Finance

Last updated 7 months ago

Reports

We have two key reporting tools that we use:

  • Xero, a cloud-based accounting system that we use to keep track of sales and related costs, and view our P/L on an accrual basis and run various reports.

  • A Google Sheet called “Free Cash Flow Financial Projections” where we track FCF (Free Cash Flow) by doing cash basis accounting.

1. Accrual Basis P&L Report

In Xero, we do our accounting on an accrual basis. Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of Mäd during a specific time period.

This is fully updated every two weeks.

2. Free Cash Flow Report

Free Cash Flow (FCF) is one way to measure a company’s financial performance.

It is calculated by taking Operating Cash Flow (Income – All Costs) and removing Capital Expenditures as they happen (not with depreciation).

FCF represents the cash that Mäd is able to generate after spending the money required to maintain or expand our assets. The interesting thing about FCF is that it actually grow even if we have months/quarters that show a negative P/L, as it measures the overall effectiveness of our business model vs our sales cycle.

A high FCF is important because it allows Mäd to pursue opportunities that enhance shareholder value. This means aggressively and proactively reinvesting future known profits back into the company to bolster future growth. For Mäd, this will especially mean a large investment in branding, employee training and development, and the highest quality equipment possible.

However, because we cannot grow Mäd with profit, but we need actual cold hard cash (who doesn’t!), we then use Google Sheets to track the amount of cash that we actually generate from our operations during a given time frame. Unlike in accrual accounting, on this sheet, we also track capital expenditure to ensure that we understand the implications of making large hardware orders as we scale.

Our calculation for FCF is the following:

(Invoices Paid + Other Income) – (Cost of Goods Sold + Operating Costs + Capital Expenditure) = Net Free Cash Flow

For tracking sales, we have one line for each customer, and the total cash received by the customer that month is entered as a sale. If there are multiple invoices, add the total of the invoices as the amount, and add a comment to the cell, giving a breakdown of the invoice details.

The final results will be the tracking of the following:

  • Monthly Income

  • Total Historical Income

  • Monthly Expenses

  • Total Historical Expenses

  • Net Monthly Free Cash Flow

  • Total Historical Free Cash Flow

  • Free Cash Flow Margin

This is updated in real time as soon as new information (sales, costs) come in. There is a level of approximation for variable costs such as servers, where we don’t know the precise amount upfront, these can be estimated.

3. Free Cash Flow Projection Report

This is done by cloning report #2 (Free Cash Flow Report) and adding the projected payment date for potential sales, and the requirements for hiring, hardware purchased, and any additional project costs.

Updated every two weeks.

4. Status Updates Reports

The finance team is responsible for tracking the daily status updates in everyone in the company, including the following data:

  • Status Update colour (green/yellow/red).

  • % of status updates completed per person

  • % of status updates for the whole company.

On the 5th of each month, the finance team will email the whole company with the following details:

  • Average status update % completed for the whole company for last month, and how many people under 80%

  • Average status update % complete for the whole company for the month before last, and how many people under 80%

  • People who need to improve their status update % completion.

  • All-star performers with 100% status update rates.

Paying Vendors

Our aim should be to pay vendors at the earliest opportunity, but always ensuring that we keep a positive cash-flow cycle by ensuring that we’re paid by our clients prior to having to pay our vendors. If there is a delay by the client, the vendor should be informed and kept up to date on a regular basis.

On a general basis, we pay vendors within ten working days of receiving the client payment related to the work of the vendor, but ideally within two working days.

Payment Terms for Client

NET 7, unless already negotiated.

Official Approval of Expenses

  • Finance team creates a draft bill in Xero

  • Management team approves the bill

Using Company Money

As a simple rule of thumb, use company money as if it was your own. Don’t spend unnecessarily, but also don’t skimp on spending money when required. We trust your judgement on this matter.

For small everyday expenses, just keep a receipt (digital or printed) and hand it to the Finance Team with your name on it, and you’ll be reimbursed as per the next payroll schedule.

For larger expenses than your limit allows, speak to someone who has a higher spending limit (See Expense Limits for details) and ask them to approve the expense via email (so there is a written record of the approval) before you go ahead and spend.

Advances

For larger spending, request money upfront from @manny and cc @erika via email, the earlier the better. Bring back receipts plus change.

Expenses Limits

These are per expense, not per month.

  • Everyone can spend up to $100

  • @kit can spend up to $300

  • @erika can spend up to $2,500

  • @manny no limit

    • Board approval by unanimous consent required for any expense that can be deemed a “large capital expenditure.”