Financial Management for Startups is a blog penned by Certified Public Accountant, Michael C. Thomsett. The blog offers tips on starting a business, self-management, financial management, accounting for startups, technology startups accounting software reviews, technology companies accounting services reviews, business consulting reviews, business partnerships reviews and provides information on tax returns preparation services.
No matter if you are just starting your journey or are in the middle of running a startup, finance management is one of the cardinal rules to be considered. This is because money is an important factor that can set you on the right path and it can also bring your business down.
You can’t neglect your startup’s financial health in the crucial early stages.
- The success of your business depends on how well you manage its finances.
- Learn about each aspect of your business’s finances, making financial projections so you can anticipate rough patches and profitable times.
- Banks, alternative lenders and peer-to-peer lenders are sources you can turn to when you need money to help your business grow.
- This article is for entrepreneurs who are running a new business and want to know how to manage their startup’s financial health.
In the beginning stages of managing your startup, the nitty-gritty of finances might be the last thing you want to think about, but letting financial planning fall by the wayside is a troubling habit for new business owners.
The pressures of success and profitability can weigh down a new business. But no matter your level of familiarity with business finances, you should keep certain key questions and resources in mind. Here are seven steps to take for the successful management of your startup’s financial health.
1. Open a business bank account.
A business bank account is one of the most important pieces of getting your startup’s finances in order. Whether you open a checking account, cash management account, or savings account, opening a business bank account is a wise move for these reasons:
- It prepares you for tax season. Keeping your business and personal expenses separate will make it easier to file taxes. If you skip this step, come tax season, you might have a hard time untangling your business and personal expenses from each other. This can result in you losing out on deductions or cause a logistical nightmare later.
- It offers legal protection. A business bank account can offer you limited personal liability protection depending on your business’s legal structure. If your business gets sued, for example, a business bank account may help prove that your business is a separate entity from you, which can protect your personal assets.
- It makes you appear more professional. A business bank account allows clients and customers to pay your business rather than making payments to you personally. This lends your venture an air of professionalism.
Key takeaway: A business bank account is key, as it separates your personal and business finances.
2. Recognize your financial literacy.
Gathering the proper tools and educational resources to understand and manage your business’s finances takes time, but it’ll save you a lot of stress and money. Don’t be afraid to admit when you don’t understand something.
“A very low percentage of new business owners actually go over every number in their finances every month, and even fewer actually understand all the numbers on the page,” said Barry Moltz, financial advisor, author and public speaker on small business management.
Key takeaway: You don’t need to be a complete expert on business finances, but you should understand what everything means and how it should be tracked and managed.
3. Manage your cash flow.
Cash flow is the money that moves in and out of your business. When you make more money than you spend, you have a positive cash flow. With 61% of small businesses struggling with cash flow globally, you need to pay close attention to yours. These are a few ways to avoid negative cash flow:
- Send invoices as soon as possible.
- Closely monitor your debt and savings.
- Borrow money before you need it.
- Evaluate your business operations to see where you could cut expenses.
- Adjust your inventory for cost efficiency.
Key takeaway: Manage your business’s cash flow by sending out invoices quickly, cutting costs and debt where you can, and adjusting inventory when necessary.
4. Determine your startup’s financial and market logistics.
Once you have a working knowledge of business finances, you have to ask the tough questions specific to your enterprise:
- How much money do I need to start this business?
- How long until my product or service will become profitable?
There is no perfect answer to these questions. It depends on your niche, which should be as narrow as possible in the beginning.
“Entrepreneurs often try to target as broad of a population as possible,” Moltz said. “That will just lead to more competition.” [Interested in finding the right accounting software for your small business? Check out our best picks and reviews.]
Understanding your niche will help you answer these more concrete questions. Service-based businesses, for example, take much less money to start than product-based businesses. No matter your market, the key is to not overspend.
“New business owners spend way too much money in the startup phase,” Moltz said. It seems logical – the more money you spend getting customers, the more customers you will get. Unfortunately, that is not usually the case. That’s where profitability comes in.
Key takeaway: Make sure you have a strong grasp on your business niche, how much money you need to get started, and how long it should take before your business becomes profitable.
5. Conduct financial forecasts to gauge profitability.
Similar to how much money you’ll need to start your business, your future profitability depends on many different factors.
“A business can take its time becoming profitable for however long you have the cash flow to support it,” Moltz said. However, he added, most small businesses need to achieve profitability in the first year to be sustainable.
If you take time for financial forecasting – a management tool that estimates profitability based on your past and present financial conditions – then you should know ahead of time when you’re supposed to be cash-positive.
“Over-forecast revenue and under-forecast expenses,” Moltz said. In your forecast, cut your revenue in half and double your expenses for the first six months or year to avoid overspending. In this vein, Moltz’s go-to piece of advice for his clients is that “revenue is vanity and cash flow is sanity.” It doesn’t matter how successful you appear from a sales standpoint if you aren’t generating revenue.
Key takeaway: To gauge your business’s profitability, conduct a financial forecast based on your past and current financial conditions.
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6. Carefully research your funding needs.
While some business owners bootstrap their ventures, others turn to outside funding to grow their businesses. There’s a lot to consider if you go this route, including how much money you need, the loan’s repayment terms, your credit score and when you need the funds. Not every kind of funding will work for your business, so determine exactly what your business needs in order to make an informed decision.
These are some of the financing options available to small business owners:
- Traditional loans from banks
- Grants
- Business lines of credit
- Invoice factoring
- Merchant cash advances
- Peer-to-peer lending
Key takeaway: Small businesses have several funding options, including bank loans, grants and alternative lenders.
7. Utilize experts.
At the end of the day, your most reliable tool for financial planning is old school – the expertise of another person. Consultants, financial advisors, your accountant, a CPA and a bookkeeper are all potential resources.
“A lot of business owners don’t manage their finances because they don’t understand it,” Moltz said. An expert’s help with putting together your financial statements, evaluating your expenses and forecasting your profits can save you a lot of time and money in the long run.
Your time and money are precious, so you want to ensure they are spent effectively. You should take this same attitude with your business’s financial health. Rushing your business’s potential for success will only hurt it in the long run. Instead, dedicate significant time, energy and maybe even money to maintaining the financial health of your enterprise.
Key takeaway: If you aren’t a true expert in managing finances, consider hiring experts like financial advisors and accountants to steer you in the right direction.
Yara Simón contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.
Others advice
Financial management for startups is, without a shadow of a doubt, the key to any startup’s success. There’s going to be myriad of things to manage and keep track of and it can become quite overwhelming without a solid plan in place.
You’ve got the idea, developed a business plan and jumped into building your very own business from the ground up.
But there can be several pitfalls that new business owners fall into when it comes to the financial structure and maintenance of the startup.
To push past short-term survival and into a thriving, profitable company, what steps do you need to take to be prosperous?
Lauren Kelly, the director of Zen Accounting, helps small businesses achieve their growth potential on a daily basis. Here she gives us her top six pieces of advice about financial management for startups, to get young businesses off the ground and into its own financial rhythm.
Set up a business bank account
First things first… Stop using your personal account for business transactions. It might sound simple – but this can become a real issue.
It can develop complications if the personal and business ins and outs are not kept separate – especially when it comes to tax time. It would become apparent incredibly quickly that things could be missed.
If nothing else, it allows you to keep complete control of your finances and in the long run will make your life easier.
Manage cash flow
This is fundamental. Not just during the startup period, but throughout your entire lifetime as a business owner and entrepreneur. So much of financial management for startups is knowing where your cash is coming from and when it will arrive.
Starting off it’s important to negotiate good terms with your suppliers and stick to those terms. There’s no need to pay early… pay for invoices when they’re due and preserve cash flow.
On the other side of the coin, when it comes to sending out invoices, make sure they are done in a timely fashion – pretty much as soon as possible after the work has been done.
Make sure when you invoice you undertake good credit control procedures. Be on the ball with getting the money and getting people to settle their side of the agreement on time.
It’s simple…without money coming in, there’s no money to go to suppliers.
Build strong relationships
A strong network goes a long way when you launch your startup and beyond.
Develop relationships with suppliers, clients, connected companies like GrowthMinds and even your trusty accountant, if you have one. These are the people that will keep your business afloat. Without them -and the customers, of course- your bright idea will fall flat.
You might want to go at it alone, but be sure to keep the right people sweet and ask for advice when you need it.
Keep good records
There’s going to be invoices, receipts, and all kinds of paperwork and finances to keep track of. Make sure you have a system in place to ensure that nothing gets lost amongst the chaos.
Keeping good records is vital to the on-going health and viability of financial management for startups. Keep hold of everything.
Also, make sure you claim everything you can during tax season. To be able to do that accurately, you’ll need to keep note of every little detail and outgoing that can be reclaimed.
For example, ensure that you log miles and claim it back off the business, as well as keeping hold of receipts for anything you buy for the firm.
Create a budget and financial projections
Set yourself a budget at the start of each year, creating a goal for you and your team to work towards. From there you can check in at quarterly intervals to ensure things are in order.
Financial projections are crucial to know where you’re heading and what you want to achieve as a business. It also helps to identify peaks and troughs in advance to allow you the opportunity to rectify them before they become a real problem.
Finding any issues early can highlight areas that you as a business owner should be working on and can indicate where you need to invest.
Conclusion
Startups are known for being innovative and dynamic, but many entrepreneurs struggle to do the one thing that can make or break a company: manage their finances.