Choosing to step into the startup world isn’t easy. You work hard for your idea to make an impact in the world but you may not consider the back office operations that are needed to keep your business running. Normally, you’re busy sourcing customers, going after funding, building a team, etc. Managing your finances sometimes takes a back burner however it’s crucial to maintaining the health of your business. While Finance may not be your first priority, approximately 65% of business owners blame financial mismanagement for the failure of their business.
The success of your startup is not only dependent on impact but also on how that impact affects your bottom line. Sound accounting practices and financial management gives you the ability to modify strategies early on, have access to data that alerts you of the financial health of your business, and reports that inform your stakeholders of their return on investment. It’s imperative to understand at the very least the financial challenges you may face and how to combat them.
Cash Flow Management
Running out of cash is known to be one of the reasons startups fail. Understanding how cash moves through your business is essential to proper management. To reduce the probability of running out of cash, you need to implement spend controls, a rainy day reserve, and determine your burn rate.
By implementing spend controls, you focus on expenses that are necessary to keep your business running. By using an Accounting system, this can be done automatically and you should be reviewing this information on a consistent basis and eliminating any leaks or unnecessary expenses you have.
A rainy day reserve can save you during the times when sales are unpredictable or hard times hit. Having a cash reserve reduces the stress you may feel when funds are tight and hold you over while you focus on driving business growth.
Do you know what your burn rate is? Your burn rate is the rate at which your company spends its capital to finance operations. Understanding your burn rate helps you navigate your financial runway and how much time you have before funds run out or if funds will even run out.
Keeping Track of Various Types of Financial Transactions
As a startup, you may see different types of transactions flow through your business. All income and expense items are NOT created equal. It’s important to know the difference between equity paid into the business vs sales from a customer and how that affects your bottom line. Another common example is accounting for different expenses. Some are accounted for in the period incurred while others may be expensed over time. Your approach affects how these numbers are shown in your financial statements. Having access to sound financial practices doesn’t have to come in the form of a full-time Accountant or CFO. The industry has evolved and you can gain access to financial expertise by engaging a finance professional on a part-time basis at a fraction of the cost. By doing so, your transactions can be accounted for appropriately and tell the accurate story of what’s happening in your business.
Lack of Understanding The Story Behind The Numbers
It’s not enough to track income and expenses as this gives you very surface level data. Truly understanding the story behind your numbers tells you whether your business is viable, are you able to sustain long term, are you experiencing a period of expansion or contraction, etc. Having access to the right data and being able to understand that data is key. Many focus on the core set of financial statements not realizing that management reporting is just as crucial. These types of reports allow you to dig deeper into the segments on your business and how these areas contribute to your growth. Reviewing your numbers with an Accountant can give you the “why” behind the numbers. You can then create goals and a strategic plan that are backed by strong data and knowledge of what that data means.
Launching a startup comes with many challenges but there’s no need to reinvent the wheel. We provide support and resources to help you make sense of your financial performance. Contact Us for a free 15-minute financial consultation.