Most of the time when we open a potential client’s QBO it looks something like this. A bunch of out of the box accounts, without any account codes, organized in the default alphabetical order, and with no hierarchical structure.

If your books look like this^ fire your accountant.

Organizing your P&L General Ledger Codes

As we discussed in our forecasting post, it’s critically important to organize your Chart of Accounts (CoA) into an easily readable structure that investors and key stakeholders are expecting to see. By using account codes to make a hierarchy, and nesting accounts under key parent accounts like: Revenue, Direct COGS, R&D expenses, Sales and Marketing expenses, and G&A expenses, you can make a P&L that is easily collapsible to a management level review, and shows key stats like revenue, gross profit, operating profit, and net income at a glance.

Depending on whether or not you have government grants and contracts, need heavy facility costs to operate (E.G.manufacturing), or are a more standard B2B SaaS company, the number of accounts and the headers you have can look slightly different, but you should always split out revenue types, COGS, R&D, and SG&A at a minimum.

See below for a collapsed P&L example for a Deep Tech hardware company that does heavy government work.

Organizing your Balance Sheet General Ledger Codes

Balance sheet structure is generally less varied across clients than the P&L, but it is important to organize your assets, liabilities, and equity sections into the right hierarchy. If you have major assets (250k+) you probably want an accumulated depreciation account under each one. You need to have interest on any convertible debt and it should be included as a sub-account to the liability. Your equity section needs to actually reflect the type of structure you are. You should not have “owner’s investment” if you are a Delaware C organization (and if you are a startup, you should be a Delaware C). Equity should be split into common and preferred stock, and also split between the par value account and your Additional Paid In Capital (APIC).

Us 95% of the time when we see a balance sheet:

It’s important to get this right early, because you can never really “delete” things in QBO, you can only “inactivate” them, and sloppy organization early on will leave ghost accounts that can jam up integrations and historic reporting.

Organizing Classes, Customers, and Locations

One of the other big mistakes we frequently see is founders (or sometimes accounting teams!) trying to use the Chart of Accounts to track project or customer data. E.G. “NSF Phase I Direct Costs” as a parent account, with labor, materials, contractors, etc underneath.

This is a huge mistake because it will jam up your chart of accounts (imagine what it looks like when you have 20 projects going on at once), and it makes it harder to do reporting.

There are four main variables that you can use to slice and dice data in QBO:

• GL code

  • These are the accounts under the chart of accounts

  • Products and services for invoices will map to these accounts

• Customer

  • All revenue and COGS should be assigned to a customer! Note you can have “sub-customers” or projects under a customer

• Class

  • This is usually either a department or a product line

  • These can be turned on and off in settings

• Location

  • This can be named many things, but it can be physical locations, departments, product lines etc.

  • These can be turned on and off in settings

Note: You can put classes on multiple lines of a transaction, however “location” can only be used at the top level. E.G. You could have a journal entry, invoice, or bill with three lines, each with a different class (marketing, engineering, and product), but you can only have 1 location per Bill, Invoice, Journal Entry, which makes classes a little more robust and flexible.

Most companies can get away with just using a good CoA, Customer, and Class infrastructure for quite some time. For those just starting out with Government grants and contracts our preferred structure is

01_Admin, 02_Commercial, 03_Government

This allows you to run P&Ls for government and commercial work to differentiate profit margins, while understanding what your overhead costs are. You can also filter for government or commercial work and then split a P&L by customer, so if gross margin looks low or high for a business unit or product line you can dive in and see customer by customer who is throwing the variance.

Why should you care?

It does generally cost more to organize your data with this level of precision, but there are so many tools (like ramp!) that make this a significantly lower lift than it used to be (see what some of our clients think about what we’ve done with ramp here.) If you are planning on doing government grants and contracts like SBIRs you’ll have to do this anyway, and it costs more to clean it up than to just do it right in the first place.

At the end of the day if your accountant is more concerned about whether cash reconciles than understanding how your business is operating and why, they aren’t a good fit for startups. The Ibex team has done 50+ QBO setups and cleanups for high-growth tech startups and that number is growing by the week. Reach out if you’d like help!

What's your burn? Is one of the most universal questions investors ask, yet despite the commonality there is not a 100% uniform definition. Do they want cash flow from operations? Change in cash? Net income? Change in cash less any investment received? What do you tell them your burn is if you actually make money?

Different investors expect different answers which can be frustrating for those without a strong accounting background.

Fortunately anything anyone could want to see can be pulled from your cash flow statement…if you know how to read one.

The Three Statements

As most of us know, there are three financial statements: the Income Statement (aka Profit and Loss or P&L), the Balance Sheet, and the Cash Flow Statement. Most folks can get their heads around a P&L: revenue comes in, expenses go out, and you are left with profit at the bottom. There is some nuance around what goes into COGS vs OpEx, but most people understand the concept.

Where non-finance folks typically run into their first hurdle is understanding that the revenue and expenses on the P&L DO NOT translate to cash coming in and going out. This is where the Balance Sheet comes in. Every business using accrual accounting (which is required by GAAP, and every startup that wants to be VC backed should be doing this from day 1) will have a difference between their net income on the P&L and the change in cash for the same period.

This is because revenue and expenses must be recognized over the time period they are actually for. Some common examples:

• That $100k upfront invoice you sent to your customer for the coming year? Only 1/12 gets recognized as revenue per month, and they may not pay you for 60 days. It starts out as accounts receivable on the balance sheet, and when the cash hits, the delta from what has been earned is going to deferred revenue on the balance sheet.

• Similarly, that $30k annual insurance bill you just paid? That wasn't a $30k expense for a single month, that was for the year, 1/12 gets recognized per month and the delta goes to prepaid expenses on the balance sheet when you pay the cash for it.

• Didn’t pay any of your bills for two months? Great, your cash balance isn’t going down as much but you are gaining accounts payable liabilities on the balance sheet (or at least you should if you are doing accounting correctly).

P.S. Pro Tip: the first thing we do when we get a new set of books is to run a balance sheet for the previous 3 years and trailing 12 months. If you want to know where all the accounting mistakes are buried in startup accounting, go to the balance sheet first. If you have smart investors, they will do the same thing.

While most folks understand how to read a P&L, few really understand how to read a balance sheet. The number who understand how to read a cash flow statement will be an even smaller minority. Including, unfortunately, many investors. Especially Angels.

While everything you need to know about a business is contained within the P&L and the Balance Sheet, the Cash Flow Statement serves as a way to bridge the difference between net income and change in cash. This is divided between 3 major buckets: Operating Activities, Investing Activities, and Financing Activities. (These last two often trip people up. Investing = investments the business is making, e.g. CAPEX equipment, not investments INTO the business. That’s Financing Activities).

Let’s look at a simple example from Dr. Anderson’s Directed Energy Corp:

OPERATING ACTIVITIES

1. Net Income: We start with net income from the P&L, by the time we get to the bottom of the statement, we should see the change in cash for the period

2. Depreciation and Amortization: First, we add back non-cash expenses from Depreciation and Amortization. Because they are an expense on the P&L, but no cash comes out, the number is positive.

3. Change in Accounts Payable: Then we factor in our changes in accounts payable. If the number is positive, we’re “adding cash” because we have incurred the expense in that net income line, but haven’t paid it. If it’s negative, it means we’re reducing the balance so more cash is going out than was on the P&L for the period.

4. Change in Other Current Liabilities: Our Other Current Liabilities are likely deferred revenue. See the big uptick in Q3? That is likely due an invoice to a customer for work that hasn’t been completed yet, so the revenue doesn’t hit net income on the P&L, but we have received cash already, so the number is positive.

5. Change in Accounts Receivable: Next we factor in our changes in Accounts Receivable, i.e. what we’ve invoiced & earned, but has not been paid to us yet. This can be confusing: a negative number means we’ve added accounts receivable. Because we have revenue, but haven't gotten the cash, we are reducing the cash balance, hence, the negative.

6. Change in Other Current Assets: Our other current assets are usually inventory and prepaid expenses, similar to AR, an increase in those asset accounts means a negative for cash.

INVESTING ACTIVITIES

7. Change in Fixed Assets: As mentioned above, this can be confusing because these are things the COMPANY is “investing” in like CapEx. Because those don’t hit the P&L (they eventually will through depreciation), but cash came out, the number is negative

FINANCING ACTIVITIES

8. Change in Contributed Capital: Finally, we look at any investments that came into the company, AKA financing activities. We did a priced pre-seed round in Q1, and a 500k bridge SAFE in Q4. Since the cash comes in, but isn’t on the P&L the number is positive.

This gets us to a couple key numbers for the year:

Net Income= ($825,428)

Cash Flow from Operating Activities=($183,316)

Change in Cash= $1,344,093

So what is our burn?

Some investors (those who only do B2B SaaS which usually doesn’t have much CapEx) may just want to see cash flow from operating activities. We report this as “burn” for a number of our clients’ investors using their Standard Metrics requests. But the best bet of what investors want to see across all cases is your Change in Cash LESS any investment you received. We’ll do that calculation manually off of the cash flow statement. We take the change in cash of $1,344,093 and subtract the $2.5M of investment in the year and see it was ($1,155,907) or ~($96k) for the 12 month average.

While the promise of “full automation” for many aspects of accounting, finance, and operations is looming, we are still far away from a single tool, model, platform, or company serving as your robot CFO / COO that will perform everything required automatically. As it stands today, our recommendation for inception to Series B startups is to compile a “Financial Operations Tech Stack” of the following tools and integrate them as much as possible to take advantage of their semi-automation features.

Accounting

The gold standard in accounting tools; there are other options but the key here is integrations. Intuit has done a good job buying market leading tools and adding them to their platform (e.g. OneSaaS -> app integrations). Having a platform that can connect directly to other systems such as your payroll software, inventory management system, Amazon business account, Shopify account, Amazon seller account, Paypal, Venmo, and bank feed is key. Plus general market share and preference from accounting firms means if you want to learn a system it should be QBO.

Post Series B when you have a much larger organization (or if you have complex inventory processes), it may make sense to transition to NetSuite, but given the annual fees, implementation costs, and expertise required, this transition generally happens north of $50M+ annual revenue.

Payroll

Payroll is an example of something that has gone from a very manual process to almost completely automated in a span of 10 years. The key here is to set it up right from the beginning, because payroll is one thing you really don’t want to screw up. Gusto is our favorite platform given the ease of use, direct integration to QBO with complex mapping abilities, phenomenal reporting capabilities, and the fact that there are rarely any issues. Rippling is another slightly more robust platform, which also has a PEO option. Both are good options, though Rippling is less transparent with pricing, the setup is more custom and therefore more cumbersome, and the reporting features are clunky and non-intuitive. Gusto is a stellar payroll platform that can also do benefits well. Rippling is a full HRIS. Justworks is a rising star in the area but is yet to hit the market adoption of the other two. Anything else is trash. And yes, that includes ADP.

Medical Benefits

ICHRA/QSEHRA

Another industry that is getting eaten by software automation is benefit brokers. Unless you have 50+ employees any pricing advantage you could gain using a local broker that can get better deals is almost certainly overshadowed by the time spent dealing with open enrollment, helping employees process claim issues, and onboarding and offboarding from plans. Just pick a plan offered by Gusto or Rippling and let the software tools do the work. It reduces human error on all sides and makes your life easier.

Another option that has gained popularity with rising healthcare costs is setting up health reimbursement arrangements like an ICHRA or a QSEHRA. Especially if you have a distributed workforce, this can be nice because folks can pick the plan they want in the region they live in and that fits their needs. Plus, you have predictability by having a flat cost per employee / couple / family that makes forecasting easier. We recommend Take Command Health for this.

Retirement

Guideline is hands down the best retirement platform out there. The ease of use for employees, plus the direct integration to Gusto or Rippling makes it perfect for reducing overhead. Again, if you set it up right from the beginning and integrate it properly it truly is “set it and forget it”. No more managing cash transfers manually or paying thousands a year for someone to manage. Human Interest is another popular platform that promises the same things as Guideline: avoid it like the plague. We have had multiple issues over the years with only a handful of clients, most of whom had trouble accessing or rolling over their funds and being sent down customer service rabbit holes.

FP&A (i.e. Forecasting)

If you read our post on startup forecasting you know what huge fans we are of Fathom. This is one of the hottest and rapidly developing spaces in fintech land. There are dozens of platforms at this point but the scenario planning, report creation, and data visualization features of Fathom put it heads and shoulders above the rest.

Credit Cards / Bill Pay

The trajectory at which ramp is reshaping how we do business is mind-numbing. This is the second most important tool that we implement after the actual accounting system. New founders often don’t see the advantage immediately of having credit cards on ramp versus their bank, or workflows for bill pay that have strong financial controls and audit logs. However, when your organization is at 10, 20, or 50 people, you realize that these features allow you to decentralize spend control by relying on directors and department heads to manage spend while still having full visibility into spend in real time which holds people accountable. When you reach 50+ people the operational efficiencies start to mount into the hundreds of thousands of dollars annually. Plus the UX is beautiful and employees love it. In short, this platform is every COO and accountant’s dream. Brex used to have a chokehold on this corner of the market with their cards and banking but they stagnated while ramp got better and better. ramp also recently launched banking and treasury, the one thing last Brex had over them. See below for more.

Banking

After the SVB crash startups split pretty much into two camps for banking, either it was JP Morgan because it’s “too big to fail” or Brex and Mercury because they are more of a financial platform versus a traditional bank and offer millions in FDIC insurance. Given the issues with Brex discussed above, and the fact that JP Morgan doesn’t give two sh*ts about you until you have $20M in the bank, we highly recommend Mercury for both small and mid-size teams. If you need working capital or are looking to finance CapEx, you may want to also have a small brick and mortar bank who cares about your $100k line of credit or $500k equipment loan.

While ramp recently added banking features, Mercury recently added bill pay, SAFE note creator, a QBO integration from the Mercury side (QBO bank feed always existed). We will likely see these frenemies try to outcompete each other in the coming years, and we’ll see which product team can meet the needs best. Right now we recommend Mercury for banking with ramp for bill pay and cards.

Cap Table / 409a

Not unlike QBO being the gold standard given its robustness and market share, Carta similarly has the largest familiarity between legal firms, investors, and accounting teams. It may be slightly higher price than other cap table management systems like Cake, Pulley, or AngelList, but it’s the gold standard, so use it. The Growth tier comes with one 409a valuation per year which is helpful and important to keep up to date for option issuances.

Business Insurance

Not technically FinOps, but worth discussing here given how bad traditional insurance brokers are at working with startups. FounderShield has more intense applications for General Liability / Product Liability, Errors and Omissions, Directors and Officers, and Cyber Insurance; however, their software platform can turn around policies within hours versus weeks and they have saved some of our clients tens of thousands of dollars annually by finding better policies given their familiarity with startups.

Payroll Tax Registrations / Registered Agent / State Annual Reporting

While your payroll platform should take care of all tax filings, you need to first register with the Secretary of State and get various payroll tax IDs (could be two, could be ten depending on the state). You are also frequently required to file a basic annual report. Some states like Delaware require a more complex annual franchise tax filing that requires accounting info. You may also want to get registered agents in each state if you don’t have a physical office so that mail goes there instead of, for example, an employee's residential address. If you’re unsure if the ~$200 / year is worth it, imagine a junior engineer emailing you a picture of a subpoena notice delivered to their house, then decide. We like CorpNet for its suite of services and also direct integration with Gusto if you don't have an accountant that is a Corpnet partner.

What is on the horizon

The most interesting piece that AI has brought to the table over basic automation in recent months is the ability to hold memory, and therefore improve its ability to “think” like a human. That is to say—practically—it can get instructions for a task, take feedback, improve on that task, reason with itself to make decisions and take action. Then also rinse and repeat without ever getting bored or burnt out.

*Note: em dashes are a personal writing choice, not from Chat GPT.

AI agents are already replacing lots of manual labor hours in software development. Small 3 to 5 person teams are doing what it took 20 to 30 person teams to do only a year or two ago. We’re starting to see the rumblings of this in the FinOps space. TBD if we see generalist AI agents that use tools like humans, or if the tools themselves will flush out their AI agentic features. Potentially, someone completely upends the industry with a different approach. Regardless, we’re excited. We’re in the wildest time to be in FinOps since Excel and the PC came around and we are here for it.

Once you find a funding opportunity that may be a fit for your envisioned project, the solicitation itself can be a barrier to apply. These documents are often dozens if not over a hundred pages long and full of program specific terminology. Often, the solicitation refers to other documents which provide contradictory guidance. In this article, we break down the essentials of how to analyze a funding opportunity.

This is a huge document; where do I start?

Whenever we open a new funding opportunity, we immediately check:

Topics

• Are you a fit for the program’s priorities?

Eligibility

• Are you an eligible entity? If not, do you have a partner who is? (usually there is an eligibility information section)

Funding guidance

• Total funding pool, anticipated number of awards, individual award minimum and maximum (as well as duration). This can help you judge how competitive the process will be and also give you an idea of award size. For example, if the agency provides an award range of $200k to $1M but they only have a pool of $5M and anticipate making 20 awards, you can infer that they will prefer projects with smaller budgets.

• Cost share requirements - this can often be a non-starter for a startup if it is over 20%.

• Other costs - Do they allow indirect rates? Will they negotiate these with you if you don’t have them? Do they allow a 7% fee?

Deadline

• Is there a concept paper stage? If there is, is it mandatory or optional?

• Due dates - What time is it due and in what time zone? (often solicitations have a key dates table)

System registration(s)

• Pretty much every federal funding opportunity will require you to have a Unique Entity Identifier (UEI) at the time of submission; you can register your company at SAM.gov to get this number. If you Ctl + F “sam.gov” in a solicitation, it will help you find the section where you can see what other system registrations the agency requires for submission. For example, some agencies have their own submission system.

Okay, I screened the above information; I am eligible and want to apply. How do I read the rest of this?

Start at the Table of Contents to get a feeling for how the agency has structured the solicitation. Generally, they are split up into five to ten major sections that consist of some combination of the following:

1. Introduction and Basic Information

2. Eligibility

3. Program Description

4. Application Content and Submission Guidance

5. Review Criteria and Process

6. Award Information and Post-Award Guidelines

7. Other Information

When we really dig into a solicitation, we often start with #4 above so that we can estimate the level of effort the proposal preparation will take. It also helps us identify any wildcards we weren’t expecting to need to prepare. For example, you might learn that every budget item needs to tie to a task number and that all needs to be summarized in a Statement of Project Objectives (SOPO). Or the awarding agency may require that you have several letters of support from potential customers in a specific format. It’s important to be aware of these intricacies early in the process.

It’s also a good idea to read #1 and #3 so that you familiarize yourself with and even adopt the agency’s priorities and specific phrasing. For example, if a solicitation uses the term “clean energy” but you decide to say “green fuel” throughout your proposal, you aren’t as aligned with the solicitation as you could be.

I feel more comfortable with the solicitation. How do I start preparing a proposal?

Most applications for federal funding require the following components:

• Technical narrative / project plan

• Budget (the numbers) and budget justification (the narrative around what you’re spending)

• Senior personnel biographical documents

• Various administrative forms and questionnaires

Additionally, some common other components include:

• Letters of support or commitment

• Data management plan

• Description of facilities

• Various conflicts of interest forms (including disclosing lobbying activities or foreign connections)

• Statement of project objectives

• Commercialization plan

We start with a checklist of these items with any specific page number, templates, and formatting guidance as we review section #3. Then we create a narrative outline, which is the foundation of your proposal. When creating a narrative outline, make section headers and the initial set of bullets using the application contents guidance (#3). Then incorporate the review criteria (#5) into the bullets to make sure you address everything a reviewer will be looking for. This is an important step since these two sections are rarely perfectly aligned and it’s easy to miss something a reviewer will be looking for. Finally, review the program priorities and funding opportunity description sections (#1 and #3) for key words and phrases and make sure you integrate those into your narrative.

What else do I need to know?

The solicitation will likely refer to other guidance that you may have to look at. For example, the National Science Foundation uses something called the Proposal and Award Policies and Procedures Guide (PAPPG) to provide centralized guidance for all of their proposals. You may need to seek out these guides to ensure you are following formatting guidelines or to find templates.

Additionally, some solicitations have a “parent” solicitation that you may need to look at. For example, when the Department of Defense releases SBIR topics, they often have an agency level guidance document and then each department has their own separate guidance. Another example is the National Aeronautics and Space Administration’s ROSES solicitation.

When a solicitation provides guidance that is in direct conflict with another higher-level guidance document, you almost always follow the solicitation’s guidance.

I don’t have time to dig into funding opportunities; can someone just do this for me?

Absolutely! At Ibex Consulting, we are experts at acquiring and managing federal funding. We provide services to support all aspects of government awards, from opportunity discovery to proposal development to award negotiations to project execution. We also provide accounting and strategic finance services to small businesses.

If you’d like us to help you navigate indirect rates or are interested in any of our other services, book a call on our website or shoot us an email at info@ibexconsulting.io and we will set up a time to discuss further!

Thanks for reading our blog at Ibex Consulting! This post is public so feel free to share it or subscribe to our future posts.

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At Ibex, our finance team is often viewed as the dream crushing machine. However, IMHO the second most important step of becoming a successful founder is putting your dreams out there and allowing them to be absolutely crushed from every direction. I believe how you respond to that exercise determines your success.

How much delusion is the right amount of delusion?

The key here, especially when it comes to big decisions for your company, is to dream big but take calculated risks. If you’re like most founders, the attitude that makes you delusionally optimistic enough to start a startup has made you successful early in your career by ignoring people who tell you “no” or “that’s not achievable.”

Speaking from personal experience, the determination to prove others wrong (I have been told the technical term for this is “spite”) can be an incredibly powerful motivational tool.

However, where this trait tends to land founders in trouble is when they flat-out refuse to accept reality and try to brute-force their teams into achieving something that is, by all accounts, impossible. For example: we'll close this many deals by that date, we’ll raise this much money by that date, we can expedite shipment and get paid earlier without facing any quality issues. If we just believe and work hard enough we can do it!

At Ibex, the members of our leadership team have all held executive roles in early stage startups. We have seen “under the hood” of dozens of companies from inception to series B, and we have experienced the good, the bad, and the very, very, ugly.

What we have found in our collective experience is that a good forecast solves many of the major problems that startups face. Mismanaged cash? Hired too quickly and have to lay folks off? Didn’t hire enough to support growth and customers are unsatisfied? Fundraise fell through? Internal strife from the executive team? Lack of alignment on the direction of the company? Some of these can be avoided, and the impact of all of them can be significantly reduced, if you actually have a good forecast.

Ask yourself: What if everything we want to happen happens? And then: What if everything that could go wrong went wrong?

By visually showcasing the financial impacts of big decisions and plotting out the major assumptions from the exec team we help startups navigate the waters of uncertainty and avoid any major shipwrecks.

At the very least we’ll start with two lines in the sand that show: “what if everything goes exactly as planned” and “what if everything goes wrong.”

This will give you the “target” forecast you may want to put in front of investors and the “burndown” forecast you manage against internally. It also helps eliminate decisions based solely on gut feelings, or disagreements about what is or isn’t possible. It changes the conversation from “this needs to happen” to “if this happens, what do we do?”

Even if the future is unknown (every forecast ever made is wrong) we can eliminate the feeling of uncertainty by helping determine “if X happens we should do Y” proactively, and before emotions are running high, so when things hit the fan, as they always do, there is already a plan in place and it’s all about the speed and accuracy of tactical execution vs trying to make the strategy in the first place.

And the reason this all comes down to finance? Because you can’t lie (for long) in finance. You can argue about your weighted sales pipeline until you’re blue in the face. It’s a made up statistic. Your revenue and expenses last year were reported to the IRS and if you do it wrong you’re going to have problems.

So how do you actually make a useful forecast?

There are many factors here, but these are the core principles we operate on:

1) It all starts with accounting

We have a very high standard for accounting work. The reason for this is simple: garbage in, garbage out. It is impossible to do profitability and cash flow forecasting if the data you are starting with is inaccurate. In our experience most accounting teams lack experience in the nuances of both startups and government contracting, or at the very least lack the assertiveness required to get data from busy founders.

1a) Get your infrastructure right

Along the same lines as above, poorly designed accounting infrastructure leads to unnecessary time spent gathering and transforming data. By the time you raise your first dollar you should have an accounting system. It should be QBO. You should organize your chart of accounts so an income statement collapses to a neat structure showing Revenue, COGS, R&D, SG&A, Other income, Other expense.

If your accounting infrastructure doesn’t roll up to a simple parent structure similar to this, and isn’t organized by account codes, you need accounting help.

1b) You need accurate, up to date, financial data

After your infrastructure is in place, the key is to use it. You should be closing your books once a quarter at minimum. If you are forecasting more frequently than that you need to move to a monthly close. Your accounting team should be presenting financials to you, maybe with a few questions, and you should be analyzing the data to make sure it makes sense. Is your invoicing accurate? Are you missing vendor bills? How are your KPIs doing? What is Cash on hand? Cash burn? Gross Margin? Net operating? Net income? Are they going in the right direction? How close is reality to what you are forecasting?

There are lots of tools that make these easy to see in a report or dashboard view, and these can help foster important discussions with your accounting team such as: why is cash going down when revenue is growing so fast? Are our margins in the right place? What operational things should we change based on this data? It’s important to discuss these types of things regularly, and if your accounting team is just emailing you excel statements, you need to switch.

2) Know what type of forecast you’re making

Once accounting is in a good place, we can start looking forward. But before we start our forecasting there is a simple binary question we must ask ourselves: what type of forecast are we making, and for whom?

At its most basic there are two types of forecasts: those for internal use and management purposes, and those that live in borderline fairytale land that you show potential investors: i.e. an 18 month - 5 year pro-forma that shows the best possible outcome of what could happen if everything goes right.

These two forecasts are used quite differently. The internal one is used to manage cashflow / burn and make tactical short to mid-term decisions (e.g. how much can we pay this new hire). The other is creative storytelling and painting the picture of what could be. Know your audience and what they expect.

If you show “reality” to investors, they’ll likely discount it by at least half anyway, so to a certain extent you should be bold and paint the picture of “what if everything goes according to plan,” while making sure you can back into those numbers with a set of assumptions that are at least plausible.

This is the the first step of scenario planning. You should start with a baseline forecast based off the the most recent rolling 3 / 6 / 12 month actuals, which you use for operational decision making, and then build a target scenario on top which shows a rosier view of potential upside.

3) Technology is your friend

It is 2025. You have to use financial automation technology if you are going to be competitive. If you are manually doing forecasts in excel (and you are established enough to have a year’s worth of accounting data in a real accounting system) you’re doing it wrong. That statement will likely upset many people, but the amount of innovation in this space in the past 10 years is insane. We love Fathom and Ibex Consulting probably wouldn’t exist without it. We are constantly observing the product development in this space, and there has been an explosion of tools in the past 10 years such as Liveplan, Pry, Runway, Forecastr, Casual, Data Rails, and many others, but the scenario modeling, microforecasting, and report-creation features of Fathom make it the best in our eyes.

Regardless, all of these tools integrate directly with your accounting system and eliminate the QC needed for baseline / actuals, and they make building forecasts much faster and simpler. They also make scenario planning a breeze, which is very, very hard to do manually in excel. Scenario planning is key because early on there are many different paths your organization could take, and understanding the potential financial impact of those is a critical piece of decision making. Additionally, getting that data in as close to-real time as possible vs a few weeks later when the finance team has finished modeling it can be the difference between making a decision that kills the company and one that gets you to your next key milestone.

4) What kind of company are you building? What is the end goal?

The most important thing for co-founding teams to agree on at formation is the type of company you are building and the funding plan. Are you going to sell? If so, to whom? At what point? What items are most important to those acquirers? Many times strife in the executive team comes from disagreements here and they are often only uncovered in later years. At the very least, you need to agree whether you are building a high-growth tech company vs a small business and agree upon what success means to you. In other words, you should start with the end in mind and use your forecast to back your way into that goal.

E.G. the plan of:

“We are looking to be acquired by one of the three major players in our space, because our tool will open up an entire market segment they don’t have access to right now and will allow any of those three to cross sell against their existing tech portfolio. We’re targeting $80M+ exit post-series A without diluting the founding team more than 50%, and given what we see in the industry’s future we think a 12x EBITDA multiplier will probably be fair, so we should target around $7M EBITDA in year 5 or 6 to hit our exit goal”

is a much different long-term plan than more common refrains such as: “we plan to IPO” or “I want to run this business for the rest of my life and make a good living” or “profitability is irrelevant, it’s growth at all costs.”

There is a lot of nuance here to discuss especially between top-down vs. bottom up forecasting, but we’ll save that for another post.

5) There are only 6 items that determine whether you live or die, leave the rest to averages

Oftentimes, especially with engineering founders, forecasts can seem daunting because you’re striving for the same level of accuracy across every single account and it can feel like an overwhelming task to try and routinely forecast. A technical CEO once asked us for an edit to make R&D supplies and materials 3.75% of R&D salaries (it was a rolling 12 month average and ~5% in the first draft). The R&D supplies and materials account was less than 1.5% of total expenses. It’s a waste of time to focus on tiny tweaks like that. Generally, there are only 6 things that determine how your company performs financially:

1) Your revenue

2) The COGS associated with generating that revenue

3) Your people

4) Your professional fees (lawyers, accountants, marketing consultants, etc)

5) Capex purchases

6) Fundraising events

Forecast these accurately and you’ll be 98% of the way there. Leave everything else to a rolling 3 / 6 / 12 month average or a % formula. (Caveat: depending on your stage and industry marketing and advertising costs may be a big player as well, but these shouldn’t determine whether you live or die).

You should maintain a forecast from day one

Early on, forecasts are usually made for the purposes of fundraising, then put on a shelf and ignored until cash gets too tight and another fundraise is imminent. This is a poor strategy that can set you up for failure, especially as you progress past seed-stage. Even if you don’t have any revenue, you need to get in the practice of forecasting your expenses and cash position, reviewing what you thought was going to happen a quarter ago, and adjusting for future quarters as you learn more. Know that your forecast will always be wrong, and the most important thing is to get into the practice of explaining where the variance came from vs. getting every account perfect. If you get good at analyzing financial performance and explaining variance, you will not only naturally get better at forecasting, but you will understand your business to a level that most executives do not, improving your decision-making capabilities and increasing your chances of being part of that small fraction of a percent of founders that make real money.

Want to get help with forecasting and financial operations? Book a discovery call and let’s talk!

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Most organizations that apply for a federal award for the first time are overwhelmed by the process. From the required system registrations, hunting down forms, to preparing content that is responsive to the solicitation, to managing the application portal, it can feel like an infinite maze of complicated requirements with no end in sight. Often the last thing on an applicant’s mind is the strategy behind the indirect rates they use in their proposal’s budget. However, if you are awarded your proposed project, you will quickly learn how applying indirect rates can make or break a project in the execution stage.

What are indirect rates?

In the proposal budget, there are two types of costs: direct and indirect. Direct costs are budgeted explicitly on an exact dollar basis, while indirect costs are captured through a rate applied to the direct costs proposed.

Direct costs are incurred by performing the work proposed in the proposal’s objectives and tasks. Often the largest of these costs is direct labor, such as time for engineers and technicians to perform the proposed R&D goals. Other common direct costs include supplies, materials, equipment, consultants, subrecipients, and travel. For example, let’s say a company proposed to perform a field study on the effects of different fertilizers on plant growth and insect health. Purchasing the fertilizers and sample collection supplies, traveling to and from the site, the subcontractor hired to evaluate the insects, the researcher’s time spent working on the study would all count as direct costs.

Indirect costs aren’t tied to a specific award but are rather costs incurred which keep the business operating. Expenses including office rent, software subscriptions, legal and accounting fees, insurance, and administrative labor are all common indirect costs. Administrative labor can include personnel such as the finance, marketing, and sales teams. They also include employer payroll taxes and the benefits of all employees including paid time off, health insurance, and employer retirement contributions (this set of costs is often referred to as “Fringe & Benefits”). Indirect costs are grouped together and divided by the direct costs of performing work for customers, which results in an indirect rate percentage.

In the simplest terms it looks like this: [Indirect costs / direct costs = indirect rate %]

However, if it were actually that simple we wouldn’t be writing an article about it. The costs allowed to be counted in those two buckets, the number of tiers you use, how you apply them in your award, and the model each agency likes to use makes this a bit more complicated.

The government would prefer to only pay for direct costs, but they know that if they only reimbursed those, very few companies would work with them because it wouldn’t cover the other costs required to run their businesses. In the commercial world, this is covered by a markup on the goods and services you provide your customers with, which leads to your gross profit margin. The higher the markup, the better the gross profit margin, and the more indirect costs you can cover. This markup is limited by what the marketplace will pay for your goods and services. However, the government requires more transparency into your markup and this is where indirect rates come into play.

How do I get indirect rates?

Many funding solicitations allow you to propose indirect rates as part of your application. Different agencies use different models, for example:

• Department of Defense (DoD) = Incurred Cost Electronically (ICE) model through the Defense Contract Audit Agency (DCAA)

• National Science Foundation (NSF) = Negotiated Indirect Cost Rate Agreement (NICRA) through the Cost Analysis and Pre-Award Branch

• National Institutes of Health (NIH) = Indirect Cost Submission through the Division of Financial Advisory Services (DFAS)

Generally, you negotiate rates with your “cognizant” agency, i.e. the place you receive a “preponderance of funding” from. The DoD model allows you to propose rates using a one-tier (General and Administrative (G&A), two-tier (G&A and Fringe), or even three-tier (G&A, Fringe, and Overhead) model. These each get applied to different pools of direct costs. For smaller grants, NSF typically prefers a one-tier model called a “Facilities and Administrative” (F&A) rate that is only applied to salaries and wages. Some agreements also allow a 7% “Fee” on top of all other costs.

It’s important to note that on certain award types, agencies will allow applicants to use a rate which does not require negotiation or documentation. For example, NSF and NIH both provide a “safe rate” on Phase I SBIRs: this is 50% for NSF but applied to just the labor pool, where as the NIH is 40% and applied to Modified Total Direct Costs (MTDC). More on MTDC later. NIH also considers Internal R&D costs to be “direct” since most healthcare companies spend years in development before they ever charge a customer.

Many agencies allow a 15% de minimis rate in lieu of a negotiation (this was raised from 10% on October 1st, 2024). This allows the agency to avoid negotiating rates with every individual awardee, which would be a massive administrative burden. However, it’s also a great option for lean teams in that you get to avoid calculating rates before your business has scaled, and occasionally the rate is higher than what you could negotiate anyway.

How are these rates applied to my award?

One other common point of confusion for organizations new to working with the government is how to apply the indirect rate percentage to the direct costs of the award. The majority of the time you are going to calculate and apply your rates using the Modified Total Direct Costs (MTDC) method, which mostly removes equipment and subwards (which are different from consultants. Consultants versus subcontractors versus subrecipients is an article for another time).

When we say “mostly remove” all but 50k for equipment, and 50k for each individual subaward is taken out of the direct cost base.

When you think about it, the logic behind this makes sense: Generally your indirect costs don’t scale just because you spent $100k on a big piece of equipment, or paid another organization $100k to perform work on the project. Whereas, if you paid a person $100k to perform work, there are a lot of indirect costs that go along with that (payroll taxes, benefits, office space, software, etc).

However, sometimes an agency (the DoE being the most common in our experience) prefers to use the Total Direct Cost (TDC) or Total Cost Input (TCI) method where all direct costs are included in the base. This means you will have a much lower rate, but it will be multiplied across a much larger direct cost base.

If you choose to employ the de minimis rate, it always uses the MTDC method.

Why are indirect rates so important?

There are a few ways to look at this, but essentially indirect rates become your profit margin on every direct dollar that you bill. This also means that they materially impact how much direct work you must perform to receive the full award amount. If you are the government, you prefer lower indirect rates because you get more work for every dollar. If you are the business performing the work, you would rather do less work for the same amount of money.

Take a simple NSF grant as an example: if you billed $100,000 of labor and $100,000 in supplies, you could bill $161,000 for labor by applying the 50% F&A “safe” rate and the 7% fee, while you could bill $107,000 for the supplies from the 7% fee. This would be a total bill of $268,000 for $200,000 in direct costs, which is a 25% “gross margin”. If you hadn’t used either rate, you would have had to spend $268,000 in direct costs to receive the same amount of money. This is often even more dramatic on DoD contracts. If you had the same direct costs and had a three-tier rate structure with 20% fringe, 20% overhead, and 30% G&A as well as a 7% fee, you could bill $200,000 for labor and $139,000 for supplies, which is a $339,000 total; the for a “gross margin” of 41%.

In the NSF case you received $68,000 in indirect dollars, while in the DoD case you received $139,000. It is up to you as the business owner what you do with these payments: you can pay rent, hire an additional employee, whatever your business needs to maintain operations. Many organizations fear that they need to allocate indirect dollars to specific projects in their accounting system. This is unnecessary. This is the cause of many headaches and we fight against this constantly on the accounting side. In the end, most projects are capped, and having higher rates will not generate any more top-line revenue on the project. However, having a reasonable rate allows you the flexibility to spend money on direct or indirect items. You don’t want to be in a spot where you have money left in your budget for direct line items and have to give it back (or spend on something you don’t really need) when you could have proposed decent rates and used those indirect dollars to cover operating exepenses like lawyers, facilities, or other G&A items.

What % are indirect rates typically?

It’s difficult to compare rates directly between businesses because they may use a different number of tiers or were calculated using different systems. It’s better to compare rates based on their “total multiplier”; for example, on a DoD three-tier rate with a 7% fee, applying all four rates on labor results in a single multiplier. The following reactions can be expected on different ranges of “total multiplier” on a DoD budget:

This is too complicated; can someone just do this for me?

Absolutely! At IBEX Consulting, we are experts at acquiring and managing federal funding. We provide services to support all aspects of government awards, from opportunity discovery to proposal development to award negotiations to project execution. We also provide accounting and strategic finance services to small businesses.

If you’d like us to help you navigate indirect rates or are interested in any of our other services, contact us and we will set up a time to discuss further!