Why CTOs Should Know Accounting

By Stephen Forte,

No one talks about how important it is for your CTO to learn the business side of things. That needs to change. If you’re a co-founder or senior executive at a startup or growth stage company, you need to be more than just an expert in your area. I know that’s asking a lot. Becoming an expert is a massive task. But it’s not enough. Each senior leader needs to be familiar with engineering, marketing, sales, and accounting if you want to maximize your chance for success.

 This concept has been popularized for non-technical founders for some time, through efforts like Mayor Bloomberg’s Learn to Code and Business Week’s magnum opus What is Code. But I’ll wager if you’re a CEO, you suck at social media. You probably don’t understand it, even though it’s the future of customer engagement. That needs to change. And this change needs to extend beyond giving non-technical founders technical skills. We need to help CTOs get business savvy.

Perform a Self Assessment

 If you had to take over any of your company’s functional roles (marketing, sales, etc.) for a short period, would you be able to lead effectively? If the answer’s yes, great. Proceed. But if not, you’ve identified a major need.

Things happen, and you need to prepare for contingencies. Not only that, how can you screen and hire the right person if you can’t speak the same language?

Non-technical CEO’s should code so they can:

  • Understand how the sausage gets made
  • Talk to their team with the right vocabulary (i.e. Agile, Scrum, and Kanban)  

If you’re the CTO, don’t you want to be relevant in business meetings? You won’t be as strong in marketing as your CMO, but you can add value and influence decisions.

If you outsource business decisions to your non-technical co-founder, there will be consequences. Best case scenario? You disengage from the business side.

Worst case: your disengagement leaves your CEO to feel lonely and stressed. And then one day, you wake up to a phone call from that person saying, “Hey, we’re out of money.”

Don’t let that happen to you.

Jump into the Business Side

 I love founding teams comprised of engineers because:

  • Less technical risk
  • Solve their own problems
  • Shared background with me

I’ve been a CTO many times in my career, and I’ve exited multiple companies. But heading back to grab my MBA still made me a better CTO.

I don’t think all developers should get an MBA even though, unlike many of my peers, I think there’s value in one. Instead, I’d suggest creating your self-study MBA.

Design Your Personal MBA

Here are my suggestions for a practical education that will make you a better leader in every functional area.

Accounting

 All techies should read The Essentials of Finance and Accounting for Nonfinancial Managers by Edward Fields (who was my Accounting professor in business school).

It’s not exactly A Song of Ice and Fire, but you shouldn’t want to put this book down. You’ll get familiar with:

  • Balance sheets
  • Income statements
  • Cash flow statements
  • Budgets and forecasts
  • Annual statements

I know. It’s dry. But the book is so necessary.

If you want to supplement it, take an online accounting and finance crash-course like this one at Udemy.

Marketing

 Al Ries and Jack Trout wrote The 22 Immutable Laws of Marketing. The book was published over two decades ago, but it’s still essential. Learn from real world case-studies.

And remember this lesson: if people don’t read your website or emails, they’ll never buy your stuff.

To improve your copywriting, try the great Gary Halbert’s Boron Letters.

Sales

 Sales makes the world go round. Here are two great books:

And finally, for our non-developer friends who’ve stuck through this:

Engineering

 Read the Bloomberg article What Is Code that I mentioned before. It’s an interactive history lesson that walks through everything developer and even delves a little into philosophy.

At the very least, you should get familiar with HTML & CSS so you don’t need to bother your developers on trivial tasks. Brush up over at Codecademy.

  You’re never going to be an expert in all of these roles. But at a minimum, you need to be conversational.

Have a bias for action and carve some time out for learning. Let me know how it goes.

* Image by Flickr user foam 

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The ABCs of Startup Finance

By Tytus Michalski,

It’s fantastic to change the world with a startup and the experience can be intoxicating, especially if there is growth.

But this creates the temptation to ignore details like startup finance, which can then lead to the startup graveyard. Before changing the world, first a company has to survive. And survival requires an understanding of basic startup finance.

Some people believe that this means using large and complicated spreadsheets and a team of financial experts. But these supposedly sophisticated approaches can result in more confusion than clarity.

Forget spreadsheets, think napkins. Better to focus on the basics, the ABCs of startup finance:

A is for Accruals
B is for Balance Sheet
C is for Cash Flow

A is for Accruals

If you are running a software as a service company with a customer who prepays a one year contract for US$1,200, that’s great for your cash flow. Your revenue, however, is US$100 for that first month because revenue can only be recognized in line with the business services provided.

This example highlights the essence of accruals, which match revenues with costs when calculating profits. This is the core idea underlying the income statement, otherwise known as the P&L (you can technically use a cash based P&L but very quickly you will run into the need to understand accrual based accounting, so better to start sooner rather than later).

Because accrual profits are not exactly cash, the P&L is like a movie based on a true story. The core message of the P&L is usually similar to the underlying reality of what happened, but typically the details are changed for the sake of maintaining the story. At the extreme, even the core message can be distorted to the point where the P&L does not represent reality in any way. It is possible to be a profitable company and still run out of cash.

B is for Balance Sheet

A startup with a cash position of US$50 million may appear healthy at first glance when looking at the balance sheet. If, however, that cash was generated solely from selling equity to investors, then the cash by itself does not actually give much context about the level of health.

Thus, although the most important number on a balance sheet for an early stage startup is the cash balance, it is only the starting point for thinking about the company’s financial position. Cash must be placed in context as part of the overall balance sheet and also cash flow changes over time.

If the P&L is like a movie based on a true story, then the balance sheet is like a photo. The star of this photo is the cash balance but the balance sheet also captures many other details, some more important than others, at a specific point in time. Moreover, to truly understand a business, these snapshots in time needed to be connected together.

C is for Cash Flow

Accounting can get very complicated but at the end of the day everything is related to cash flow. A fast growing company with US$1 billion in revenues may actually have negative cash flow because of high working capital needs.

There are different categories of cash flow, and it is important to not get confused by things which sound like cash flow but are not. EBITDA, EBITA and other acronyms are not cash flow, even though some people refer to them by that name. True cash flow includes all cash in and cash out, with no exceptions.

If the P&L is like a movie based on a true story and the balance sheet is like a photo, then the cash flow statement is like a documentary. It’s raw and messy, which means that sometimes it can be difficult to keep track of the key themes. At its core, however, the cash flow statement usually does the best job of capturing the reality of a company.

Connecting the ABCs

Accruals, balance sheet and cash flow are not independent of one another; they are fundamentally connected. Changes in the P&L are reflected in each balance sheet and the cash flow statement can be reconciled by comparing the P&L to changes in the balance sheet.

The typical approach to accounting is to start with the details and ignore the underlying structure, which results in an incomplete understanding. Instead, take a holistic approach, being with the key concepts, and then the details will naturally become easier to appreciate.

Start with the ABCs and then, once you understand them, you can move on to other metrics.

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