What is Dilution?

Reviewing Stock Performance Dilution - Finance Hire

Stock dilution is a phenomenon that occurs when more shares of stock are issued than previously existed. This reduces the percentage of ownership for existing shareholders. This can happen in various ways, but it’s most often tied to company growth, mergers, acquisitions, and other types of financing.

Stock dilution can be an essential factor for investors to consider when making investment decisions about a company. It can also significantly impact the value of an investor’s holdings in that company.

Part of success in business and investing is understanding financial concepts and gaining a solid foundation. A common question people ask is: what is dilution? We’ll answer that question in this article and explain why it matters.

Definition and Example of Dilution of Shares

Dilution is a decrease in the value of the ownership interest of a company’s existing shareholders. In other words, it refers to a reduction in the percentage ownership each shareholder has of the company.

It is caused by the issuance of equity by the company to raise capital. When a company wants to raise capital, it usually issues new shares or bonds. This dilutes the value of existing shares because it increases the total number of shares outstanding.

For example, suppose you own 10,000 shares in a company that has 1 million shares outstanding. You own 1% of the company (10,000/1,000,000). If the company issues another 100,000 shares, you will own only 0.9% of the company (10,000/1,100,000). The value of your original shares has been diluted by roughly 10%.

It’s best to think of stocks as pieces of ownership in a company. Each share represents a claim on that business’s assets and earnings. Stocks can be traded on the stock market, where they can be bought and sold by investors.

When you buy stocks, you’re purchasing a tiny bit of ownership in a company. A single share of a company like Apple or Amazon means you own a tiny slice of the company’s assets and earnings.

The main reason for dilution is to raise money to fund operations, but it can also occur when investors sell their shares or when employees exercise their options. Dilution is often described as “shareholder dilution” or “equity dilution,” but it can also apply to other forms of ownership, including debt or options.

What Causes Stock Dilution?

The leading cause of stock dilution is issuing new shares to raise capital. The company can either issue new shares or sell a portion of its existing holdings.

Another way stock dilution occurs is through stock repurchases when a company buys back its shares from investors.

Dilution is not synonymous with market loss, though its effect looks similar. When the market causes a stock to drop in price, it’s usually due to decreased revenues, poor sales, or other factors that affect the industry.

Stock dilution can occur in several ways, including:

Stock Options Converted to Common Shares

Stock options are a type of employee compensation that allows employees to purchase shares in the company at a set price. The price is called the exercise price and is typically set at or above the market price of the stock on the date the options are granted.

You agree to purchase shares at this price when you exercise your option. If you don’t exercise them, they will often expire worthlessly and become valueless.

Stock options convert to common shares when exercised by an employee or other holder of a vested stock option. When you exercise your stock option and buy 100 shares of XYZ Inc., you own 100 common shares and any rights that come with being a shareholder. These rights include voting rights, dividends, and interest from your investment return on capital.

When companies issue stock options to employees, those shares may later be converted into common stock if specific requirements are met. Stock options don’t give the holder equity in the company. That doesn’t happen until the option is exercised.

At that point, it’s converted to common shares, increasing the total number of shares the company has issued, causing dilution. 

Creating or Offering New Shares

When a company needs to raise money, it can issue new shares, diluting existing shareholders’ ownership. If the company creates new shares, it’s called “issuing stock.” Issuing stock is a way for a company to raise capital without selling assets or borrowing money.

In other words, issuing stock allows investors to buy company shares instead of borrowing money from other investors.

The most common way to dilute is by issuing additional shares through an offering or secondary sale. This can happen when a company needs more funding or wants to pay down debt.

A company can issue new shares by selling them to investors in an initial public offering (IPO) or after going public. An IPO is when a company sells stock in itself for the first time. After an IPO, a company can also sell additional shares in the open market at any time.

When a company offers new shares, it may have to pay dividends to existing shareholders before paying out dividends to new investors who purchased those shares.

When a company issues stock, it must decide whether to give common stock or preferred stock. Each type of stock has its own set of terms and conditions that apply to it and affect how the company operates and its shareholders’ rights. Common and preferred stocks are both types of equity securities, but they’re not identical in every way.

Vesting of Employer Awarded Common Stock

Those shares are subject to vesting requirements when an employee is awarded equity compensation through an employer-sponsored plan, such as a 401(k) or ESPP.

Employee award plans often include vesting schedules that require employees to retain their shares for specific periods before selling them on secondary markets or receiving cash dividends from them.

For example, an employee may need to work for five years before being able to sell his or her vested shares on secondary markets or receive cash dividends from them.

That equity comes with a vesting schedule, locking in the employee’s service for a specific period. Once the vesting period expires, the stock is awarded to the employee. It essentially works the same as an option, thereby causing dilution.

Mergers and Acquisitions

There are many ways that stock dilution can occur. The most common cause is mergers and acquisitions. When a company experiences significant growth, it may need to raise capital to finance it. This may lead them to merge with or take over another company.

Merging two companies together or one company acquiring another involves combining the stock of each entity into one.

That’s done by the purchasing firm acquiring the company-owned common stock for the acquired company. That stock is often sold at a discount, which dilutes shares for common shareholders.

Mergers and acquisitions are often made to increase market share by entering new markets, acquiring technology or products, and gaining access to distribution channels.

What It Means for Investors

Stock dilution is a primary concern for investors. It means that the number of shares outstanding has increased, and therefore each share you own will be worth less. It reduces the percentage ownership that each investor has in the company. In other words, a 20% stake becomes 19%, or 2% becomes 1%.

When a company raises capital, it does so by issuing new shares to investors. This is known as equity financing. The more shares issued, the more diluted existing shareholders are. It increases the total number of shares available.

This means there are more shares to buy and sell, which helps stabilize prices over time (but doesn’t necessarily help individual investors).

This is bad news for existing shareholders because their ownership stake in the company decreases proportionately to the increase in the number of outstanding shares. 

The company can boost revenue by utilizing that new cash to scale its sales process. Share prices will dip in the short run because of dilution, but the increased profitability will eventually raise them to a new level. That’s a win for common shareholders. In this scenario, dilution is a good thing and should be promoted before issuing the new common stock.

The good news is that this dilution isn’t necessarily permanent. If a company’s earnings grow quickly enough, its share price will eventually rise again, so your investment is worth what it was before the dilution occurred.

Is Share Dilution Good or Bad?

Share dilution is when a company issues shares or securities to raise capital. The company then sells these shares on an exchange, typically at a price lower than their face value. The difference between the market price and the face value is paid dividends to shareholders.

There are many reasons why companies issue more shares than they have in previous years. One reason is that they need more money for business expansion or to pay off debts from previous years’ operations.

For example, a company may need more capital from investors if it wants to buy out another smaller competitor. Another reason for issuing more shares is if the company wants to reward its executives or employees with bonuses or stock options for their work during the year (this can be done by issuing new stock options or selling treasury stock).

3 Tips for Startups to Manage Stock Dilution

You’re probably concerned about your company’s financial health if you’re a startup. A critical aspect of this is stock dilution, which refers to the reduction in the value of existing shares.

When you sell additional shares of ownership in your company, it can cause a drop in the value of existing shares. This is a common concern for new companies looking to raise money from investors or other sources.

Here are some tips for startups on how to manage stock dilution.

Research Different Financing Options

 The cost of starting a business is often underestimated. It can be a significant challenge for startups to raise the necessary funds to cover operating costs, pay employees and invest in their businesses. Some other reasons why startups seek outside funding include:

  • To obtain access to new markets
  • To hire more employees or add new departments or divisions within the company
  • To acquire another company
  • To purchase equipment or tools

There are many ways to fund a startup, including:

Personal savings: This is perhaps the most common way for startups to get started. However, it’s also the most difficult option because most entrepreneurs don’t have enough money saved up, so they need to find other ways to get funding.

Family and friends: Friends and family may be willing to loan you money or invest in your company if they believe in your business idea and trust that you can make it profitable.

Venture capitalists are individuals or groups who invest in new companies in exchange for equity (or partial ownership). This investment is generally reserved for established businesses with proven track records and strong management teams.

Angel investors: Angel investors are private citizens who provide seed funding (small amounts of capital) through venture capital firms or angel networks — organizations made up of accredited investors who pool their money together on behalf of startups that need capital but don’t qualify for traditional financing options such as bank loans or venture capital investments.

Look into crowdfunding sites like Kickstarter and GoFundMe, which allow people to donate directly to projects they believe in (and get rewards for doing so). This is another way to raise money without giving up your company’s equity (i.e., ownership).

Model What Dilution Will Look Like for Different Options

Do the math. Some business owners look at the potential cash flow increase from an equity offering. Still, they fail to consider how this will affect the company’s equity multiplier and its impact on existing shareholders.

Those who buy stock in your company are among your most significant resources. Give them the consideration they deserve by mitigating their potential loss from dilution. 

One of the tools you’ll need for this step is a fully diluted cap table. This will show you the total number of outstanding shares, including the totals for each option if they are exercised. Incorporate these numbers into your dilution model to fully understand the impact of issuing new common stock or offering stock options to new employees or partners.     

Make Dilution Work for Your Company

Dilution is a common issue for many companies.  Dilution is a business term that refers to a reduced share value due to new shares being added to the market. When a company issues new or existing claims repurchased by management, dilution can occur. The latter is sometimes referred to as “shareholder dilution.”

While dilution may sound bad, it’s not always bad news for shareholders. Companies issue new shares all the time — and often, it’s because they have a good reason for doing so.

The first step is ensuring that all your shares are correctly accounted for. This means ensuring that any shares held by founders and other employees are vested adequately so they cannot be sold without approval from management.

The second step is to make sure that the company has a good vesting schedule in place. This will prevent employees from selling their shares too early on in the life cycle of the company.

Finally, you should consider setting up an employee stock purchase plan (ESPP) so employees can buy shares at discounted rates with pre-tax dollars or through payroll deductions. This allows employees to become investors in their own company while also helping them get more involved in its success.

A Guide to Financial Planning and Analysis

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Financial analysis is an integral part of any business activity. It helps managers understand their companies’ performance, identify areas for improvement and make better-informed decisions. 

The purpose of financial analysis is to examine past performance, forecast future performance, determine where improvements can be made, and help business owners make informed decisions about their companies’ finances.

This guide covers financial planning and analysis to help propel your career or move your current business forward.

What Is Financial Planning & Analysis?

Financial Planning and Analysis (FP&A) is the process of identifying, planning, and analyzing the financial aspects of a business. Financial planning helps organizations make intelligent business decisions by providing insight into how they perform financially. This can include assisting leaders in understanding how to improve their company’s performance or deciding whether to buy or sell assets.

FP&A professionals use their financial knowledge to improve an organization’s financial performance. They work with other departments such as sales, marketing, and operations to provide businesses with accurate and timely information on their financial performance. 

They are essential in managing company cash flow by forecasting future revenues and expenses, determining budgeting needs, performing economic analyses, and benchmarking against competitors. They are often responsible for preparing budgets and forecasts and monitoring actual results. They also provide information on the performance of different business units and new investments based on past performance.

FP&A professionals may be involved in several different areas, including:

Budgeting: Producing detailed forecasts of future revenues and expenses to plan how much money will be available for spending each year. Budgeting includes long-term planning based on historical trends and short-term predictions based on current conditions.

Cash flow forecasting: Producing forecasts for cash inflows and outflows. These forecasts analyze whether a company’s current assets will be sufficient to meet its liabilities when they come due.

Capital analysis: Determining whether a proposed investment makes sense from a financial perspective. This analysis might include comparing returns from proposed investments with those from alternative assets, such as bonds or other securities offered by companies with similar risk profiles.

What Is the Difference Between FP&A and Accounting?

FP&A and accounting are two different functions within an organization. 

Accounting professionals are responsible for preparing financial statements, including balance sheets and income statements, and complying with government regulations related to taxes, auditing, payroll, etc. They also generate reports based on the information gathered from various systems within the company.

FP&A uses accounting information but goes beyond it by looking at how the data and trends affect future performance and how changes in prices, costs, or investments will affect the business over time. The FP&A team analyzes the data, generates reports, and makes recommendations to senior management based on their findings.

The role of FP&A is to provide insights into how changes in business processes or strategies will impact future performance. This allows management to make better-informed decisions about strategy and resource allocation.

In addition, FP&A professionals typically have backgrounds in finance or accounting but also possess strong analytics skills because much of their work involves analyzing data. Some companies even hire people with backgrounds in industrial engineering or information technology.

What Is the Structure of an FP&A Team?

Financial planning and analysis (FP&A) teams comprise people from various backgrounds and skill sets. This diversity is essential because it affords the team members a more comprehensive view of the business. Many companies have FP&A teams divided into several different areas, each with its responsibilities.

Although FP&A teams can vary in size and structure from company to company, there are some common elements that most FP&A teams have.

The company’s chief financial officer (CFO) is the senior executive directing a company’s financial actions and initiatives. Team leads report to the CFO directly or through a VP of finance or COO, depending on the company’s organizational structure. 

Below those leaders are individual contributors who work in specialized roles such as analysis, forecasting, auditing, and forecasting. These people take information from various sources to build reports for decision-makers within their functional area.

Accounting

The accounting department is usually the most significant part of an FP&A team. Accountants are responsible for ensuring that all financial data is recorded correctly by generally accepted accounting principles (GAAP).

They also prepare reports used by management to make critical business decisions such as budgeting or determining whether or not to pursue a course of action. This also includes internal auditors who monitor finance departments for compliance with accounting standards.

The accounting department has several different roles and functions, including:

  • Accounts payable: The department that handles invoices and payments.
  • Accounts receivable: The department that collects money from customers.
  • Audit: The department that checks the company’s books to ensure they’re accurate.
  • Controller: A high-ranking executive who oversees accounting functions in a company. Controllers typically manage many different departments, such as accounting and finance.

Treasury and capital market

This is where you’ll find professionals focusing on investments, cash flow, and capital markets. This team oversees the company’s cash flows, including short-term debt funding, long-term financing, and capital investments.

It also manages the company’s relationship with its investment banks and compliance with regulatory requirements.

FP&A

The FP&A team is the hub that drives the financial performance of an organization. The team is responsible for collecting, analyzing, and reporting financial data to ensure all stakeholders have the necessary information to make intelligent financial decisions for the company.

FP&A teams typically consist of a chief financial officer (CFO), controllers, and analysts. In larger companies, FP&A teams may also include other finance professionals involved in planning, budgeting, or forecasting.

The team’s responsibilities may include:

  • Developing the annual budget
  • Planning and tracking projects
  • Analyzing revenue and expenses
  • Managing financial risk
  • Identifying opportunities for investments
  • Supporting other departments with their day-to-day needs

FP&A also has a strategic role in helping companies make decisions that affect their long-term financial health. These decisions may include pricing strategies or investments in new products or services.

What Does a Financial Planning and Analysis Team Do?

 A financial planning and analysis (FP&A) team are responsible for helping businesses make decisions about a company’s financial health. This can be done through forecasting, reporting, budgeting and forecasting, expense management, and other tasks.

The team gathers financial information from various sources, analyzes it, and presents the findings to management.

FP&A teams are typically found in companies with many employees and multiple departments or divisions. The team’s efforts can help ensure that each department works toward the goals and objectives. In some companies, the FPA team reports directly to senior management or the board of directors.

Accounting is often focused on looking backward, whereas FP&A is focused on the company’s future. They do this by leveraging financial management software, especially tools for budgeting, scenario planning, forecasting, and corporate performance management. 

That said, most of their obligations fall into one of three categories:

  • Financial planning
  • Decision support
  • Specialized support

Financial Planning

The financial planning and analysis team is responsible for managing the budget and analyzing the financial statements. 

Financial planners develop budgets and forecasts, which help managers decide how much to spend on different business areas. They may also evaluate capital investments and make recommendations regarding these expenditures. 

Financial analysts review financial statements to ensure that they are accurate. These professionals analyze trends in sales, costs, assets, and other factors to identify problems before they become serious. They also compare actual results with budgets and plans to determine whether the company is performing as expected or if any issues need to be addressed.

To pursue these ends, the FP&A team must constantly run through three critical financial statements:

  • P&L (income statement)
  • Balance sheet
  • Cash flow statement

These three documents help the team account for key financials like gross profit and net income margin, the cash balance on hand, monthly cash burn, and various ratios.

Decision-Making Support

FP&A teams don’t just focus on forecasting and planning. Financial planning and analysis teams are also responsible for helping companies make decisions about their future. The team’s primary goal is to help businesses grow by analyzing data and forecasting financial results.

One of the main questions they must ask is, “Is the company’s current assets and investments delivering ROI, or is there a better way to utilize cash flow?” To help solve these issues, they may seek to identify areas to invest in or generate cash flow while also analyzing the cost-efficiency of each department.  

Depending on the company, many FP&A teams are in charge of creating a monthly “CFO book,” which provides key metrics, including:

  • Current forecasts, listing both the risks and the opportunities within the current plan
  • Historical financial analysis 
  • Key performance indicators (KPIs)

This book can empower upper management or the CFO, helping them identify opportunities for investment and optimization.  

Specialized Support

Depending on the business, an FP&A team may be pulled into various other roles for which they have specialized expertise. 

Businesses need accurate data to make intelligent decisions about their operations. This data can come from numerous sources, including sales reports, inventory databases, and customer information.

However, it takes someone with specialized training to gather all this information and turn it into valuable numbers that management can use.

The FP&A team gathers data from every department within the company, including finance, accounting, and marketing. They also use independent research firms for outside sources of information such as industry trends or economic forecasts.

The result is a complete picture of how well your business is performing financially and what areas need improvement. This information gives you an edge over competitors who may not have access to this type of data or don’t know how to analyze it correctly.

FP&A Teams’ Three Primary Statements

The primary responsibility of FP&A teams is to provide insight into what happened in the past and what is happening now so that executives can make informed decisions about the future. To do this, FP&A teams use three main statements:

  • Profit and Loss (P&L) Statement
  • Balance Sheet
  • Cash Flow Statement  

On their own, each serves a unique purpose, but together, they make it possible for FP&A teams to perform financial modeling and forecasting.  

Profit & Loss Statement

Also known as an income statement, the profit and loss statement measures the business’s profitability over time. It has two major parts: income and expenses. These components allow the FP&A team to calculate how much money was gained or lost in the intervening time. 

This is the most popular financial statement because it shows whether a company made or lost money during a specific period, like a month or year. The profit and loss statement shows you what happened to your money over a period (typically a year). In contrast, the Balance Sheet is concerned only with where your money is at any given moment.

One of its purposes is to help investors gauge how well a company is performing by comparing expenses against revenue. If a company has more expenses than revenue, it loses money; if it has more income than expenses, it makes money.

By analyzing a P&L statement, an FP&A team can better gauge the company’s overall financial health.

Key Features of the Profit and Loss Statement

The profit and loss statement is a document that summarizes the revenues and expenses of an organization over a given period. You’ll find three key features on it: revenue, fees, and net income. These three features show how well your company is financially doing over a given period.

Items Included in the profit and loss statement include:

Revenue: The total income of a company refers to the total amount of money brought into the company. It represents all sales generated in a given period, such as one quarter or one year. Revenue includes all money a company receives from its customers, whether it’s cash, checks, or other forms of payment. 

Expenses: Expenses are the costs incurred while generating revenue. Expenses can be broken down into four main categories:

Cost of Goods Sold (COGS): After subtracting its direct costs such as materials, labor, and shipping, this is the profit a company makes.

Operating Expenses: This covers payroll, rent, utilities, and other things that aren’t directly related to production or sales. These are generally fixed costs that are relatively consistent from month to month.

Balance Sheet

The balance sheet is a snapshot of a company’s financial position at any given moment — it reports what a company owns (its assets), what it owes (its liabilities), and its net worth (assets minus liabilities). The balance sheet is also sometimes called the statement of financial Position.

This statement tells you how much money the company has on hand and how its financial situation compares to when it was last examined.

The balance sheet is the heart of a company’s financial statements because it tells you if it is in good shape or in danger of bankruptcy.

Key Features of the Balance Sheet

When looking at a balance sheet, you will see three key features: assets, liabilities, and equity. These three sections contain information about your company’s financial position on a given day. 

Items Included in the Balance Sheet include:

Assets: The sheet’s asset side shows various things that belong to your organization. Assets are grouped into current assets and noncurrent assets. Existing assets are resources that can be converted to cash within one year, such as cash on hand, accounts receivable (i.e., money owed by customers), inventory, and prepaid expenses (e.g., insurance). 

Noncurrent assets are resources with values lasting beyond one year and include long-term investments, fixed assets (e.g., machinery), intangible assets, and deferred charges.

Liabilities: Liabilities are the debts and obligations of a business, such as loans, accounts payable, and accrued expenses. Liabilities can be short-term or long-term.

Current liabilities are debts that must be paid within one year. Examples of current liabilities include accounts payable, interest payable, income tax payable, and short-term loans.

Long-term liabilities are debts that mature more than one year in the future. Long-term liabilities include bonds payable, mortgages payable, and long-term notes payable.

Equity: Shareholders’ equity is the net difference between assets and liabilities. After accounting for everything owed, the equity section sums up assets minus liabilities and shows what you own. Equity can be damaging if liabilities exceed assets, called a deficit.

Cash Flow Statement 

The cash flow statement looks at how cash moved during a particular period — usually over one year. It shows cash changes from operating, investing, and financing activities. It offers an overview of how well a company generates money to fund its operations, pay its debt, and support its investments.

For investors, the statement of cash flows can be significant, as it shows how much actual cash moved in and out of the company during the reporting period.

The information is intended to give investors and other stakeholders an idea of how well a company is using its money, and it’s also a good way for companies to stay accountable to their shareholders.

Key Features of the Cash Flow Statement

The statement of cash flows groups cash-related activities under three main sections: operating, investment, and financing. These sections tell you the overall state of your company’s cash flow. 

Empower Your FP&A Team

 Your FP&A team is the backbone of your finance organization. They’re responsible for collecting and analyzing data to help you make sound business decisions.

As the leader of your company, it’s up to you to empower your FP&A team with the tools they need to succeed. That includes educating them on your strategy, empowering them with the right tools and technology, providing them with access to data, and building trust among all team members.

What Is Burn Rate, and How to Calculate It?

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Burn rate is the rate at which a company is spending its capital. It’s a valuable metric for those in the startup world because it shows how quickly a company is depleting its cash reserves.

This number is significant because it shows how fast a company is burning through its funding. If a company burns more than it makes, it will eventually run out of money and shut down.

Burn rate is a key metrics in your startup’s life cycle. It tells you how fast your company is burning through the capital.

Burn rate helps you understand how soon you can expect to reach cash-flow break-even when refinancing will be needed and what impact your decisions will have on future cash flow.

What is Burn Rate?

Burn rate is a metric used by startups and small businesses to track how much cash they’re burning through each month. As the name suggests, it measures how quickly the company is draining its bank account or other sources of funding (e.g., credit cards).

Burn rate is calculated by taking your monthly expenses and dividing them by the number of months until you run out of cash. For example, if a company has $1 million in monthly costs and 12 months of runway left, its burn rate is $83,333 per month ($1 million / 12 months).

Why does this matter? Because it tells founders how much time they have left in terms of cash before they need to raise more funding or shut down their business.

The first step toward improving your burn rate is understanding precisely what it is — and why it matters so much to your startup’s future success or failure

Who Needs to Worry About Burn Rate?

The term burn rate has come to be associated with startups. High burn rates can cause problems for small businesses, especially those relying on venture capital funding.

Venture capital firms typically want to see their investments turn into profitable companies within five years, so they tend to invest in businesses with low or moderate burn rates.

High burn rates can also cause problems for startups because they don’t have much room for error regarding cash flow management — if something unexpected happens, such as an employee quitting or losing an important client. There may not be enough money to cover unforeseen costs without debt.

Burn rate is a critical metric for three types of businesses:

Startups With Venture Capital Funding

If your startup is funded by venture capital, you should be very concerned about the burn rate. This is because venture capitalists expect their money to be used wisely. If you’re burning through capital too quickly, it puts pressure on your company to hit product-market fit and earn revenue as soon as possible.

In addition, venture capitalists expect a return on their investment within ten years. If you’re spending too much money and not bringing in enough, it can be challenging to show them a path toward profitability. In some cases, they may even ask for an exit before you’ve reached that point.

Taking all of this into account, it’s important for startups with VC funding to track their burn rate carefully. They need to know how much they’re spending each month and how long they have until their next funding round arrives.

They also need to know how much cash they’ll have left when the current round runs out — so they can decide whether or not to raise more money from investors or try another source of financing (such as debt).

New Companies Getting Started

Burn rate is significant for startups that have just launched their products or services and have yet to generate revenue. These companies often spend heavily on marketing, sales, and other expenses trying to find and retain customers.

As long as these expenses are temporary, these startups still have plenty of time before they run out of cash — so long as they can show positive signs that their business models are working and leading them toward profitability.

New companies getting started often have high burn rates because they lack the revenue or profits needed to sustain their operations without external funding sources like venture capital or loans from friends and family members.

In that situation, an early-stage startup should focus on reducing its burn rate as much as possible to conserve precious capital for later stages when it needs it more urgently to grow quickly enough to survive the competition and evolve into a sustainable business model.

Established Businesses Borrowing Money

Burn rate can be an essential metric for companies raising money from investors, but it’s also useful for established businesses borrowing money.

If you’re an established business and take out a loan, you’ll probably be required to provide financials to your lender. That’s because the lender wants assurance that you can repay the loan.

The lender usually looks at your cash flow and burn rate (how much cash you spend each month) to determine whether you can repay the loan. If your burn rate is too high and you don’t have enough money, the lender might not lend you money.

If you’re not sure how much money you’ll need in the future, it’s essential to know how quickly your burn rate is growing to figure out when you’ll run out of cash and have trouble paying back what you owe.

Importance of Metric in Venture Capital (VC)

Burn rate is a critical metric in the venture capital (VC) business. It’s a ratio that shows how much cash a startup spends every month. VCs use this metric to determine whether they should invest in a startup and, if so, at what valuation and terms. If you’re looking for funding, it’s essential to know how much money you’ll need to get off the ground and how quickly you need to raise it.

In the VC industry, investors usually want to know everything about your business — from how many customers you have to how many people are using your product each day.

They want to know everything about your financials, too — how much money you’ve raised from investors, how much cash you’re burning through each month, etc.

That’s why startups need to be prepared with these types of metrics when they present their businesses to investors for funding.

VCs use burn rate to assess whether a startup has the potential to succeed or not. The specific number used for this calculation varies depending on what type of VC firm you are dealing with. If your startup has a higher burn rate than their internal benchmarks, it may be too early for investment because you won’t have enough money to scale up your business operations once you’ve reached profitability.

Burn rates are significant for startups because they indicate how long an entrepreneur thinks their company will last before running out of cash. The higher the burn rate, the faster that company may need additional capital — which could be obtained through another round of financing or other sources such as grants.

What Are the Implications of a High Burn Rate?

Burn rate is the amount of cash a company spends per month. It’s essential to track burn rate because it tells you how long your company can survive if it doesn’t receive additional funding.

Burn rates are often used in business planning and fundraising, but they can also understand how much money you need to keep your business running.

The burn rate is all about cash flow, so if you have a high burn rate and no new money coming in, you’ll eventually run out of funding and shut down.

If your burn rate is high, it can be difficult to predict when you’ll run out of cash. Companies like Amazon, which has historically operated with a high burn rate, keep their cash balance high to keep themselves from getting in trouble.

The primary implication of a high burn rate is that it makes it harder for startups to raise additional funding because investors are more likely to be concerned about short-term profitability rather than long-term growth potential. Here are some more of the potential implications:

Cash Flow. The speed at which you’re spending money will determine how many months you have to fund your company before you need to raise additional capital. Suppose you need to raise money in less than six months. In that case, it’s unlikely that investors will be interested in providing the funding because they don’t want to enter into an investment without knowing how long their money will be tied up in your business.

Credit Lines. Suppose you use credit lines (i.e., credit cards, line of credits, etc.) for working capital. High burn rates may lead to increased interest expense and penalties for late payments, which could ultimately hurt your ability to secure additional money if there isn’t enough cash flow from operations to pay off those debts.

Existing Investors. High burn rates may cause existing investors and lenders to question whether they should continue investing more money or extend more credit lines to your company — especially if they already have concerns about its financial health due to poor performance or low sales volumes.

Top Talent. High burn rates can also make it difficult for companies with high burn rates to hire top talent because potential employees may feel that they might think that the company won’t be able to afford their salary demands or their equity will be worthless when the company shuts down.

Gross Burn Rate vs. Net Burn Rate

The gross burn rate is the total amount of money spent per month on expenses, including salaries, rent, and other costs. It includes:

Your monthly expenses — rent, utilities, payroll, etc.

Cost of goods sold (COGS) — this is your inventory or the number of units you produce and sell each month. If you’re selling products or services, COGS is the cost of creating or delivering those services. 

The net burn rate is the money left to cover all expenses, including salaries. The net burn rate is also the gross burn rate minus cash inflow from clients, investors, or partners.

This number represents how much money you need to raise each month or quarter to stay alive — or how much money it costs to run your company per month or quarter before generating any revenue.

The Gross burn rate helps understand how much money a startup is spending. It can also indicate if your company has enough capital to support its current level of operations. However, the gross burn rate is not a good measure of profitability because it doesn’t include revenue or other income sources.

Net burn rate gives you a better idea of how long your company will be able to sustain itself before running out of cash. If your business is profitable and has positive cash flow, your net burn rate should be zero or negative. 

How to Calculate Gross Burn Rate

The gross burn rate is the total monthly cost of operating the business, including rent, payroll, and marketing. It’s one of the most critical metrics for SaaS companies.

The gross burn rate is calculated by adding up all the expected expenses in a given month and dividing them by the number of months remaining until you achieve your break-even point. The gross burn rate calculation requires two values: your monthly operating expenses and starting capital or total cash.

For example, if your company has $3,500 in expenses per month and you funded your business with a $50,000 loan, then calculate the gross burn rate:

  1. Add up all your monthly payments (salaries, office rent, customer support, etc.).
  2. Divide by the amount of your money you’re funded your business

$3,500 / $50,000 = 0.07

Multiply by 100, and you get 7%. So, your monthly burn rate is 7%. Every month in business, you spend 7% of your initial investment.

The equation for it is:

Gross Burn Rate (%) = Monthly Operating Expenses / Starting Capital x 100

How to Calculate Net Burn Rate

Calculating your net burn rate is just as important as calculating your gross burn rate. It’s an indicator of how much runway you have left in your bank account, and it helps you make smarter decisions about the future of your business.

The net burn rate is calculated by first subtracting all revenue from the total amount of money spent over some time. This figure represents how much money was spent on operational expenses like payroll and marketing during that period.

The formula for calculating net burn rate percentage is:

Net Burn Rate (%) = (Revenue – Operating Expenses) / Starting Capital x 100

Let’s take an example. You own a store, and you’re earning revenue but still spending $3,500 a month, and last month you only made $2,000. You also invested $50,000 capital in starting your business. Your net burn rate, in this case, would be:

($2,000 – $3,500) / $50,000 = 0.03

Multiply the result by 100, and you get a net burn rate of 3%.

How to Reduce Burn Rate

If you’re running a startup, you know that burn rate is one of the most critical metrics. Your burn rate is how much money you spend each month, and it’s usually measured in dollars per month or dollars per week.

If your burn rate is too high, you won’t have enough money to make payroll or pay for other expenses like office space. If your burn rate is too low, you might be spending less than you need to run a profitable business.

A high burn rate can be disastrous for any company. It means that they’re spending more than they’re earning and burning through their cash reserves at an unsustainable pace.

However, there are ways to reduce your burn rate without sacrificing growth.

Re-evaluate Your Recurring Costs

If you have monthly or annual recurring costs, such as hosting fees or software licenses, it’s good to re-evaluate those costs every three months.

You might not need all the features they offer, so consider switching to less expensive alternatives or reducing the number of users who need access.

The same goes for services like accounting software — if you don’t use all its features and only use it once a year to file taxes, find something cheaper that works just as well (or better).

Layoffs and Pay Cuts

To reduce your burn rate, you need to cut costs. The first place to look is at the payroll. If you have an underperforming staff or aren’t utilizing them properly, it’s time to let them go. Don’t be afraid of making the tough call — sometimes it’s better to let someone go than keep them around and pay them for their lack of contribution.

Layoffs can be sensitive, but they can also help reduce your burn rate by removing employees who aren’t contributing as much as they should. If you have a team of 10 developers who are only working on one product, you could potentially replace them with five developers working on two products.

Another way to reduce your burn rate is by cutting salaries. This can be a difficult decision as it often involves reducing the wages of your most senior employees. Still, if you can’t afford these salaries anymore, you have no choice but to make cuts. Pay cuts can also help reduce your burn rate if you can cut other expenses along with it.

For example, if you had five developers working full-time at $100k each, and you were able to cut their salaries down to $80k each while keeping their hours the same, that would save your company $200k per year without reducing the number of hours worked or the quality of the work product.

Marketing (Sales Fixes All)

Marketing is the only thing that will help you grow your sales enough to reduce your burn rate. This isn’t suggesting that you throw money at the problem, but rather thoughtfully drive revenue through marketing.

This could mean hiring amazing salespeople and incentivizing them properly. Other ideas like focusing on driving down your CAC and initiating growth hacks that are free or low cost to drive high-value sales and so on.

Look For Additional Funding

Consider looking for additional funding if your burn rate is high and your revenue isn’t keeping pace.

You might be able to find angel investors or venture capital investors willing to invest in your business early if they believe they can make a return on their investment by helping you grow faster than you could on your own.

The key is finding someone with experience working with startups like yours — someone who understands the risks involved and can advise you on how to avoid common pitfalls.

Manage Your Burn Rate and Survive

Burn rate is the amount of money you spend each month. It’s the cash flow you need to grow and run your business, and it’s a critical metric for any entrepreneur.

This may seem obvious: You need to spend money to make money. But it’s essential to understand how much you’re spending and how you can reduce the burn rate to plan for growth and know when to stop spending.

Ultimately, reducing your burn rate requires an exceptional understanding of your team’s assets. Please keep track of the various assets you have at your disposal and where they are.

By identifying opportunities for cross-departmental resource sharing and strategic cost-cutting, it will be easier to keep a handle on your startup’s finances. It may not happen overnight, but by being proactive, you can better avoid asking for large sums of money before running out completely.

Best Business Credit Cards for Startups

Best Startup Credit Cards Finance Hire

If your business just started or is still getting off the ground, you might wonder what the best credit cards are. As a startup, you probably don’t have much revenue coming in, and you want to spend as little as possible. 

Choosing a business credit card for your startup comes down to four factors—ease of use, signup bonuses, rewards, and the credit limit. The best business credit cards for startups will help you build your business and credit and easily manage cash flow while providing valuable rewards that can be spent on office supplies, travel, and more. 

This guide will explain each of them in detail so you can make an informed decision when it comes to choosing a new credit card.

What Are the Best Credit Cards for Startups?

If you’re a startup business, getting the right credit card can be a great way to build your business credit, earn rewards, and ensure your business is ready to grow. But with so many different types of cards available, it can be hard to pick the best one for your needs.

For example, some cards offer cashback or airline miles, while others provide travel-related perks like free concierge services or rental car insurance. It’s essential to choose a card that will give you the most benefit for your business.

Startups are not like small businesses, and their credit card needs differ from traditional small businesses. At the moment, our top two recommendations are Ramp and Brex. They offer some of the best spending limits for business credit cards, and they both lack a personal guarantee which we will discuss later.

The Best Card for Startups – Q2 2022

Q2 2022 is here, and with it, a new set of credit cards. If you’re a startup or even an established business, it’s essential to have a credit card to help your business prosper. There are a lot of different cards out there, and each one has its unique perks and rewards. 

One of the most popular options is the Brex Credit Card. This card offers some fantastic benefits and can be used by anyone looking to expand their business or personal finances. The Brex card provides several benefits for businesses, including no annual fee, no foreign transaction fees, and a signup bonus of $750.

Brex also offers tools to help you manage your spending through its app and website, including notifications when payments are due, alerts when someone else has used your card (so you can monitor who has access to it), fraud protection services, and even business trip tracking tools so you can keep track of where you spent money while traveling for work purposes.

We also recommend the Ramp Business Credit Card. This is an excellent choice for those who want to build their credit history and establish their business as a legitimate entity. If you’re starting or have some money but don’t have much of a track record yet, RAMP is an excellent option for getting started with business credit cards. This card has no annual fee and lets you earn points that can be redeemed for cash back or airline flights. They also offer a $750 signup bonus when you sign up with them for the first time.

Why Startups Need a Specialized Credit Card

A startup needs a credit card because it doesn’t have any money — or at least not enough money to cover all its expenses. Most startups spend more money than they make because they’re trying to scale their companies quickly.

The main reason to get a specialized credit card for your startup is to improve your cash flow. Credit cards allow you to buy now and pay later, which can be helpful when you need to make a big purchase or cover an unexpected expense. This can especially be helpful in the early stages of building your business because it gives you time to generate additional revenue before paying off the card balance.

Another reason to get a credit card for your startup is to build a credit history for yourself or your business. Having good credit can be critical when applying for loans, mortgages, and other types of financing down the road — so having even one or two years of good payment history will help give you an edge over other applicants who don’t have any credit history. At all!

Finally, using a specialized small business credit card can also help improve your company’s reputation by showing that you take financial responsibility seriously and are willing to invest in yourself and others. 

How Do You Choose a Better Credit Card for Your Funded Startup?

Your credit history and score are often not yet on the radar when you are starting a business. But as soon as you start accepting payments from customers, your finances can become an essential factor in the success of your business.

One of the most important things you’ll need to choose is a credit card for your funded startup — but what should you look for?

The first thing to consider is how much you plan to spend each month. If you’re planning on making larger purchases or paying off smaller purchases over time, you’ll want a card that rewards both types of spending.

If you’re planning on making large purchases soon, then a card with an annual fee might be worthwhile because it gives you extra rewards points just for signing up.

On the other hand, if you’re planning to spend less than $1,000 per month, there’s no point in paying an annual fee or getting locked into a longer-term contract.

Next, consider how often you plan to use your card and how much flexibility it offers regarding interest rates and balance transfers. The interest rate on your credit card matters because it determines how much money you will pay in interest over time. The lower the interest rate, the less you’ll pay interest charges if you carry a balance on your card each month.

Features to Look For in a Credit Card for Your Startup

Startup Focused Rewards

If you’re starting with credit cards, it’s essential to find one that has rewards that you’ll use. This could be cashback, travel points, or airline miles — whatever fits your lifestyle.

You’ll have to decide how much flexibility you want in your rewards program. Some cards offer different rewards depending on how much you spend each month, while others don’t give priority based on how much money you spend with them.

The good news is that most credit card companies reward spending in general, so there is usually no need to worry about this aspect of your credit card.

A Spending Limit Based on the Company’s Balance Sheet

When you apply for a credit card, the bank or credit card provider will look at your balance sheet to determine whether you are a reasonable risk.

They want to know if you have your business has assets (or if you are personally qualifying that you have a home, car, etc.) and if your revenue is sufficient to repay the debt. If there is no collateral or payment, they will probably ask for a personal guarantee.

The banks don’t want to give out credit cards with unlimited spending limits because they would be on the hook for any losses if you defaulted on the payments. So, if you have a large credit card limit, it’s probably because you can provide some form of security or collateral against losses.

No Personal Guarantee 

If you’ve ever had a credit card with a high limit, you may have been asked to put up a personal guarantee — essentially promising that if you don’t pay off the debt, the bank will come after your personal assets. This is not ideal because it can affect your ability to get another loan or open new lines of credit in the future.

A personal guarantee means you’re responsible for paying back the debt if your business fails. A small business credit card without a unique warranty is best to ensure that you aren’t liable for any outstanding debt if your company goes under or declares bankruptcy.

Easy and Fast Bookkeeping

One of the most significant benefits of using a credit card is that it can make your life easier for bookkeeping. You don’t have to worry about writing checks or keeping track of receipts because everything is automatically recorded on your statement each month.

If you’re concerned about keeping up with your finances and balancing your checkbook, a credit card with easy bookkeeping can make a difference.

Look for cards with free tools that allow you to track your spending and keep tabs on your credit score — so you don’t have to pay an expensive monthly fee for those services elsewhere.

Spending Management Tools

If you want help keeping track of your spending, a rewards card with budgeting tools can be significant. Some cards will help you track your spending by providing monthly statements showing how much money you’ve spent on other purchases (such as dining out or travel). Others allow you to set spending limits so that if you try to go over your budgeted amount, they’ll alert you before you spend too much.

Here are a few things to keep in mind when choosing a card for your startup:

Rewards programs

Credit card companies offer amazing rewards programs that can help you save money on everything from gas and groceries to traveling and entertainment.

While plenty of cards offer cashback or miles on all purchases, some cards offer higher rewards rates for specific spending categories. This can be especially useful if you know where your business will spend most of its money and want to earn more points faster.

You’ll want a rewards program that makes sense for your company. Some businesses prefer cashback, while others prefer travel rewards. If you’re looking for cash back, consider what percent you’d like to earn and how often you’d like to receive the money. While most rewards programs offer 1% cashback, some can go as high as 5%.

If you’re interested in travel rewards, consider which airline or hotel network is suitable for your business’s needs and how often you’ll spend money on these purchases.

Credit limit

 A credit card’s credit limit is the maximum amount you can spend on your card.

It’s essential to have a credit limit in line with your spending habits and financial goals. For example, if you want to build up your credit score, it makes sense to only charge what you can afford to pay back each month.

If your credit limit is too high, you may be tempted to charge more than you can afford.

Credit limits are typically set by individual creditors, who use information about your business revenue, expenses, and other details to decide how much they will lend you. When you apply for a new account, the creditor also looks at how much debt you’re currently carrying on other accounts — including other cards from the same issuer — and how this relates to your business assets and profitability.

Fees

Credit cards can be a great way to build your credit and earn rewards on everyday purchases. But they aren’t all created equal. Before you apply for a new credit card, check the card’s terms and conditions, including any annual fees, interest rates, and other charges. Here are some of the most common costs that you might encounter:

Annual fees. Most credit cards charge a yearly fee, but it’s typically only set once a year — either at the beginning or end of your first year as a cardholder. Annual costs vary by card and issuer, but they generally range from $50 to $500 per year. You may be able to avoid paying an annual fee if you have good credit or if you open an account with a large bank or issuer like Capital One, which offers different cards with no annual fee at all.

Late payment fees. If you pay your bill late — even by one day — you could face steep penalties in addition to interest charges on any unpaid balance: A late fee is standard for many cards that charge interest on purchases as well as cash advances (though some issuers waive this fee if you’re still paying off your balance gradually).  

How Do Brex, Amex, and SVB Startup Credit Cards Compare?

BrexSilicon Valley BankAmerican ExpressChaseRamp
Built for Funded StartupsYesYesNoNo Yes
Rating for Startups4/53/53/53/54/5
Spending LimitFairly GoodGoodFairFairFairly Good
Rewards / Cash BackStartup FocusedStartup FocusedPersonal Travel RewardsPersonal Travel Rewards1.5% cash back
Personal GuaranteeNoNoYesYesNo
Easy BookkeepingYesYesYesYesYes
QuickBooks Online SyncYesYesYesYesYes
Annual Fee$0$0$295$95$0
Instant SignupYesNoNoNoYes
Ability to Carry BalanceNoNoYesYesNo
Control Team SpendingYesNoNoNoYes
Reimbursements FeatureNoNoNoNoYes
Business Checking AccountYesYesYesYesNo
Sign Up Bonus$750NoneNoneNone$750

Brex

Brex is a startup that provides business credit cards to startups. The Brex card offers several benefits for businesses, including no annual fee, no foreign transaction fees, and a generous signup bonus of $750.

You get 10,000 points when you spend your first $1,000 on your Brex Card, another 10,000 when you spend $3,000 in 3 months on your Card, and 20,000 more when you link payroll to your Brex account.

The Card also offers a 0% introductory APR on purchases for 12 months, with no balance transfer fee or interest rate increase after the intro period ends. 

The primary benefit of the Brex Card is its easy application process: There’s no minimum credit score requirement or collateral needed to get approved for an account — just some basic information about your business and its revenue.

Even if your credit score is as low as 300, you can still qualify for this Card. The downside is you’ll need a minimum of $50,000 in the bank to be eligible for monthly repayments, maybe more. 

Brex also offers tools to help you manage your spending through its app and website, including notifications when payments are due, alerts when someone else has used your Card (so you can monitor who has access to it), fraud protection services, and even business trip tracking tools so you can keep track of where you spent money while traveling for work purposes.

The Card also offers free FICO score access.

American Express (Amex) Blue Business Cash

If you’re looking to get a business credit card for your startup, the American Express Blue Business Cash card is another great option. The Card has no annual fee and offers 2% cashback on all eligible purchases of up to $50,000 per calendar year, then 1% cash back earned is automatically credited to your statement.

The American Express (Amex) Blue Business Cash Card has a 0.0% intro APR on purchases for 12 months from the date of account opening; then, after that, it has a variable rate of 13.99% to 21.99%, based on your creditworthiness and other factors as determined at the time of account opening.

The best part about this card is that it’s available to businesses with as little as $5,000 in gross revenue per year. That makes it a good choice if your startup isn’t yet making much money — or if you want to keep things simple.

This card has no annual fee and comes with other perks, such as price protection and extended warranties on items purchased with the Card. The American Express Blue Business Cash card is a simple card with no annual fee and no rewards. It’s designed for small businesses that need to keep their costs down and don’t want to get into the details of complicated reward programs.

American Express (Amex) Business Gold

Amex has a great business card for startups called the American Express Business Gold Card. This Card offers a generous welcome offer of 70,000 Membership Reward points after spending $10,000 on eligible purchases with the Amex Business Gold Card within the first three months of card membership.  

This Card can offer some fantastic rewards. The AmEx Business Gold Card offers some great tips for startups that spend heavily on travel and dining out categories, typical expenses for businesses in those industries.

You earn 4 Membership Rewards points per dollar when you use an airline, purchase at gas stations, and more. The 4X rewards apply to the first $150,000 in combined spending per year from some of their categories, and after that, spending earns 1 point per dollar.

The American Express (Amex) Business Gold Card has a $295 annual fee.

As a startup, you should consider applying for this card if your business has a good credit score. American Express can be tricky because it requires excellent credit to get approved — but once you’re approved, it can be a fantastic addition to your wallet.

You’re looking at a credit score of about 690-850 to qualify for this Card.

Cardholders also get access to over 1,000 airport lounges worldwide through Priority Pass Select membership and access to Global Shop Direct, which allows you to shop online at more than 350 international retailers.

American Express (Amex) Business Platinum

The Amex Business Platinum is an excellent card for startups because it offers a large signup bonus, a generous rewards program, and special perks for travel.

The Card has an annual fee of $695, but the rewards program can make up for that in just a few months. For example, you get 5X Membership Rewards points on flights and prepaid hotels on amextravel.com and 1X points for each dollar you spend on eligible purchases.

The Card has an introductory offer of 120,000 Membership Rewards points after spending $15,000 on eligible purchases with your Card within the first three months of Card Membership.

The Amex Business Platinum card has no foreign transaction fees, which can save you money when traveling internationally. It also comes with complimentary airport lounge access (with the correct membership level), which can help you relax before or after a flight without paying exorbitant airport lounge fees. 

This provides access to over 1,000 airport lounges worldwide — another perk for business travelers who want to get work done while traveling by plane or train. The American Express Global Lounge Collection can provide an escape at the airport. With more than 1,400 airport lounges across 140 countries and counting.

The Card’s biggest perk is its rewards rate — 5 points per dollar spent on airfare, hotels, and car rentals; 2 points per dollar spent on all other purchases; and 1 point per dollar spent on everything else.

You can redeem points for statement credits or use them to book flights through Amex Travel online or by phone, which could be an easier way to earn airline miles if you’re not flying very often.

Silicon Vally Bank Startup Card

Silicon Valley Bank is one of the most respected financial institutions in the Silicon Valley region. The bank caters to venture-backed and high-growth companies, offering a card for startups.

This Card is not just a credit card but also a business checking account that comes with a free MasterCard. It has no annual fee, and there are no foreign transaction fees.

The Card has an introductory APR of 0% for 12 months on balance transfers made within the first 60 days of opening an account. There’s also an introductory APR of 0% on purchases for 12 months, after which the rate will be 11.24% – 23.88% variable based on your creditworthiness.

If you use this card responsibly, it could make sense to get it because it has some nice perks like travel protection insurance (up to $250,000 in accidental death and dismemberment insurance when traveling), purchase protection insurance (up to 120 days against loss or theft of items purchased with your Card), auto rental insurance (covers collision damage & theft of rental cars up to $100,000) and extended warranty protection.

The Card has no annual fee, but you’ll need to be approved for an account before applying for the Card. This means you’ll need to have a business relationship with Silicon Valley Bank first — even if it’s just a small one.

Ramp

It can be tough to get a business credit card if you’re a startup. Many banks will not issue cards to companies that have been in business for less than 12 months.

That’s where RAMP comes in. The company is an alternative financing company that helps startups get approved for a small-business credit card. There are no fees, and you can get approved even if your company has only been around for a few months.

The cards come with zero percent introductory APRs on purchases and balance transfers. Still, they also have high-interest rates after that term expires — up to 19% APR depending on your outstanding balance.

If you’re just starting or have some money but don’t have much of a track record yet, RAMP is an excellent option for getting started with business credit cards.

This card has no annual fee and lets you earn points that can be redeemed for cash back or airline flights. You also get exclusive discounts on travel expenses such as baggage fees and airport parking. 

Divvy

If your startup is starting and has little in the way of assets or income, it can be tough to get approved for a card in the first place. That’s where a startup-friendly credit card like Divvy comes in. The Card offers perks for small businesses and startups that other business credit cards don’t — including a cash back bonus, no annual fee, and foreign transaction fees.

The Divvy card isn’t your typical rewards card either. Instead of giving you points or miles that you can use for travel or gift cards, the Divvy gives you cashback on every purchase. And there are no limits on what you can earn or when you can redeem your earnings.

As a bonus, Divvy also gives you access to multiple lines of credit without needing to go through a traditional bank (and applying through one at a time). That means if you want to use multiple lines of credit at once — which can help boost your scores — Divvy will let you do that without any issues.

The Divvy Business Card is a solid choice for startups that want to earn rewards on every purchase. It has no annual fee, and it offers 2% cashback on all purchases, which can be redeemed as a statement credit or applied toward your monthly payment. You’ll also get 10% back in additional rewards by saving through the Divvy Spending Portal.

The Card doesn’t have an introductory 0% APR offer or any other perks, but its low ongoing APR of 14.74% – 19.74%, depending on your creditworthiness, makes up for that shortcoming.

Chase Ink Business Preferred

The Chase Ink Business Preferred card is an excellent option for startups and one of the best credit cards you can find. It offers 100K bonus points after spending $15,000 on purchases in the first three months from account opening. $1,000 cash back or $1,250 toward travel when redeemed through Chase Ultimate Rewards.

The Card has no foreign transaction fees and gives you access to the Chase Ultimate Rewards travel portal, where you can get additional discounts on airfare, hotels, and more. You also get 3 points per $1 on the first $150,000 spent on travel and select business categories for each account.

The Chase Ink Business Preferred card is an excellent choice for small business owners who want to earn rewards on their spending and access the Chase Ultimate Rewards program. The Card has a $95 annual fee, but it can more than pay for itself with its high rewards rate.

With Fraud Protection, your card transactions will be monitored for possible signs of fraudulent activity using real-time fraud monitoring. And with their Zero Liability, you won’t be held responsible for unauthorized charges made with your card or account information.

Chase Ink Business Unlimited

Chase Ink Business Unlimited is one of the best business credit cards for startups. It offers a generous rewards program and no annual fee.

The Chase Ink Business Unlimited is our runner up for startups because it gives you a great rewards rate on travel and dining and no annual fee to pay.

The Card offers a $750 bonus cash back after spending $7,500 on purchases from account opening in the first three months. You’ll also earn unlimited 1.5% cash back on every purchase made for your business.

The Chase Ink Business Unlimited is a great card for small businesses that aren’t sure how much they’ll spend each month. The Card has no annual fee and offers an introductory APR of 0% on purchases and balance transfers for the first year. After that, you’ll pay a variable APR of 16.49% to 22.49%.

There are no foreign transaction fees, and you can earn 3X points per dollar spent at U.S. stores. You also get 2X points per dollar spent on travel and shipping costs, social media advertising, and search engine advertising from Google, Bing, or Yahoo.

Our Top Pick for the Best Startup Credit Card

At the moment, our top two recommendations are Ramp and Brex. They offer some of the best spending limits for business credit cards.

There are many different types of startup credit cards, but only a few are designed specifically for startups. When you’re starting up your business, it’s easy to get confused by all the different cards available and not know which one is right for your needs.

To help make things easier, we’ve put together this list of our top picks for the best startup credit cards for startups in 2022.

What is ABL?

Inventory for Asset Based Lending Finance Hire

Asset-based loans are a type of financing that allows businesses to obtain loans based on the value of their assets. The lender uses the value of your business’ assets as collateral for the loan.

Asset-based lenders lend money based on an asset’s value rather than relying strictly on a borrower’s credit score. 

The primary benefit of using asset-based lenders is that they don’t rely on traditional credit scoring methods. Instead, they look at the value of your assets as collateral for the loan.

This can be helpful if you have a poor or limited credit history because it will allow you to access funding that may not be available through traditional means. 

However, it also means that your application will be subject to more stringent scrutiny than traditional loans.

What Is an Asset-Based Loan?

An asset-based loan is a type of financing that uses your business’s assets as collateral to secure the loan. If you have valuable equipment, real estate, or other items that can be sold if you default on the loan, an asset-based lender can help you get funding for your business. The lender may take possession of the property if you fail to make timely payments.

Here’s how it works: You pledge some or all of your assets, such as cash, stocks, bonds, and real estate, as collateral for a loan. The lender will evaluate the value of your help and determine how much money you can borrow based on those assets’ value. 

An asset-based loan has several advantages over traditional loans. For example:

They often come with lower interest rates than other types of loans. The lender has to take certain risks when issuing an asset-based loan. But they are assured that they can recover all or part of their money when they hold your assets as collateral. 

Second, asset-based lenders may be more willing to work with you if you have bad credit or no credit history.

Even if you don’t qualify for traditional loans based on your income or credit score, some lenders may still consider issuing an asset-based loan based on the value of your assets and the likelihood that you’ll make good on your payments over time.

Finally, many asset-based lenders offer flexible payment plans that align with seasonal fluctuations in business revenue and expenses. You don’t have to make regular monthly payments like other loans.

Who Uses Asset-Based Lending?

Asset-based loans are not available to just anyone, however. It would help if you had a business with valuable assets that could be used as collateral for the loan.

For example, if you own a car dealership, the cars you sell can be used as collateral for an asset-based loan. If you own a repair shop, the tools and machinery in your shop could also be used as collateral for an asset-based loan. 

In most cases, asset-based lenders require that you have been operating your business for at least six months before they will consider giving you an asset-based loan. If you’re starting with your business idea, it may take some time before you qualify for an asset-based loan.

The asset-based lending process is used by a wide variety of businesses, including:

  • Companies that need financing for equipment and machinery.
  • Businesses need funding to purchase a new building or add to an existing one.
  • Businesses that need financing for inventory purchases.
  • Companies that need working capital loans to support their day-to-day operations.

In general, asset-based lenders provide merchant cash advances, business lines of credit, and invoice factoring services to small business owners with good credit and ample assets to put up as collateral.

Who Qualifies for Asset-Based Loans?

Asset-based loans are a great way to help build your business credit. Small businesses and startups often use them, but established companies with solid assets can also use them. The key is to have assets such as inventory, equipment, or accounts receivable that can be used as collateral against the loan.

If your business has been in operation for at least six months and you’re looking for a short-term loan, an asset-based loan might be right for you.

The good news is that you don’t have to be a millionaire to qualify for asset-based loans. The bad news is that it’s not as easy as it may seem. Asset-based lenders require borrowers to have an established business or a viable business plan.

They also look for signs of financial stability, such as personal income and existing assets. 

The requirements to qualify for an asset-based loan are the same as those for any other type of business loan. The lender will look at your credit score, income, and personal debt load. However, other factors impact your eligibility.

Business Collateral

This is where the asset-based loan gets its name: you must have assets that can be used to secure the loan. It could be real estate or a piece of equipment or machinery for your business.

If you plan to purchase these items with an ABL, the lender will want proof that you can do so, such as a letter from the seller or title company stating they have accepted your offer on the property in question.

For example, if you want a $100,000 asset-based loan, you need to have $100,000 worth of assets that can be used as collateral. This could be equipment, vehicles, or even real estate like land or a building your business owns.

Once the bank has this collateral, they will lend you money against it so that you can use it as capital for your business.

Business Profitability

The lender wants to know that your business will generate enough money every month to pay back what it owes them. They’ll look at your current financial records — including income statements and balance sheets — to make sure you’re making enough money (or are capable of doing so).

Liquid Assets That Are Available for Collateral

Assets such as stocks and bonds, real estate investments, or other items that can be sold quickly are often used as collateral in asset-based loans. These types of assets can be sold if you don’t pay back your loan on time.

A Good Credit Score

A good credit score will help you get approved for a more considerable loan amount because lenders see this as a sign that you’re less likely to default on the debt.

You also need to provide proof of insurance on each item being used as collateral, along with an appraisal report from an independent third-party appraiser who has been licensed by a state agency or department of insurance.

What is the Cost of an ABL?

The cost of an ABL is not a one-size-fits-all solution. The interest rate and monthly payments are dependent on several factors that are unique to your business, including:

The amount you borrow. Larger loans typically have lower interest rates. For example, the average small business loan is about $50,000 and has an annual percentage rate (APR) of 9 percent or less.

How long do you take to pay back the loan? Longer terms generally mean lower monthly payments but higher interest rates. If you’re unsure how long it will take to pay back your loan, check out this handy calculator from Freddie Mac that can help estimate how much money you may owe at the end of different terms.

Your credit history and income. Borrowers with solid financials will likely qualify for better rates than those applying with a subpar score or income level.

The cost of an ABL is typically a fixed-rate, meaning that it does not change over time. However, there are some cases where the interest rate can be variable based on changes in market rates. 

How is an Asset-Based Loan Different from Factoring?

If you want to know the difference between asset-based lending and factoring, it’s essential to understand the basics of these two lending methods.

Asset-Based Lending

Asset-based lending is a type of financing that uses your business’s assets as collateral for loans. The lender uses your company’s accounts receivable, inventory, equipment, and other assets as collateral for a loan. The lender then holds on to these assets until you repay the loan.

Factoring

In contrast, factoring is a cash flow solution that allows your business to sell your accounts receivables to a third party. Instead of waiting 30 or more days for your customers to pay their bills, you can immediately receive an advance on those payments.

The third party will purchase your invoices at a discount, usually around 90% of the face value of each invoice, and then collect payment directly from your customers.

This type of financing allows your company’s working capital needs to be met immediately without waiting for customers’ payments or sitting on large amounts of money in accounts receivable.

While it is similar to factoring, you get paid immediately; there are some differences.

The main benefit of an asset-based loan is that it allows businesses with irregular cash flows to obtain capital quickly and easily — without having to wait months or years for approval from a bank or other financial institution.

A factoring company buys your invoices at a discount and sells them to investors as promissory notes at total face value. They usually charge fees for this service, but it can be quicker than waiting for payments from slow-paying customers who have gone out of business altogether — especially if you have large accounts receivable balances or high-risk customers (e.g., those who frequently go bankrupt).

Should I Choose Factoring or Asset-Based Lending for My Business?

If you have a business, chances are you might need some financing. There are many ways to get credit for your company, but there are two main categories: factoring and asset-based lending.

Factoring is a type of financing that allows your business to receive cash upfront on invoices that you have already been paid. Factoring is often referred to as invoice financing or accounts receivable financing.

The other major category is asset-based lending, which provides loans based on the value of assets owned by your business. Assets can include real estate and equipment and collateralized receivables such as accounts receivable (money owed to your company).

The big question for entrepreneurs is which type of financing is suitable for their situation? 

Whether to use factoring or asset-based lending for your business depends on several factors. The first thing you need to do is determine how much working capital your business needs or how much cash flow you need at any given time.

Factoring is a great way to get cash in your hands quickly, and it can be beneficial if you want to grow your business quickly. It’s also ideal if you have a lot of accounts receivable that are coming due soon and need cash before the end of the month. 

The benefit of factoring is that it helps businesses avoid working capital shortages and allows them to focus on growing their business instead of chasing down payments from clients. Factoring is perfect for companies with a lot of accounts receivable because they can generate quick cash without waiting for a customer to pay. This enables them to grow their business faster and expand into new markets or product lines.

The downside of factoring involves some risk, such as increasing bad debt and fees.

Asset-based lenders typically offer longer repayment terms and higher interest rates than other lenders, so they’re not always the best choice to get funds quickly. 

On the other hand, asset-based lending makes sense for companies that want to maintain control over their assets without selling them outright and taking on debt to get funding for their business needs.

Sometimes it makes sense to take out a loan from an asset-based lender when you have multiple projects coming up that require funding over time — such as building out new offices or purchasing equipment — not just one big purchase like building a new warehouse or purchasing inventory for the holidays.

Questions to Ask Yourself About ABL Loans

If you’re thinking about taking out an ABL loan, it’s essential that you know what you’re getting into before making any decisions. Here are some questions that you should ask yourself about ABL loans before deciding whether or not to pursue them:

Is Your Company New?

Many lenders require that the business be more than six months old before considering an ABL application. This is because ABLs are deemed riskier than traditional loans, so the bank wants to see that your company has been around long enough to be successful.

If you’re just getting started in business, it might not be the best time to take on more debt than you can handle. While ABL loans are usually smaller than traditional bank loans, they still require collateral.

If your startup isn’t generating revenue yet or doesn’t have any assets to use as collateral, an ABL loan may not be the right choice for you right now.

Do You Need Money Fast?

If your answer is yes, an ABL loan is probably right for you. These loans are designed for people who need money fast and don’t want to wait weeks or months for their application to be processed.

If you have good credit and can afford monthly payments, an ABL loan may be the best option for your situation.

How Much Money Do You Need?

This is the most critical question to ask yourself when thinking about taking out an ABL loan. If you don’t know how much money you need, it will be hard to figure out whether or not an ABL loan will work for you.

Before determining how much money you’ll need for expenses like tax payments, utilities, and maintenance costs, before deciding how much of a debt load you can handle.

Do You Want a Flexible Arrangement?

An ABL loan can be a great option if you need flexibility in how much money you receive and how much time you have to pay it back. If you’re planning on buying something that may go over budget and want more time to pay it back, this can be an excellent choice.

With an ABL loan, you can draw down the funds in small increments—as little as $10,000—and repay them when needed. This makes these loans ideal for businesses that need financing on an ongoing basis.

Advantages of Asset-based Lending

Asset-based loans offer many advantages over traditional financing methods such as personal loans and credit cards:

You do not need good credit to qualify for an asset-based loan. Some lenders will even consider lousy credit applicants with poor scores and high debt loads because they know that these people have something valuable that can be used as collateral for their loan applications.

It is easier to get approved for an asset-based loan. There is no need for extensive paperwork or formal verification from banks and other financial institutions who may be reluctant to lend money without seeing proof that they will get it back one day!

Lower interest rates. One of the most significant advantages of an asset-based loan is that it usually carries a much lower interest rate than other types of financing. This makes it easier for your business to manage its debt load, which can help you avoid costly problems like missed payments.

Flexible terms. Asset-based lenders allow you to borrow money against your assets instead of your credit score, so they’re often more relaxed about what kind of terms they’ll offer you and how much money they’ll lend. You may get a more significant loan amount with a more extended repayment period than other financing options — especially if you don’t have great credit or haven’t been in business long enough to qualify for a traditional loan.

Final Thoughts on ABL Loans

ABL loans are a great way to get access to funds for your business. These loans are ideal for small businesses and startups that don’t have enough cash to qualify for traditional financing but have valuable assets such as real estate, equipment, vehicles, or inventory. They offer low-interest rates, flexible terms, and the ability to repay early without penalty.

The main drawback of ABL loans is that they may not be available to all businesses. To qualify for an ABL loan, you need a healthy company that can repay the loan on time. If you have trouble getting approved for an ABL loan, consider applying for a conventional business line of credit instead.

If you have good credit and a solid business plan, an ABL loan can help your company grow and take advantage of opportunities.

The Four Basic Financial Statements

Example Income Statement

A financial statement is a report that summarizes transactions, such as sales or expenses, and shows the financial condition of a person or organization. It’s a simple way to get helpful information about your finances in one place.

Financial statements are generally organized into four basic financial statements. These include a balance sheet, an income statement, a cash flow statement, and a statement of retained earnings. 

 It’s essential to understand the information on your financial statements so that you can track how your investments are doing. Having a good understanding of what the numbers mean, and looking for trends over time, will help you make more informed decisions about your finances.

The Four Basic Financial Statements (And Why They Matter)

Financial statements are reports that show a company’s financial position over a specific accounting period. They show how much money is coming in and what money is going out of the business. All businesses use these four financial statements to measure their performance and the results of their operations. 

These documents help you understand your business better, but they also help creditors, investors, and other interested parties understand your business and make predictions of its earning potential. 

Each statement provides a different point of view, but they all work together to form one complete picture. 

Balance Sheet

The Balance Sheet is a snapshot of a company’s financial position at any given moment — it reports what a company owns (its assets), what it owes (its liabilities), and its net worth (assets minus liabilities). The Balance Sheet is also sometimes called the Statement of Financial Position.

It tells you how much money the company has on hand and how its financial situation compares to when it was last examined.

The balance sheet is the heart of a company’s financial statements because it tells you if it is in good shape or in danger of bankruptcy.

Key Features of the Balance Sheet

When looking at a balance sheet, you will see three key features: assets, liabilities, and equity. These three sections contain information about your company’s financial position on a given day. 

Items Included in the Balance Sheet

Assets

Assets: The balance sheet’s asset side shows various things that belong to your organization. Assets are grouped into current assets and noncurrent assets. Existing assets are resources that can be converted to cash within one year, such as cash on hand, accounts receivable (i.e., money owed by customers), inventory, and prepaid expenses (e.g., insurance). 

Noncurrent assets are resources with values lasting beyond one year and include long-term investments, fixed assets (e.g., machinery), intangible assets, and deferred charges.

Liabilities: Liabilities are the debts and obligations of a business, such as loans, accounts payable, and accrued expenses. Liabilities can be short-term or long-term.

Current liabilities are debts that must be paid within one year. Examples of current liabilities include accounts payable, interest payable, income tax payable, and short-term loans.

Long-term liabilities are debts that mature more than one year in the future. Long-term liabilities include bonds payable, mortgages payable, and long-term notes payable.

Equity: Shareholders’ equity is the net difference between assets and liabilities. After accounting for everything owed, the equity section sums up assets minus liabilities and shows what you own. Equity can be damaging if liabilities exceed assets, called a deficit.

Example of a Balance sheet

A balance sheet is typically divided into three sections, starting with assets on the left side, then continuing with liabilities, and ending with the net worth on the right side.

This sample balance sheet shows how the balance sheet is typically laid out, the items reported, and how it differs from other statements. 

Example Balance Sheet

Income Statement

The Income Statement measures the business’s profitability over time. It has two major parts: income and expenses. When added together, these components equal net income for the period. The Income Statement is also sometimes called the Profit & Loss statement.

This is the most popular financial statement because it shows whether a company made or lost money during a specific period, like a month or year. The Income Statement shows you what happened to your money over a period (typically a year). In contrast, the Balance Sheet is concerned only with where your money is at any given moment.

One of its purposes is to help investors gauge how well a company is performing by comparing expenses against revenue. If a company has more expenses than revenue, it loses money; if it has more income than expenses, it makes money.

Key Features of the Income Statement

The income statement is a document that summarizes the revenues and expenses of an organization over a given period. On it, you’ll find three key features: revenue, fees, and net income. These three features tell you how well your company is doing financially over a given period.

Items Included on the Income Statement

Revenue: The total income of a company refers to the total amount of money brought into the company. It represents all sales generated in a given period, such as one quarter or one year. Revenue includes all money a company receives from its customers, whether it’s cash, checks, or other forms of payment. 

Expenses: Expenses are the costs incurred while generating revenue. Expenses can be broken down into four main categories:

Cost of Goods Sold (COGS). After subtracting its direct costs such as materials, labor, and shipping, this is the profit a company makes.

Operating Expenses. This covers payroll, rent, utilities, and other things that aren’t directly related to production or sales. These are generally fixed costs that are relatively consistent from month to month.

When a company borrows money, there’s interest to pay on those loans. Since this is an expense, it gets added here. These costs depend on how much the company has borrowed and the interest rate.

Taxes. The government expects its share of profits from companies, and those taxes are recorded here.

Net Income: Net income is the money you have left after you’ve paid all your business expenses. It’s also called net profit or the bottom line — which is why it shows up last on the income statement.

Start with your gross revenue and subtract your business expenses to calculate net income. You’ll end up with either a positive or negative number. If you have a positive number, that’s how much money your business made during the period covered by the statement. A negative number indicates a loss.

Example of an Income Statement

This sample income statement shows the income statement is typically laid out, the items reported, and how it differs from other statements.

Example Income Statement

Cash Flow Statement

The cash flow statement looks at how cash moved during a particular period — usually over one year. It shows changes in cash from operating activities, investing activities, and financing activities. It offers an overview of how well a company generates money to fund its operations, pay its debt, and support its investments.

For investors, the statement of cash flows can be significant, as it shows how much actual cash moved in and out of the company during the reporting period. The information is intended to give investors and other stakeholders an idea of how well a company is using its money, and it’s also a good way for companies to stay accountable to their shareholders.

Key Features of the Cash Flow Statement

The statement of cash flows groups together cash-related activities under three main sections: operating activities, investment activities, and financing activities. These sections tell you the overall state of your company’s cash flow. 

Items Included in the Cash Flow Statement

Operating Activities: The operating activities section reports activities that involve your company’s core business operations. This includes revenue generated and expenses incurred in the day-to-day operations of your business. For example, a software company would consist of all billing for licenses sold to customers and payments made to employees and third-party contractors.

Investment Activities: After paying all the expenses incurred while running its business, a company has to generate additional revenue through investments to keep itself afloat. These activities include all investments made by the company in other companies (through stock purchases or loans) or its own business by purchasing property, equipment, etc.

Financing Activities: Financing activities are how funds enter the business and how they leave—in other words, how capital is raised and paid back. Investing activities are also transactions related to acquiring or disposing of assets—for example, if a company buys new equipment for the company, that transaction would appear in this section. Investing activities can also include making loans to other companies as well.

Example of a Cash Flow Statement

This sample cash flow statement shows the income statement is typically laid out, the items reported, and how it differs from other statements.

Example Statement of Cash Flows

Statement of Retained Earnings

The statement of retained earnings also referred to as the statement of owners’ equity, is a financial report that details what portion of a company’s profits have been kept over a given period. Retained earnings are the portion of earnings that a company keeps rather than paying out to shareholders. They are part of the equity section of a company’s balance sheet.

The statement of retained earnings is not as widely used as other financial statements, such as the income statement, balance sheet, and cash flow statement. It is usually combined with one or more of these statements into a single report.

Investors need to understand how much money the company is retaining instead of distributing, as this represents future investments that can be made into new projects and ventures. This amount also represents earnings that have not been paid out and are available for reinvestment or distribution.

Items Included in the Retained Earnings Statement

The statement of retained earnings usually appears on the balance sheet as part of the stockholder’s equity and is generally prepared after an income statement and before a balance sheet. This is done to compute the retained earnings at the end of a period reported on the balance sheet—a component of stockholders’ equity.

Example of a Retained Earnings Statement

This sample statement shows how the retained earnings statement is typically laid out, the items reported, and how it differs from other statements.

Example Statement of Retained Earnings

Bringing It All Together (Why You Should Review All Statements)

When you’re running a business, keeping track of finances is critical. You need to know where the money is coming from, where it’s going and what’s left over at the end of each period.

You need to prepare four basic financial statements: balance sheets, income statements, cash flow statements, and shareholder equity statements. Some people refer to these as “books,” and you can use them to get a quick read on your firm’s financial health.

These financial statements are essential for several reasons. You’ll need accounting reports to comply with government regulations or file tax forms in many cases. Different agencies will require various statements, but they generally revolve around these four concepts.

In addition, the statements help you analyze how your company is performing over time and compare that performance with other companies in your industry. This information can help guide decisions on everything from next year’s budget to whether or not your company should pursue a merger or acquisition strategy.

Finally, if you want to borrow money or invest for any reason, lenders and investors will usually require some type of accounting report to evaluate a company’s financial health.

What Is the Difference Between a Controller and a CFO?

Chief Financial Officer Working at Desk Finance Hire

It’s not uncommon for small business owners to use “controller” and “CFO” interchangeably. But while they have similar roles, they’re quite different.

A CFO is responsible for all financial aspects of the company. This can include setting the company’s overall long-term financial goals, overseeing various departments within the company, preparing budgets and financial reports, and more.

In comparison, a controller is responsible for all accounting transactions within a company. This can include payroll, accounts payable, accounts receivable, bank reconciliations, etc. 

Controllers need to have a strong understanding of accounting to make sense of financials for the company. CFOs are usually upper management that oversees other members of the finance department.

This article aims to clear up some of the confusion between these two jobs and outline the differences in their roles, responsibilities, reporting structures, and more.

What Is a Controller?

A controller is a company’s chief accounting officer and often serves as the head of the accounting department. A controller manages the accounting department and supervises people like accountants, tax managers, and payroll managers. A controller usually reports to the chief financial officer (CFO), and the CFO distributes the financial management responsibilities to the controller.

In smaller companies, it may be the case that the controller is the only accountant available to report directly to the CEO. There may also be an accounting clerk to help assist with some accounting.

Controllers are also responsible for setting budgets and managing cash flow, as well as the preparation of financial statements. They also monitor accounts receivable and payable, revenue, payroll, and inventory records to ensure accuracy. They may also supervise a staff of accountants or bookkeepers who handle day-to-day accounting activities, such as journal entries, payroll processing, or billing invoices.

To become a controller, you will need a bachelor’s degree in accounting, finance, or business administration and several years of experience in management roles in an accounting department. Certification can also be taken for better pay and more work opportunities, such as the Certified Public Accountant or Certified Management Accountant designation.

Other financial controller duties may include:

  • Implementing policies and procedures
  • Creating budgets
  • Approving invoices
  • Preparing financial statements
  • Managing strategic planning
  • Handling risk management
  • Planning and handling risk management
  • Safeguarding company assets
  • Processing payrolls
  • Reviewing financial statements
  • Working with CPAs on audits and tax returns

What Is a CFO?

CFO stands for Chief Financial Officer and is essentially a financial manager in charge of the company’s entire accounting department. Its role is to oversee and improve its operations and economic activities.

If a company has a controller or an accounting manager, that person reports to the CFO (although these roles might be combined). In larger companies, there can be more than one CFO. For example, there might be a CFO for each subsidiary or division within the company.

CFOs spend most of their time applying revenue strategies, assessing financial opportunities and risks, and keeping an eye on cash flow – both day-to-day and in the long term. The CFO role also requires an understanding of business strategies, risk management, and financial analysis. Because of this, finance officers often have extensive experience working as accountants or in other positions within the finance department before being promoted to CFO.

CFOs must have strong leadership skills to manage a team, execute tasks, and set goals for specific projects. They must also demonstrate excellent communication skills to report critical information to upper management and shareholders.

Other CFO duties may include:

  • Overseeing the company’s finance team, including accountants, controllers, auditors, etc
  • Planning with project managers on ways to increase revenue
  • Supporting the sales and marketing team
  • Raising capital from investors
  • Mergers and acquisitions
  • Managing the cash flow of the company
  • Long term strategic planning for the company

What Are the Main Differences Between a Controller and a CFO?

Although controllers and CFOs manage finances within a company, their responsibilities can be quite different. The finance department is an essential part of a company’s functionality.

They organize the most critical aspects of business, such as accounting, tracking sales and expenditures, and managing payroll. Within this department, two key roles are controller and CFO (Chief Financial Officer). 

The primary role of a controller is to oversee the accounting department’s daily activities and make sure that established financial goals are met. This includes creating budgets, approving invoices, working on audits and tax returns, processing payrolls, etc. A controller also ensures sufficient cash flow to fund operational needs. This person will also be responsible for drafting financial reports to present to upper management or board members.

The role of a CFO varies depending on the company’s size and industry. Typically, their duties include:

  • Analyzing data about the company’s finances.
  • Creating financial plans for the future.
  • Improving efficiency.

Managing internal controls and risk assessment is another critical function of a CFO, supervising financial staff members and preparing reports for investor relations purposes.

Here are four more critical differences between a controller and a CFO:

Accounting vs. Finance: Controllers are usually experts in accounting and are well-versed with GAAP and tax rules. In most cases, they hold a CPA title or similar professional titles. CFOs, on the other hand, have a broader understanding of finance, investing, and the capital markets. They don’t necessarily need to be CPAs or have a solid grasp of accounting practices. CFOs usually have strong backgrounds in investment banking and management positions. 

Internal controls vs. External controls: Controllers are also responsible for monitoring the company’s internal controls and helping protect its assets of the company. As such, they focus more on the internal processes and workflow of the company. In contrast, CFOs spend more time looking externally for investment opportunities, partnerships, and acquisitions that will help grow the company for the future. 

The face of accounting vs. face of the company: Controllers usually oversee and work with the company’s accounting department and, as such, are seen as the face of accounting. The CFO is the face of the company financially to outside parties. They handle all the acquisitions, partnerships, and networking with banks and other financial brands.

When a Company Might Need a Controller

As a company grows, so do its financial needs. When enough growth occurs, someone must be hired to handle the company’s finances. This person is usually called a controller. 

A controller is essentially a chief financial officer for smaller businesses. In some cases, controllers are also called accounting managers or accounting directors.

Controllers oversee all day-to-day accounting operations and procedures in smaller companies that do not have enough revenue or business transactions to warrant hiring a CFO.

A controller’s responsibilities include, but are not limited to:

Supervisions of Bookkeeper or Staff Accountants

The controller is responsible for overseeing the work of lower-level accounting employees. In a smaller company, the controller may be responsible for supervising only one person, whereas, in a larger company, they may supervise multiple accountants and bookkeepers.

Accuracy of Financial Reports

The controller is responsible for the accuracy of the company’s financial statements (income statement, statement of retained earnings, and balance sheet) and maintaining internal controls to keep the business’s financial records in compliance with accounting and tax regulations.

Fixing the Period Close and Report Delivery

One of the most overlooked aspects of any accounting department is delivering information in a timely and accurate manner to executives or other members of management. A controller can be a good investment for a company that needs to improve how its financial statements are prepared and delivered.

Preventing Errors, Fraud, and Security Breaches

A controller is responsible for the accuracy of financial information. The controller ensures that the business has proper controls to prevent errors, fraud, and security breaches. In addition, a controller will often play a role in identifying business and financial risks.

Better Support of CPA (Tax Preparation)

If you are starting with CPAs, a controller can help support your tax preparation efforts so that you can focus on growing your practice.

Ownership of Accounting Department

A controller oversees the accounting department the same way a CFO manages the entire financial department. Controllers manage the day-to-day operations of the accounting department and assist in general accounting practices. They must ensure that the accounting team complies with generally accepted accounting principles.

When a Company Might Need a CFO

The chief financial officer (CFO) is an executive responsible for managing and overseeing your company’s finances. While many small businesses can get by with a controller initially, you will eventually need to consider hiring one if you plan on growing your business.

When should you hire a CFO? Here’s when you should consider bringing on a CFO:

Supervision of the Finance Team

Like any other department in a company, the finance team (e.g., controllers, accountants, and bookkeepers) requires strong leadership and guidance. It is the job of the CFO to ensure that the financial team is performing to expectations, both for the short-term and long-term success of the company.

Need for Sophisticated Reporting and Analysis

Once a company begins to grow exponentially, controllers and other finance experts may not have enough experience or knowledge to handle the company’s sophisticated reporting and analysis requirements. A qualified CFO help steer the finance team in the right direction and help drive a positive impact on the team. 

Financial Strategy and Guidance

A business might need help with expert financial strategies such as long-term projections and strategy formulation. The CFO becomes therefore participates and often leads those important planning sessions. 

Stakeholder Reporting and Communication

Partners of the company, including investors, banks, and boards, might want to see all the financial data laid out in a meaningful and attractive manner. CFOs are often required to prepare these materials and help present this data to CEOs and managers.

Fundraising (Capital Markets) Assistance

CFOs are usually knowledgeable in investments and market research and are often hired to take the lead on fundraising duties.  

What Size Companies Bring In Controllers?

The size of your company often determines how quickly you bring in a controller, a CFO, or both.

The controller’s role is to manage the entire finance team and a company’s resources. Most companies will hire a controller when they reach $1 million in annual sales, says Stephen Beatty, managing strategic advisory partner at S.G. Beatty & Co.

In contrast, companies will typically hire a CFO when they reach the $10MM, and almost all companies will have a controller by the time they get that revenue.

The controller is usually hired to handle more accounting tasks and oversee the accounting department. And if no CFO is present, they also act as the manager, reporting directly to the CEOs of the company. 

At the $10MM mark, the controller is almost always in a management role instead of handling other accounting tasks.

What Size Companies Bring In CFOs?

Generally speaking, the $10MM in annual revenue is when companies will consider bringing in a CFO. 

Controller vs. CFO Salaries

Both the controller and CFO are financial leaders in an organization, but they have different responsibilities. A chief financial officer (CFO) is above the controller, overseeing the finance department. A controller is often just below the CFO and leads the accounting team. 

As such, CFOs have more responsibilities than controllers and tend to earn more. For example, Career Explorer reports that the median salary is around $100K per year, while the top 20% earners in the U.S earn an average of $229K per year. 

According to Career Explorer, the average cash compensation for a controller is $71K, while the top 20% of earners are compensated an average salary of about $135K per year.  

Salaries for both roles vary depending on the company size and the location, but both careers are compensated very well compared to similar financial positions.

The Qualifications of Great Controllers

A great controller is essential for an organization to be successful. A controller must have a solid understanding of business and accounting principles that can be applied to businesses’ financial issues every day.

A suitable controller will have an excellent judgment in applying principles and practices to situations. A controller should have experience with managing internal controls, budgets, financial statements, and general ledger structure. But most importantly, a great controller must have the ability to lead other people and communicate effectively with management.

The following qualifications are essential for a controller:

  • Bachelor’s degree in accounting or finance
  • Certified Public Accountant (CPA) certification preferred
  • Experience in financial statement preparation
  • Experience with budgeting and analytical tools
  • Experience with internal controls
  • Experience working with auditors
  • Experience managing staff members
  • Exhibit excellent verbal and written communication skills

The Qualifications of Great CFOs

The CFO of a business is a vital part of the strategic team. They are responsible for financial planning and analysis, forecasting, budgeting and reporting, cash management, and risk management. The CFO is also responsible for formulating strategies to ensure that the company can meet its obligations.

The CFO is also involved in raising capital to help the company grow and prosper. In addition, the job entails working with outside banks and investors to establish relationships.

To be successful in this position, a CFO must have excellent communication skills, both verbally and written. They must be able to understand complex financial issues while explaining them in easy-to-understand terms. They also need to have strong analytical skills and a thorough knowledge of computer systems and accounting software programs.

Conclusion

Both a controller and a CFO are members of the finance department, but they play very different roles in the management of an organization. 

The controller is responsible for overseeing the work of lower-level accounting employees. In a smaller company, the controller may be responsible for supervising only one person, whereas, in a larger company, they may supervise multiple accountants and bookkeepers.

The CFOs role is much broader. Their part is to oversee and improve its operations and financial activities, both short-term and long-term.

How do you know if you need one of these specialists or both? It can vary from one organization to another, but you’ll want to prioritize both positions depending on your specific needs and the size of your business.

S-Corporation vs. C-Corporation: What’s the Difference?

C Corp Versus S Corp Finance Hire

If you’re an entrepreneur, chances are one of your biggest questions has to do with the differences between C-corporations and S-corporations. While they have their similarities, they differ in several critical areas, such as how they operate, how these two entity types are taxed, and the ease with which they can be expanded.

Understanding the difference between these two entities is the first step toward registering your business legally. With the information below, you’ll be able to figure out the best option for your business.

What Is a Corporation?

A corporation is a group of people that is legally treated as if it was an individual. The people who own the corporation are called its shareholders. A corporation can make money and must pay taxes on that money, but unlike individuals, it cannot be put in jail for not paying its debts or for breaking laws. 

There are many different kinds of corporations. Most are businesses, such as a car-making company or a grocery store chain. However, some people use corporations to hold their other assets (like stocks, bonds and real estate) in order to save money on taxes.

A corporation is created by the government of a state, who issues legal papers called articles of incorporation. Sometimes it is possible to create a corporation without going through the state government by creating something known as an unincorporated association. This usually has to do with religious groups or nonprofit organizations like charities or libraries. 

The owners of a corporation (the shareholders) elect a board of directors to control the corporation’s business affairs and direct the officers (who may be directors themselves). The board hires managers and employees to run the corporation’s affairs.

What Is a C-Corporation?

A C-corporation is the default type of corporation. It is the only type of corporation subject to tax at both the personal and corporate level — this is called “double taxation.”

The corporation itself pays the first layer of tax, and then the second layer of tax is paid by shareholders when they receive dividends. When you incorporate as a C-corporation, you’ll have to file separate annual tax returns for your business and yourself. This double taxation can make C-corps expensive to maintain, but it also offers the most significant amount of legal protection for its owners.

Because C-corps are separate entities from their owners, they offer limited liability. They are treated as their entities in the eyes of the law and are therefore responsible for taxes, debts, and any legal action taken against them. Suppose something happens to the business (like going bankrupt or being sued). In that case, the owners aren’t responsible for the debts the C-Corp may incur, and shareholders will only lose what they invested in the company. Their assets are kept safe.

What Is an S-Corporation?

An S corporation is a particular type of corporation that can only be created through an IRS tax election and must meet specific requirements. If approved, an S-Corporation has the same legal structure as a C-Corporation regarding liability protection and ownership, but the difference lies in how it’s taxed.

In addition, forming an S-corp provides limited liability protection for its owners. And it does not require the formalities of regular corporations, such as maintaining corporate minutes or holding shareholder meetings. 

An S corporation does not pay any corporate taxes. Instead, the corporation’s profits and losses are divided and passed through to its shareholders. Shareholders must report their share of the profits or losses on their individual tax returns and pay federal income tax at their individual income tax rates. The shareholders must also report their share of the profits or losses and pay self-employment taxes if they are actively involved in the business.

This differs from other business entities, such as C-Corps, which are taxed twice — once at the corporate level and again at the individual level when dividends are paid out to shareholders. Therefore, the S-Corp election is less costly and allows small business owners to avoid double taxation while enjoying limited liability protection.

An organization can only attain s-corp status through the IRS if all its shareholders sign and submit the 2553 form. In addition, the organization must meet the following criteria:

  • The organization has no more than 100 shareholders
  • The organization is domestic and operating in its home country
  • All the shareholders meet the IRS eligibility requirements
  • The organization is not registered as an insurance company, a bank, or an international sales corporation

Attaining the s-corp status can be a complex and time-consuming process, but the tax-saving benefits can be beneficial once set up. 

How to Form a C-Corporation

Here’s a quick overview of how to form a C-corporation:

  1. Pick a business name that follows corporate naming rules set out by your state.
  2. Find and appoint directors of your c-corporation
  3. Sign up and register your Employer Identification Number (EIN)
  4. Register your C-corp by filing articles of incorporation
  5. Issue your first stocks to the shareholders of your c-corp
  6. Obtain all the necessary permits and licenses for your company

How to Form an S-Corporation

Your business must meet a few requirements to qualify for S-corp status with the IRS. Here’s a quick overview of how to get started:

  1. First, check with the IRS and regulations in your state to make sure you qualify for the s-corp status.
  2. Your corporation must be domestic and operating in the United States
  3. It can only have “allowable shareholders,” meaning none of your shareholders can be non-US citizens or partnerships
  4. Your c-corp cannot have more than 100 shareholders
  5. It can only have one class of stock
  6. It can’t be a bank, insurance company, or international corporation
  7. You must then file Form 2553, signed by all of your company’s shareholders. 

5 Differences Between a C-Corporation and an S-Corporation

Here’s a quick overview of the significant differences between S corporations and C corporations to help you decide which is suitable for you:

Taxation

A big difference between how S-corps and C-corps work is how they’re taxed. C corporations are taxed at the corporate level, and then shareholders pay taxes again when dividends are distributed. S corporations do not pay any federal corporate taxes on their profits. Instead, the company’s income or losses flow through to the shareholders, who report them on their tax returns. 

Shareholders

A C-corporation can have an unlimited number of shareholders and stockholders. A shareholder is an individual or entity that owns part of a corporation. They hold shares of stock in the corporation, representing their interest and voting rights in the organization. And because of this, it is easy for a C-corporation to raise capital by selling shares. An S-corporation can only have a maximum of 100 shareholders/stockholders and must be United States citizens or residents. This restriction makes it difficult for an S-corporation to raise capital through selling shares.

Paperwork

S-Corporations have fewer reporting requirements than C-Corporations because they are not subject to double taxation. There is no tax at the corporate level and then again on profits when distributed as dividends to shareholders. It also means that shareowners don’t have to pay self-employment taxes on paid salaries.

Rights and Responsibilities

An S corporation has only one class of stock, which means that all shareholders have equal rights and duties in decision-making and profits/losses. On the other hand, C corporations have different classes of stock; therefore, some shareholders may have more decision-making power than others. In addition, certain types of stock can be set up to receive more profit sharing.

Ownership and Liability Protection

A C corporation can be owned by multiple investors, while an S corporation can only hold one investor or a partnership. In a C corporation, the owners’ assets are protected from company debt, while in an S corporation, they are not.

Questions I Should Ask Myself Before Becoming a C-Corporation or S-Corporation

Here are three questions you should ask yourself before becoming either a c-corporation or s-corporation status:

Do I Want to Limit My Shareholders?

A C-corporation can potentially have an unlimited number of shareholders. On the other hand, An S corporation is limited to 100 shareholders. This makes the S corporation structure more attractive for small businesses. However, if you expect your company to grow beyond that point, you might want to consider a C corporation.

Is Double Taxation Worth It?

Double taxation is one of the most significant disadvantages of a C-corporation. Even if you’re the sole owner, you’ll pay taxes on your profits twice: once at the corporate level when they’re earned and then again as personal income when you take them as dividends. In contrast, S-corps are only taxed once at the owner’s level.

However, there are some circumstances where double taxation can be worth it. For example, if your corporation has significant profits and you will be hiring employees in the future, a C-corp can shield those profits from personal taxes until they’re paid out as wages. That’s because wages are subject to payroll and income tax, but dividends aren’t subject to payroll tax.

In addition, your business might be more profitable if its taxes were paid at lower corporate tax rates than your income tax rate.

Is There Another Option That Works for Me? 

The most significant difference between C-Corps and S-Corps is their tax status. In the eyes of the IRS, a C-Corp is a distinct entity from its owners, so it pays taxes on its earnings. This is called double taxation (because the company and its owners both pay taxes on profits), and it’s a significant drawback to forming a C-Corp.

S-Corps don’t have to pay taxes on their earnings. Instead, profits and losses are passed through to the owners, who report that income on their tax returns. In other words, the company itself doesn’t owe any money — the owners do. But they only pay once, so there’s no double tax.

But there is another type of corporation called a limited liability company (LLC), which is also taxed differently.

LLC stands for limited liability company. It is a type of business structure that allows the owners to limit their liability. An LLC is similar to an S-corporation in that it is a separate legal entity from its owners. However, it differs from corporations in several important ways.

LLCs are considered “pass-through” entities, meaning the company profits and losses pass directly to the LLC members’ tax returns and are taxed at their individual income tax rates. This can save the business owner money on taxes over time if taxed at a lower rate than the corporate rate.

LLCs have fewer formalities than corporations. Unlike a corporation, LLCs do not need to hold annual meetings or keep minutes of meetings and resolutions. They also don’t have officers, directors, or shareholders.

An LLC is a business structure with its own rules, regulations, and tax obligations. An LLC can be used for any business, including real estate investment businesses, restaurants, or retail operations. Professionals like doctors and lawyers can also use an LLC to structure their practices.

Which Entity Type Should You Choose?

When it comes to forming a new business, many different paths and options are available to entrepreneurs. One of the first questions you’ll inevitably face is choosing what type of business entity you want to form.

Two of the most common business entities for small businesses are C-corporations and S-corporations.

Both C-corporations and S-corporations have advantages and disadvantages, so you must understand each one before deciding which one to pursue. This post covers all these aspects in detail.