Managing a startup can be overwhelming at the best of times. Fifty percent of new startups fail inside the first year. It’s estimated that of the remaining who survive this milestone, some ninety-five percent will fail before year five hits (source).
That’s business though. From conception, to your first successes, right on to your first IPO, money is going to be tight. Even big multi-billion dollar businesses still have to crunch down on their spending, while putting a large portion of their profits back into marketing, hiring, infrastructure, and product development.
Learn how to manage your funds in the most effective way possible now, and not only will you increase your chances at survival and business prosperity, you’ll learn more helpful ways to secure funds to grow your business and hold onto to more equity when the time comes to call on outside investors.
Financial ups and downs can be minimized
To be successful, you need to be a master of finding money where there is none. Without this most precious resource, you’ll be hard pressed to survive past the first year, let alone the second, third, etc.
Nearly every start up will have plenty of ups and downs financially in their first few years. Take a look at the large bevy of mobile apps out there today that are successful, and you’ll find lots of them can tell you stories of money lost and gained; or large pools of employees that had to be let go at some time, just to keep the doors open.
Here’s 7 money management tips startups need to keep on top of, to both survive and thrive:
1. Messy bookkeeping equals financial ruin
There’s so much that can go wrong when business owners don’t understand basic bookkeeping. Beyond that, you need to have an independent bookkeeper and reputable business accountant.
To call yourself a responsible business owner, you need to know how to review the balance sheets and see where the money is coming in and out of your business. You owe this to yourself, your partners, your employees, and investors – if applicable.
2. Be diligent in paying the bills and collecting what’s owed
This is how you maintain a positive cash flow to keep the business afloat. Don’t expect all your clients to pay their bills on time if you’re not willing to send them gentle reminders.
Also, strive to negotiate 30-day receivables so you’re never left in a position where you’re risking your credit with vendors because you’re still waiting on money that should have been paid long ago (or “robbing Peter to pay Paul,” as the old saying goes).
3. Know your margins inside and out
What’s your margins? What does a product costs you from production til it’s finally received by the customer? How much does each service cost in labor, equipment, materials, logistics – etcetera – once you’ve finally billed the customer?
This is so easy to do these days with apps and plugins. You can track your online margins using tools that you found by scanning the sea of cheap or free apps available for mobile devices. The Motley Fool also has a great write up about doing your own calculations. Most important, you have to price your products according to what the market will buy them for, without feeling the need to be the cheapest solution all the time (ie., creating a higher perceived value over pandering to the discount-minded).
4. Don’t rely on a single revenue stream
This happens to a number of businesses. Relying on one stream of income is very dangerous to your startup. You can never get comfortable with just a few large clients.
Nor will a single product keep the company afloat when the market cachet of that product dies down. A great example is Kraft Foods, Inc. They’ve consistently expanded their product lines and acquired different industry companies over the years to diversify; moving from door-to-door cheese sales, to ice cream, batteries, Tupperware, confectionery, cereals, whole foods, and more.
5. Don’t pay too much taxes
A good accounting system, including the added services of a professional business tax accountant come tax time, can help minimize the risk of paying too much in taxes. However, that doesn’t mean most startup managers will think to do this.
Unfortunately, in most cases, you’ll have to seek out this professional separately, as a standard business accountant may not have the knowledge to match up your true tax obligations, and the deductions you’re entitled to, like someone who specializes in tax preparation only can (just like your family doctor isn’t educated to deal with heart problems in the way a cardiologist is).
6. Don’t overpay or overspend
Overpaying means buying something like a chair for $200, or PC for $600 when you could have bought them for half that, had you looked around a bit. Overspending is when you buy a luxury item your business doesn’t really need just yet, when you don’t have the cashflow to justify such a purchase.
A great example of overspending is those fancy coffee machines that cost hundreds of dollars to buy and hundreds more in refill cups every month. Did you know those handy little K-Cups for the Keurig end up costing you $50 a pound to buy? Premium ground coffee costs around $10. Be frugal without being cheap.
7. Wasted time equals wasted revenue
You’ll hear plenty of older folks telling you “I’ve got nothing but time.” This is great when you’re old and gray, but not when you’re the founder and/or manager of a growing startup company. You have to treat every aspect of your own time and your employee’s time while on the job as an opportunity to maximize your profits and lower expenses.
When you have “free” time, use that time to think of ways to balance profits by increasing revenue/lowering expenses. Consider ways to expand the business. Start researching investors before you need them, so your not stuck scrambling when the time comes.
Key Takeaway
Get a handle on these 7 money management fundamentals and you’ll find your days significantly less stressful to deal with.
Money makes the world go round. Your business has no chance of survival if you don’t manage it to near perfection.
