Financial Strategies for Startup Entrepreneurs

June 6th 2019 at 11:51am Published by firstdownadmin

Building a company is truly one of the hardest jobs that someone can do. You might be passionate about the whole experience, but let us tell you just how important it is to be rational, and treat the needs of your organization as it grows.

Most entrepreneurs follow a business plan that is focused on their passion. Most entrepreneurs try to opt for business ideas that are related to their area of interest. For instance, someone with a degree in chemical engineering would be looking to think of ways to make biodegradable plastic through micro-algae or something similar. Many coaches and business experts also reiterate this point, saying that it is a must for you to only start a business in something you are an expert of. You can’t completely rely on your employees to manage the core processes that you undergo on a day to day basis.

However, regardless of the core area of interest that a business owner has, finance is something that they should know about before they start in business. You cannot successfully manage your organization without knowing about the steps you need to take to ensure the financial well being of your organization.

The Importance of Finance

Knowledge about finance and other fields linked to it can be extremely useful to you as an entrepreneur. We mention the importance of finance to your business here:

Make Profits

Going by the popular age-old belief that money can make money, you must know how to manage finance in your business to increase your profits. From the initial capital invested in your business, to the funding you take from external funders, a lot of the day to day operations happening in your business are linked to finance. To survive and experience growth, a business should keep increasing revenues and profits. Proper utilization of resources and finance can help you weed out better profits and ensure more consistency as a business.

Manage Operational Expenses

The day-to-day expenses in your organization are met through proper utilization of finance. From paying your employees to paying rent for the month, you need to understand the basics of finance for making such payments.

When it comes to expenses, budgeting is necessary. You need to have a basic idea of your monthly expenses in mind so that you can plan and budget for them accordingly. A well thought out financial plan gives you the stability you require for managing profits coming into your organization. You can conflate both the initial capital and the retained profits together to increase your financial reserves.

Purchase Assets & Inventory

The money you invest in your business is needed for asset creation and acquiring inventory. If you buy new assets for your business, you need to go for monthly payments rather than one payment at one time. Even if you have cash available with you, it is best to take one step at a time and to not rush the process. To handle a monthly payment plan, you need to know the basics of finance and how interest works usually.

Mitigate Risks

Financial risk can derail the progress of your business in ways more than one. All entrepreneurs want financial stability for their business, but this stability comes at the cost of mitigating risks along the way. Good knowledge of finance can help you manage these risks and overcome the different complexities that currently hinder your way. Your financial management skills are necessary for pulling out contingency plans, even if you have entered a troublesome situation.

Tips for Managing Finance

Knowing the importance of finance in a startup, we now move on to some of the financial tips you can follow for making your startup a success. Follow these tips to milk the benefits of being good at finance:

Time Is Money

One of the best tips we can give you about finance and management inside your business is to consider time as a resource that can lead you around the first few months. When entrepreneurs first start in business, they have many meetings to go to and many other things on their plate. Even with such a schedule, some entrepreneurs can make the dreaded mistake of not valuing their time and using it towards the mutual interest of their business. Only when thing go wrong that these entrepreneurs realize just how much time they have wasted, and how nothing they do now can swing back the clock to when they want.  

One of the best advice you can get during the start of your business is ‘a lack of time is a lack of priorities’. Where you spend your time defines your priorities. Don’t head over to meaningless meetings and then rant about being busy.

The best tips you can follow for time management at the start of your business are:

• Prioritize your processes and know which meetings you should attend. Know just what is required for your business and work accordingly.
• Know the tasks that require your attention and those that don’t. If you’ve hired an experienced developer for making an application, then give them the wiggle space they need for innovating. Micromanagement might not be necessary for such a situation, as your experienced pro would know just what to do, which is why you’re paying them lavishly.
• Equate time and money together. Just like you’re being thoughtful with how you spend your money in the initial days, you should also think about where to give your time.

Time is money, and if you’re able to save yourself time during the start of your business, you surely will head towards further glory.

Prepare for the Worst, Hope for the Best

These say optimism is one of the best traits an entrepreneur can have, but we don’t believe in that. While you should hope for the best when it comes to your business, you should also be prepared for the worst outcome.

Optimism can be contagious in the sense that it doesn’t make you look at things from the minuscule perspective that is required. Optimism can shroud your thinking and lead you into a land of make-believe where you imagine things will randomly just happen and there is no chance of them failing.

For instance, if you’re starting your business and budgeting for it, you might be prompted into thinking that you will be breaking even by the third month of your operations. While you will surely hope for this to happen, you should mentally and realistically be prepared for the worst.

Hope for the best and direct your efforts so that the best outcome happens, but also be financially prepared to handle the worst outcome. Continuing the example above, the worst outcome could be that your business fails to break even after even 1 year of operations. Would you be prepared for such a risk had you directed or conditioned your mind towards thinking that it won’t take this long a time for break-even to happen?

Moreover, if you’re not prepared for the worst in your business, you will go down the pits of failure when the worst does happen. Financially, you should calculate all the risks on the way and prepare yourself for the worst that can happen at all times.

Learn How to Manage Your Cash Flow

One business coach we once worked with mentioned, “there are three reasons a company fails: they run out of cash, they run out of cash and they run out of cash.” While this sentence might sound like a bit of an exaggeration to you right now, believe us when we tell you how true it is.

Cash flow is the number one metric that you should know how to manage when starting a business. Let’s just build on you the importance of cash flow through a simple case. What are the most important metrics you would want to achieve as a business owner? Greater revenue? More cash? Better profits?

All of these metrics are in the minds of entrepreneurs when they start their business. But what would you need by your side when you want to buy a new operation plant for expanding or when you want to pay the employees at the end of the month? Cash!

Better revenue and greater profits are both good metrics for judging the success of your business but don’t make the cardinal sin of confusing them with cash. Cash is the single most important reserve for your business.

The inability to follow cash flow can lead you into a liquidity crunch, in which case you will have to go for external sources of finance. While we have multiple new and innovative methods of external financing, it is best to manage your cash flow in a manner where the need for them doesn’t arise in the first place.

Set Clear Goals and Milestones

When you are new to a business, you can often commit the mistake of setting vague goals and milestones. This practice can lead to multiple problems, as you realize that you haven’t prioritized your finances based on your goals.

You would want to have clear goals and milestones in mind so that you can prioritize your spending accordingly. If your goal is to expand in size over the coming year, you should set forth a reserve accordingly and look for convenient options for expanding.

However, if your objective or goal is to survive through the early period of starting a startup, then you might not follow the same financial routine that you will follow if your goal was to grow. Know your objectives well, and communicate them over to all employees.

Milestones are necessary for successful goal tracking, as they help you follow your goals with periodic checks. Milestones can help you in keeping track of your progress. For instance, if you plan to make your profits reach $20,000 in a year, and you have $5,000 of profits coming over during the first quarter, then you can tell that you’ve met the first milestone.

However, for milestones to be realized and met, you need to first have clear goals defined across the organization. Milestones can mitigate the risk of not meeting your goals, but there is nothing you can do to mitigate the risk of a poorly set objective.

Track Your Spending

When you first start your business, there is a lot that could be going on in front of you. From meeting business stakeholders to understanding consumer needs and preferences, you will be stuck in a lot of other priorities. Knowing the hustle, most business entrepreneurs end up neglecting the importance of tracking their spending.

Regardless of how involved you are in other ventures, you should make it a habit to track the spending you are doing.

The benefits of tracking your spending include:

• You can record the expenses you made for separate heads and later analyze them. For instance, if you end up spending more during the first month than you expected, you can use your list of expenses to see where you went overboard. If you don’t have a track of your expenses, you would not be able to identify the potential loose points. Knowing where you specifically went overboard can help you in overcoming the complexities later down the line.
• You can set budgets for the future using this information. The budgets you set before you start your business are all based on estimated and predictions. And, from what we know about the world of business and finance, estimates and predictions aren’t always right. However, once you start your business, you can use your spending expenditure from the quarter before or from previous months to determine your budget for the coming period. Such budgets are more comprehensive and more focused.
• You can identify what percentage of your money is being spent towards the core processes. Identify core processes and see how much you’re spending towards them. If a crunch time does come, you should know just how much you should have to keep operating successfully.

As an entrepreneur, we would recommend you to get directly involved in the process for tracking expenditures. You can get dedicated help for this subject matter, but you would want to initially know about your expenses, and where they are being incurred.

Understand the Perks to Offer

Now, once you start hiring people you will come to realize the importance of giving benefits or perks for working with you. From raising motivation to helping in job satisfaction, benefits can help in ways more than one.

As an entrepreneur focused on finance, you should try to go for perks that cost less and give more perceived value. To begin with, you need to separate the money you can pay your employees when it comes to employee benefits. Use that money to your full advantage by hiring a benefits consultant as well, and working with them to achieve peak optimization of resources. Don’t go overboard with your employee benefits thinking that you can replace them later down the line. Once you set the bar high, you have to consistently follow it up or risk employee dissatisfaction.

Maintain a Barrier Between Your Personal and Business Finances

Your personal and business finances shouldn’t intermingle. Remember that your business is a separate entity, which is why it should preferably have its bank account, cards, and credit rating. Your credit rating shouldn’t be interlinked with that of your business.

The biggest disservice you can do to your startup is to not give financial independence. The finances of the business should be maintained separately from your own, and you should look towards making sure that you don’t use the business finances for your expenditures or vice versa.

Additionally, this border should further be adhered to if you get a small business funding for your business.  The funding you get for your business should strictly be used for the expenses that relate to your business.

You can wreak havoc on the finances of your business if you start spending money from the business account for untracked expenses. We would advise you to draw only a specific salary for the first few months or a full year until the business can stand on its own feet.

Consider Insurance

Entrepreneurs aren’t in favor of insurance when they are first starting their business. The general perception is that insurance is something that can be avoided to provide money for further expenses. We believe that insurance is quite a safe bet that can help you out during a complex time when you do need it.

As a business owner, you need to make sure that your finances and all other assets are safeguarded. In the case of any mishap, insurance can come and offer you a reimbursement.

If you don’t have an authentic insurance plan to your name, you won’t be able to safeguard your business or your interests in the long run.

Insurance also provides you with the financial security you need during your starting days. While you can start your business with insurance in areas that are extremely important to you, you can expand the horizons with time to cover other areas as well.

Limit Fixed Costs from Day-1

You should limit your fixed expenses when you first start your business. Try to keep your operations thin when you start, because setting the bar high can be too hard to maintain in the long run. You don’t need an elaborate office and most certainly don’t need fully catered meals delivered to you three times a day.

Try to cut down on the costs during the initial days and try to be as much of a miser as you can. Over the top amenities and fancy offices are all features that you can incorporate into your business later down the line. Generating revenue should be your top-most priority, which is why your focus should solely be on ensuring that these priorities are being met.

Besides just keeping your fixed expenses low, we believe that this is the time to also keep your variable expenses on the lower side. If you’re manufacturing and selling a product, make sure that you benefit from economies of scale and also buy your raw materials at the best rates. You might have to search the market for your preferred rates but take the extra mile here as it can set the trend for the future.

Maintain an Emergency Fund

An emergency fund can save you in times when you need a small business funding to help you out of a financial conundrum. An emergency fund is a reserve that you keep topping up with a fixed percentage of your annual revenue.

The emergency fund can then be actualized at the right time. This fund helps you prepare for any liquidity crunch, where you run out of cash.

If you don’t happen to have an emergency fund during a time of poor liquidity, we believe that you should head over to private funders for small business fundings. Such funding from private funders happen to have convenient rates and payment plans. You can pay back the funding within a payment plan that suits you best.

The best part of these funding is that your credit history isn’t used as a basis to reject your funding application. The funders use your credit history for setting the rates, but they don’t outright reject your funding application based on the credit history alone.