Startup Financials You Need to Know
In the first part of this particular series, I introduced the first two aspects of your startup financials that you must understand in order to properly prepare your idea for launch. As a reminder, they are the investment to start and the economics of the business. If you’re just catching up with us here, I encourage you to read the first part of this series before proceeding.
We’ll discuss the third and fourth aspect that I highly encourage you to fully understand before taking the next step with your new business idea.
By definition, financial management is the system and processes that you utilize to manage cash flow, accounts receivable, accounts payable, and then create projections of how your business may perform in the long run. By nature, entrepreneurs tend to have a very positive outlook on the future of their business, but it’s important to be realistic.
As a young entrepreneur just turning 21, I had grandiose projections of where our first company would go financially that were quite unrealistic. Over the past 5 years, I have learned from failure and received irreplaceable mentorship from individuals with over 20 years of experience running the financials of multi-million dollar businesses. The lessons that I have learned have taught me to tone back my projections and keep my main focus on what is happening with my financials today.
Without a strong set of systems, processes, and documentation methods to accurately maintain your financials, businesses can quickly hemorrhage cash without the entrepreneur even knowing. Many entrepreneurs will wait to handle this aspect of the business until the product/service has been launched and there is traction in the market. I argue that putting your financials off places you into a position where you are not fighting to get organized. Start your business the right way as organized as possible.
I personally support a very strong belief in being frugal as an entrepreneur always placing the betterment of the company first. Similar to the stories of many entrepreneurs as they started their visionary companies, my co-founders and I choose to pay ourselves enough to pay the bills so that the remainder of the cash can be invested back into the growth of the company.
No matter how you decide to manage your startup financials, it is an essential step to deliberate on before cash starts to flow freely throughout your business model.
- Self-reflect on the financial management of your business.
- What systems and processes will you be utilizing to accurately manage the movement of money in your business? what knowledge are you lacking today that you must acquire to make that plan come true?
- Will you be hiring a bookkeeper and an accountant to handle monthly recordings and year end taxes? Or will you handle all of this on your own?
- How will you store and accept money? Do you have a business checking account? How about a business credit card? PayPal? What fees are associated with each? How can you minimize the fees?
- What method will you use to make accurate projections of revenue, profit, and expenses? Do you know your break even per day? How will you link your strategic decisions and goals to the projections that you’ve created? What happens if you miss your earnings expectations?
Getting excited about starting your business but forgetting to put your financial ducks in a row is a huge mistake. Be the most knowledgeable person about your startup financials in the room at all times.
The fourth and final aspect of your startup’s financials is an exit strategy. The exit strategy is a means by which you plan to sell the company at some point in the future for a return on your initial investment into the founding of the company.
The most common exits are the sale or acquisition of your business and taking your business public. Having a clear cut exit strategy is most critical when you are planning to raise funding as investors want to know when and how they are going to be getting their return on investment.
Regardless, it’s important to at least consider the exit strategy so that you understand how it may logically unravel if you were to reach that pinnacle.
With my first company, I made the mistake of not having a set strategic motive for an exit because I was too focused on the long term vision that I had for the business. Through my experience building the idea into a multi-million dollar company, I learned from my lack of focus on an eventual exit. We had build a cash cow, but we hadn’t molded the company properly to ever be prepared for an exit. I now better understand that exit strategies are important because they push you towards adding a specific value to your business every single day.
While you may not believe me reading this today, there comes a point for most entrepreneurs where the passionate fire that they once had burning for the company’s future begins to falter. It’s an important statistic to keep in mind as you are preparing to sink your teeth into a new company.
- Self-reflect on how your company may eventually exit…
- Who or what type of company would be most interested in the product/service that you are building?
- How can you structure and grow your business model so that it has a sense of stickiness.
- Stickiness is the ease of your customers able to leave your product/service. A high level of stickiness indicates that it would be very difficult for your customers to leave you. And vice versa.
- For what amount of money would you consider a buyout or acquisition? why?
- How can you craft your short term strategy to set you on a path towards reaching your ideal exit strategy?
Without a keen understanding and management strategy for your startup financials, you risk the possibility of being in a worse situation that you where you started. When starting a business, cash is your livelihood and will allow you to pursue new growth initiatives. Without cash, your startup will wither and die.
Never take the financials of your business lightly and always best the smartest person in the room when your financials are the topic of discussion.