Finances and Frugality

Denys Linkov
9 min readOct 25, 2020

Money makes the world go round, so why do so many people know so little? Basic finance is essential for our personal lives but also for any kind of business endeavour; it’s hard to be a successful business if you keep losing money*. This article isn’t designed for those who know zero about finance, but rather those who are interested in learning how to approach problems related to money. You’ll get the most out it if you know the basics of finance.

In Dec 2018 I realized that we needed to have a stronger succession plan for TU20. From that emerged the TU20 leadership series, a 12 week set of readings and exercises that helped to prepare the next group of TU20 leaders. This is chapter 9, originally written in March of 2019.

Financial planning

One of the most important things marks the transition from Startup to Scale-up is the need for financial planning. As a small Startup, your goal is to make customers happy and solve a problem well. But then you start having paying customers and hiring more people, and suddenly you are spending hundreds of thousands of dollars each month. If you are not careful, things get out of hand very quickly, so what do you do?

Cash Flow is king

Do you have money to pay your expenses? Good. Does your cash inflow cover your cash outflow? Even better. Typically when we hear about successful companies we hear about the profits they generate. But profit doesn’t pay the bills, cash does.

Fat Tony, courtesy of the Simpsons

What’s common in business is for payments to come in 30, 60 or even 90 day increments after sending out invoices. Many small businesses never collect this money and are too lazy to hire Fat Tony to get the money for them.

Mo factories, Mo problems

Imagine you are a streetwear brand called Pupreme. Your t-shirts cost $2 each and sell for $50 because you have mad street cred. You are having a sale in 2 weeks and you know that you will sell out, so you buy 5,000 t-shirts using a bank loan which you have to repay in 2 weeks. Suddenly there is a snow storm and your sale is delayed a day.

How much money will you make after your sale?

In theory you should have made $240,000 in gross profit, but because of cashflow issues, the bank wanted their money back and took all of your t-shirts. Without the necessary cashflow, you lost out on a highly profitable business opportunity!

The beauty of the software industry is that you don’t have to buy lots of inventory. Instead, you usually need to hire smart people to build and sell your app, and smart people cost a lot. So even though you don’t spend a lot of money on giving someone your software, you spend a lot on sales, marketing and adding new features.

What can you do?

Usually when starting off a business, you have little access to debt or any form of financing, so you usually get money from yourself or the 3 Fs (Friends, Family, Fools). By leveraging your own financial reputation, you can feed it into your business to cover any issues. When the business gets large enough, people just throw money at you, even though you may lose a ton of it (see Uber).

Be frugal

As a Startup you need to find ways to save money yet maintain a strong product and brand (aka look like you have your shit together). So you keep your team small, don’t pay for expensive conferences, don’t wine and dine your customers, and pay yourself the bare minimum to survive. Costs add up very quickly if you are not careful, so you have to balance economies of scale, cash flow and free things to get by.

The best way to succeed is getting stuff for free (by knowing people) so you can put the most amount of money into your customer and product. It also forces you to be creative on how to fit all 25 pieces of life together. Jeff Bezos says this well in his principle:

Accomplish more with less. Constraints breed resourcefulness, self-sufficiency and invention. There are no extra points for growing headcount, budget size or fixed expense.

Large companies fail because they try throwing money at a problem. Big surveys, grand openings, 100-person teams. All usually unnecessary. What becomes scary is when large companies work as efficiently and with as much vigor as a 4 person startup. Then they become the everyday store.

Being frugal begins with setting goals and asking questions. In your personal life, you may ask, “What makes me happy?” (more on this later). In business, it can be “how can I solve this problem more efficiently?”. You then ask more questions like: “What is the issue currently”, “Who is the customer”, “How do we set up meetings with the right people?”. Notice that money isn’t part of these questions. (If someone says they can make introductions for you for a low, low price, be wary. On the other hand, what are conferences for?)

I once had a student reach out to me to ask how he can get his company funded. So I asked him a simple question, why do you need the money? His response was “We need to raise money to pay legal fees to incorporate”. After digging a little deeper it became clear that their prototype and customer research needed more work, two things that don’t require much funding.

Money should be used for three things:

  1. Paying people
  2. Keeping the lights on
  3. Saving time

Paying people is super important. Unpaid internships are horrible (see more of my thoughts here) and people need to eat. If you have a close group of founders that all agree to work for free for now, that’s slightly different, but you should make a plan.

Later on you can use money to supercharge your growth but if you have true product market fit (i.e you create stuff people want) you shouldn’t need to spend a lot on marketing. Even when you have money, find creative ways to use it, in both business and real life.

Time is money

However, don’t become cheap with your money. Don’t be afraid to spend money when it’s useful. If you’ll save 3 hours a week by having sales software that costs $10 a month … just buy the software.

If you spent 20 hours negotiating to get a $100 venue for free (once) is it worth it?

(This is very different if you will keep using the venue, as Lifetime Value is important to consider.)

As you get older, you will start valuing time more because of opportunity cost and general busyness. We forget this as students because we have limited purchasing power and aren’t that busy in the non-academic world.

So even for TU20, if you could be saving a lot of time using a tool … just ask.

Financial projections

The reason businesses stop being innovative is that they optimize financially. They become numbers obsessed; how do I get profit from $1 billion to $2 billion, how do I increase margins, how do I deliver shareholder value?

When you stop focusing on employees and customers you lose. Microsoft almost died because of this, IBM and GE have lost a significant portion of their business because of this. So as a word of caution, projections and financials should help keep you in check, not in a choke.

Different projections

Typically a good way to structure your finances is to look at what you can do in optimistic, well-aligned, and pessimistic scenarios, which are typically called Bull, Baseline, and Bear (BBB). You would do this for both revenue and expenses. Here’s an example for TU20 2019–2020:

And then you can do something similar for every expense item, say, for marketing.

One of the issues people face with budgets in the corporate world is the problem of not spending money. If you come in under budget, it’s very likely your boss (or their boss) may go, “Oh you didn’t need that money, let’s cut your budget to what it was before”. Then you start to fume as you saved millions of dollars from smart decisions while your colleagues spent it buying food and being wasteful, and now they are rewarded with a bigger budget. So, at the end of budgets, people often spend recklessly.

So what is the purpose of money?

Money should help enable your success in life and in business, but the fundamental follow-up question is: What does money enable me to do?

What does your department do with 10, 100, 1000,10k,100k dollars? It’s surprisingly difficult to spend that much money well, and if you don’t know what to do with the money, things start going poorly. This is also true in your personal lives.

What does money allow you to do?

  1. Trade for time
  2. Motivate and get more accomplished with people and partner organizations
  3. Show mutual value and commitment — if the customer is willing to pay, they’re mutually aligned
  4. Unlock new opportunities — such as expensive new equipment or experiences
  5. Invest/Save it for later

These principles apply to both your business venture and personal life, just from a different perspective. Most young people will deal with the stresses of money first on the personal side, so let’s talk about that for a little bit.

Choosing careers

Money is important, but what does it allow you to do?

If you are a Computer Science PhD candidate and are working on new research that improves our understanding of the world, you will be making around $25k a year during your PhD (as a stipend). If you were to work, you could be making $70k a year building a random app (most of the time).

So ask yourself, what does money allow you to do? Is it fulfilling work, is it covering of basic needs, is it hobbies?

This means figuring out what your goals are…

Moving from no money to money really quickly

After graduating and starting a new job, you are finally making money. This is a dangerous time and you need to know about finances before this happens: savings, investments, your goals, and budgeting. If you don’t, things could get bad really quickly. Throwing money at problems or basic needs can build dangerous reliances for the future, and as you continue to earn more money later in your career, the effects are amplified.

Picking a career around money

It’s still confusing to me why people blindly go into investment banking or law. The work itself is often monotonous (you read all day and do the same things in a slightly different way) and you work 60 hours on a good week. But the pay is good, so you can afford to live without a roommate (among other things). The question is, is getting paid 150k out of school (in the case of investment banking) worth working 9am–2am (yes, you read that right)? That’s for you to decide.

It’s not to say that other careers are more fulfilling, you might be just doing boring paperwork in a min wage charity job, or making another Uber for X app for a random startup, you should just think a little more your career options.

How employers avoid paying you more

“We have great culture.”

“We have interesting work.”

“We have great growth opportunities.”

“We have a ping pong table.”

If you hear these things and the company won’t pay you at the market level (average rates for people with the same skill sets), walk away. All the things above (other than a ping pong table) should be givens, and if you think about it, you can’t really have great culture if you underpay people.

With this being said, don’t walk into an interview after graduating asking for 100k (unless that’s a comparable salary in your field). But if you know people are making (and online data is showing) 80k and the company offers you 40k, it’s time to get the negotiating hat on or walk away.

Post-tax money (net pay) matters

Never budget pre-tax or think about money pre-tax (aka gross pay). If you’re making 60k and 14.5k goes to tax, you have 3.8k to spend every month, not 5k. Don’t forget this!

Final thoughts

Money is complicated. In the current world, asking questions about money means asking questions about your philosophy of life. Take things slow, follow your values, and allow smart financial decisions to help you achieve your goals.