Don’t put off getting the finances in place for your startup project. The sooner you implement proper (and simple) financial management, the easier it will be when you start growing. Here are three steps to get started.
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One of the main reasons why promising startup ideas are prematurely abandoned is because of poor financial management. A study by CB Insights found that 38% of startup failures are due to lack of funding or failure to raise new funding.
Understanding how to manage cash flow, track expenses, and allocate resources can make the difference between success and failure. Fortunately, the financial process for early-stage projects is not complicated. This means no deep knowledge is required to understand and manage the process. All you need to do is understand and follow some financial concepts and some good financial management practices relevant to early-stage startups. Here are three things you should do to get on the right track.
1. Separate personal and business finances
One of the most common mistakes first-time founders make is confusing their personal finances with business finances. While it can be helpful to use personal accounts for business income and expenses early on, this can create confusion and make it difficult to track your company’s financial performance. Separating personal and business finances is critical to maintaining accurate records and simplifying tax filing. The first step could be something as simple as an Excel sheet that tracks all financial transactions related to the project.
As their numbers grow, they will need to open a business bank account. This way, all revenue and expenses related to your startup will go through this account, making it easier to manage. It also protects you from personal liability. If your business faces legal issues or debt, your personal assets will be safer if you clearly separate your personal and business finances. Establishing this separation early will give you a more professional image when dealing with vendors, investors, and customers.
2. Track cash flow and manage liquidity
Cash flow refers to the movement of money into and out of a business. Managing cash flow is important for any startup, as lack of funding is one of the most common reasons startups fail. Positive cash flow means there is more money coming in than going out, while negative cash flow means the opposite.
To effectively manage your cash flow, consider implementing cash flow forecasting. This involves forecasting future cash inflows and outflows based on expected sales and expenses. For example, if you have a large contract that pays out in three months, but you know you have to pay your salary next month, forecasting can help you plan how to close the gap. . Tools like QuickBooks and Xero can help automate the tracking process so you can always stay on top of your finances.
3. Monitor key financial indicators
In addition to tracking cash flow, it’s important to monitor key financial metrics to understand your startup’s performance. You don’t need to track every financial metric. It’s helpful to understand the financial terminology used in the startup world, but in the early stages, only a few terms are important. Metrics such as gross profit margin, burn rate, customer acquisition cost (CAC), and customer lifetime value (CLV) are important to understanding business performance and resource efficiency.
Gross profit margin measures the profitability of a product or service. It is calculated as revenue less cost of goods sold (i.e. the direct costs of providing a product or service (such as materials)) divided by revenue. High gross profit margins mean a large portion of revenue is kept as profit, which is essential for long-term sustainability. Generally, a product or service with a low gross profit margin suggests that the business needs greater scale to be profitable.
Burn rate, on the other hand, measures how quickly you are burning through your cash. If your burn rate is too high, you may run out of funds before you can secure more funds or achieve profitability. Regularly monitoring these metrics will help you identify potential problems before they become major problems, allowing you to make more informed decisions about the future of your business.
