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Legit Numbers 🔢: Collapse of SVB, Startup KPIs, EBITDA, and more
Legit Numbers 🔢 #02This week's top posts on Your CFO Guy LinkedIn |
Welcome to the second edition of Legit Numbers! Whether you're a seasoned finance professional looking to enhance your skills or someone just starting out in your career, this course is tailored to meet your needs. Through this course, you'll gain a comprehensive understanding of building a 3 Statement Model that you can apply to your own work. If you enjoy reading my content, please consider leaving a testimonial to share your thoughts with others. Your feedback helps me continue to create valuable content and connect with a wider audience on LinkedIn. Thank you for your continued support, and let's dive into this week's Legit Numbers! What we’ll be covering in this edition:
Let's dive in... ➡️ 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 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 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 ➡️ 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) ⬇️ Got any other examples to add? 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) 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! |
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