Welcome back
This part of the session is about Startup Budget/Accounting
So let’s begin with the startup budget
Before we go into the startup budget,
I suggest you guys to remember a very important quote
from the startup scene
First: Everything takes longer
to do than you think it will
Second: Everything costs more than you think it will
Third: no entrepreneur thinks of everything
So basically, you need to prepare for many options,
in terms of the money, in terms of the plan,
in terms of the time, something like that.
Please keep that in your mind
Let's look at the budget
When you start company,
you need to budget for one-time costs and ongoing costs.
There are two different types of the budget
What about one-time costs?
One-time costs are one-off costs
paid before your startup is set up
So basically, once you pay
some kind of service for the setting up,
you don’t have to pay later
This is just a one-time cost, one-time done
On the other hand, ongoing costs are recurring expenses(recurring costs)
a business must pay on a regular basis
Mostly, monthly fees, quarterly or yearly
Those are ongoing costs
So, can you distinguish one-time cost and ongoing cost?
I’ll give an example of a one-time cost.
Look at this: new buildings for the businesses,
or new machines, vehicles, equipment, researching money
researching fee for your target market
initial advertisement fee, initial stock fee, initial payment toward insurance,
or kind of initial money regarding your recruiting employees
Those are all one-time costs
Once you pay, you don't have to worry about them later
What about the examples of ongoing costs?
Rent fee: you should pay monthly for the rent fee
Wage and salary: you should pay monthly salary to your employees
Maintenance: you should pay the maintenance fee every month
Loan payment: you should pay it back to the bank
Interest: if we borrow the money from the bank
then you should pay interest
Communication: you know telecommunication i mean telephone internet and the others
What about mortgage?
Mortgage fee(mortgage repayment):
if you lease the car, then you pay it
or if we purchase the apartment or purchase the office
then you pay the mortgage
Mostly, it's a 30-year mortgage, but you should pay monthly
Look at more detailed examples
For example, down payment for the property rent
Before you rent the office,
you put your fundable or non-fundable down payment
This is a down payment
Once you pay the down payment,
you don't have to pay another down payment
Equipment: if you have a machine, you pay to purchase the equipment
Once you pay everything,
then you don’t have to worry about paying for the equipment later
Initial advertisement and decoration of your store,
or any other cost related to a one-time
What about ongoing cost?
Ongoing cost, the best example of ongoing cost would be property rent
You should pay monthly for your office
Utility fee: electricity and water gas that you pay monthly
and the monthly advertisement if you engage in advertisement
through the facebook or google then you pay monthly
Communication: if you have a telephone or internet,
you pay internet fee and telephone fee monthly
Insurance: if you have insurance, you pay a monthly insurance fee
and also, salary monthly
Those are all ongoing cost
Now you understand what is one time cost and what is the ongoing cost
Then, how do you use this concept in your startup?
I want to help you understand the startup case.
I made the hypothetical startups
This startup is an AI-based kind of online tutoring service
Think about an AI-based online tutoring service.
The CEO, Tom, started this company, and he invited a CFO,
a Chief Financial Officer, Greg into this company
Tom also invited marketing manager, Rachel, into this company.
This is the setup of the company.
Then, they got $100,000 as an angel investment money luckily
This is a kind of situation
Then, they met together and discussed their budget
I asked Chat GPT to draw this situation as a cartoon
Look at the first cartoon
Here is our starting point
Luckily we got, $100,000 from angel investment
So we have $100,000 on hand
What about our office cost? Office cost zero for six months
Why? Because Hanyang University Startup Foundation support the office fee
So we can use this office for free
What about infrastructure fee?
Well, we don’t have to worry about cloud services
because Naver Cloud supports startups like us.
We applied to the Naver Cloud program,
and thanks to Naver Cloud, the infrastructure fee was waived
We are very lucky
No infrastructure fee, no rent fee in the first-half year
Then Greg continued talking about one-time costs
He explained how much the company had already spent
For example, the legal fee
We already spent $2,000
Corporate bank fee $500
Initial logo design ＆ Website, we spent $3,000, etc
So in total, we paid $7,200
That $7,200 is a one-time cost
Then, the CEO, Tom, explained the ongoing costs: the monthly costs
For example, we hired developers
as part-timers, and we pay them monthly.
How much? $2,500 per month
Also, we use marketing tools such as Notion and Canva: $300 per month
It's a monthly subscription fee.
Also, we need minimum living expenses
for Rachel and Tom, $1,000 each
So in total, that’s $2,000, which is monthly salary
And we use communication or team collaboration tools
such as Slack, Zoom, etc.
We subscribe to them and pay $100 monthly
So, how much in total? We pay $4,900 per month
Then we can easily calculate the runway
Runway means how many months are left with our current cashes
In this case, we had $100,000 on hand as cash,
but we already paid $7,200
So, we need to calculate the remaining money monthly
We divide the remaining money by our monthly cost, $4,900
How many months are left?18.9 months with this money
This is how we use ongoing costs and one-time costs
Then suddenly, the CMO, Rachel, jumped into the discussion
and added something
She said, 'Wow, our target is clear
From a marketing point of view, our target is private academies
Private academies are the decision makers"
Here is our go-to-market plan, GTM
We can conduct outreach throughout LinkedIn or email
We'll engage in email marketing or LinkedIn marketing
Also, we can prepare a B2B demo day,
targeting 10 local private academies
And we can launch a pilot program with 1-2 medium-sized private academies
Then, CEO Tom was surprised about this the marketing plan
"In order to make this happen, we need to prepare the money
But we didn’t prepared the marketing cost for LinkedIn or Demoday Pilot
How much are you planning to go into monthly?"
It can be monthly marketing fee for Demoday Pilot or LinkedIn marketing
Then Rachel says, "I think at least $5,000 will go into monthly marketing"
So they should calculate the runway again
Why? Because their monthly spending has increased, the monthly ongoing increased
So, they quickly calculated again
CEO Tom, quickly recalculated
The ongoing cost should be updated
Everything is the same, but there’s a missing $100,
the $100 for tools like Zoom or Slack, do you remember that?
Anyway, putting all the numbers together, we add $500 for marketing
It's not initial marketing
It's ongoing marketing monthly
So, in total, how much?
Our ongoing costs add up to $5,000
We add up $5,000 to previous ongoing cost, $4,900
Putting it together, our ongoing cost changes to $9,900
Later, we need to calculate runway again
Based on this calculation, we just have 9.4 months left
Our runway drops to just 9.4 months
Previously, we had long runway left
but now, we got just 9.4 months
This is how we use ongoing costs and one-time costs
I will give you some summary of the terms
One-time cost is one-off cost for the initial setup
Again, ongoing cost is any recurring cost a business must pay regular basis:
monthly, annually or quarterly
And what about runway?
Runway is the number of months the company can survive with current money
Burn rate means how much you spend each month
In this case, the previous burn rate was just $4,900,
but right now, we added $5,000 as a monthly marketing fee
so our burn rate increased from $4,900 to $9,900
Then, we calculated our runway again
Now you understand how to use one-time costs and ongoing costs as a startup
Don’t underestimate the importance of ongoing and one-time costs.
Let's move to another topic, which is "Accounting"
Accounting is the language of the businesses
What do you mean by that?
You talk about accounting both inside and outside the business
Because it is a language
Basically, accounting is tracking your money in the businesses
But you are startup, and you don’t have any records to be tracked
So you don’t have to worry about past performance
Instead, you will be concerned with future performance
In startup case, accounting is about the future
It is the language for your future
Please understand it in this way
So, why is accounting important?
Accounting proves what your business did financially in the past
But in your case, you express and explain your performance based on future accounting
Also, accounting shows how much your business is worth in the future and in the startup
Bank, creditors, development agencies and investors require your accounting reports
Also, accounting provides easy-to-understand plans for your operations
You can't know how your business is doing without accounting
In the business area, there are only two reasons exist why accounting matters
Accounting provides succinct and clear information
that is useful to you and your stakeholders,
such as your co-founders or your investors
And also, you need to meet legal or contractual requirements
That's why you need to prepare for accounting report
In order to prepare accounting report,
as a startup owner(startup founder)
you need to understand the basic concepts of accounting
So, that's why I'm talking about the accounting report now
Well, there are basically two important, useful, and commonly used accounting reports
One is the balance sheet, and the other one is the income statement
Don't worry about it
Although you are not majoring in business, it is pretty easy to understand
What is the balance sheet?
Let's move on to the balance sheet first
Balance sheet is a statement of what your business owns
and what it owes to others is kind of debt
What you have right now is what you own
What you own is called an asset
The second component is what it owes to others, which is debt
The third is how much value the owners have invested in it, which is your equity
Do you understand that?
It's a little bit complicated
Well, again, the balance sheet, as an accounting report, is a snapshot
You take a picture right now, and so the balance sheet provides a current situation,
and how it looks like
The balance sheet presents just three things, three components
The first one, your asset, what you own
Second one is debt
How much you owe to others, is debt
Third one is your real value
how much is your real value, that is equity
Another important thing that you should remember
is balance sheet equation
There is a principle about the balance sheet
Your balance sheet should include the information about three information
asset, liability, and equity
Asset is the same as liability + equity
I will show you the example
Look at this table
Let's say you started the company with $100,000
This is your seed money
You started a company with $100,000
With that money,
you purchased your working tools, such as PCs or the others
How much? $50,000
You already spent $50,000 in order to purchase working tool
Now, $50,000 left as a cash
So you put this $50,000 cash in your company
Anyway, what you have right now is $50,000 in cash,
and some kind of working tool valued at $50,000
In total, how much? $100,000
Although $100,000 is not all cash right now,
the value of your company,
value of what you have, is the same $100,000
Later, we ask you, where did this $100,000 come from?
Well, half of the money came from my money,
and the other half came from the bank
The half of them, $50,000, came from bank
We say it's debt
Half of them came from your pocket money
So, your money, $50,000, we call it equity
Look at these two parts
What you have right now is $100,000(cash and tools together)
That's your asset
Asset should be equal to debt + equity
How much is your debt? $50,000
How much is your equity? $50,000
Put together, it's $100,000
This $100,000 and that $100,000 are the same
This is the equation of the balance sheet
When you write down your balance sheet, you should keep this principle
When investors look at your balance sheet,
they immediately understand what happened in your situation
So that's why we use this balance sheet
Now we understand how to use it
Don’t worry about it, even if you don’t understand it right now
Because II'll give you hypothetical situation that help you to understand
how we use the balance sheet
What is asset?
Asset is something the business owns
What is the liability?
It's a legal obligation that you pay back later
if you borrow the money from the bank,
probably you should pay back later: in a year or two
This is debt
And what is the equity?
Equity is your money, your value
or if you invite investors, their money would be the equity
Well, this is the same
This total asset is the same as debt + equity
It's the same thing
This is also the same thing, but the format is a little bit different
This is 2012, 2011 and probably, we have 2013
Anyway, we can understand how this company has changed
For example, the company's asset increased from $172,000 to $235,000
So the company is growing
If you see the dept, the debt has decreased
Debt has decreased from $147,000 to $132,000
Equity increased
Equity increased from $25,000 to $103,000
There's equity changes
From this balance sheet, we understand what happened inside the company yearly
Let's move on to the second important financial report, which is income statement
It is very important
What is income statement?
Income statement is the statement that lists your revenue and costs
If you know your revenue and cost, then we can easily calculate your profit
How to calculate profit?
Profit can be calculated by revenue - cost
Revenue is the money that you made,
the cost, the money that you spent
Basically, the money you made should exceed the money you spent
Then you can get a positive profit
If it's opposite, you get a negative profit
This is the typical format of the income statement
For example, you got total $259,500 revenue.
Total expense(total cost) is $176,200
So your net income(profit) is $83,300
How to calculate it?
It's pretty simple, $259,500 - $176,200
You can get $83,300
Remember, the profit is revenue - cost
This is another format of the income statement
I think it's pretty much similar
In this case, we divide costs into 2 group
Operating costs and the other costs, taxes.
Anyway we got same profit
The total revenue is $170,800, and the total cost, we divided very specifically,
We got $83,300 as a profit
Now, you understand how to interpret the income statement
with financial report
Don’t worry if you don’t get it yet
We’ll show you how to use
the balance sheet as an income statement in a startup
in the next session