generating revenue next month, that number would get logged into the spreadsheet. If a freelancer was hired to work on a project next month, that figure also gets logged into the spreadsheet. Mr Haden stated that “unlike cash basis accounting, where expenses are only logged when a bill is actually paid, accrual accounting which recognizes costs when billed, the spreadsheet resulted in a hybrid method of financial planning.” So by always knowing in “real-time”, the amount of cash on hand and what would be spent and earned in the coming months, Optimove could use the snapshot to make decisions about where to invest the company’s money better.
(Image credit: Rose Wong Tedx)
The Founder explained the process further
As an example, he said they would add an employee hire’s salary to their calculation of monthly costs, even if their start date was not for another 90 days. In the same format, they also added new client revenue as soon as the contract was signed. By doing so they could always see the amount they had available to be able to invest back into the business. And they said, “when this gap became substantial enough—for instance, after signing a new client—we would invest in the most immediate bottleneck, whether it was engineering talent, a bigger marketing budget, or customer support resources.” And by taking this type of approach, it allowed the business owners to bootstrap their startup, using their revenue to fuel growth. Instead of borrowing seed-stage money from investors to fund growth initiatives, they waited until their cash buffer allowed them to expand product or service offerings, make new hires, or build out new infrastructure.
The result was when finally after 6 years later of organic revenue growth, they took a 20 million dollar investment that gave them a valuation of almost 100 million.
Who needs projections?
Their spreadsheet model performed so well that they could skip spending a bunch of time analyzing estimated sales versus actual sales. They also didn’t create sales forecasts or develop sales projections. Instead, they focused solely on the snapshot of the “present.” So after years of developing and iterating many versions of their software, they had built up a pipeline of enterprise use clients, and they had dramatically grown their finances. There revenue nad expenses had jumped up dramatically.
And so was the company’s cash buffer. When the founders eventually decided to take a $20 million growth investment, their cash buffer stood at $3 million. Mr. Yakuel said, “the fact that this financial model served us through years of growth attests to how well it embodied our [operating principle]: iterate quickly and invest every dollar back into the business.”
How to make one spreadsheet work for your business
The author Mr. Haden describes that depending on the type of business you have and how many customers may vary for using the one spreadsheet tool. Now say the run a retail shop where the Day-to-day fluctuations in sales and revenue can vary. Past sales history can give you a sense of future sales, but you never really know how a day will go until the end of that day.
Mr. Haden suggests spending a few minutes every day updating your spreadsheet in real-time. Log daily revenue. Log any daily expenses that are outside expectations or “business as usual.”
Keeping the spreadsheet up to date will allow you to keep making smart decisions about the future. If sales double expectations today, great. That larger revenue gap and additional cash buffer might enable you to make an investment to a new hire or software equipment.
If sales are significantly down today, that’s not so great. But knowing your business’s financial health in real-time can help you decide where and when to cut spending proactively.
For example, say you own construction contractor business. And you want to hire a new employee to expand your service territory, but you hesitate to do so until you have a six-month salary buffer to bridge the revenue gap while you attract new customers. Your spreadsheet will cut through the accounting clutter and tell you when to pull the hiring trigger.
While you won’t be able to predict the future, you will know exactly where you stand—and what you can afford to prioritize so you can keep your business moving forward.
It’s all about perspective
This type of spreadsheet tool will not replace all accounting and bookkeeping functions. Your small business will need to track inventory, manage payables and receivables, track sales and costs, manage payroll—all the financial nuts and bolts of operating a business.
So in that sense, yes: Keeping a simple spreadsheet an additional task.
Think of using your spreadsheet as a dashboard that lets you see, in real-time, exactly where you stand in terms of a revenue gap. You’ll know, ahead of time, whether you need to cut costs, or whether you can afford to invest in efforts that will help you grow your business.
But you’ll have to stay disciplined. If you agree to a service contract that won’t start for 60 days, still log it now. If you sign a contract to service a new client on a monthly basis, but you won’t start receiving revenue for 60 days, still log it now.
That way, you can make decisions in real-time, not after the fact. After all, the best decisions are proactive. And when you’re building a business, that’s precisely what you need to be. Feel free to contact Huckabee CPA for a free consultation on tax, accounting or strategic financial growth strategies.