This 3-minute blog post on startup finances covers:
Alex’s startup is dying. His bank account is almost empty. Ding! He grabbed his phone. It’s a message from his co-founder: “Alex, we should’ve known. If we had been more serious about our finances, we wouldn’t be like this.”
Have you ever been in a situation like this?
When you’re a startup founder with zero finance background, you don’t have the strongest expertise when it comes to numbers. That’s okay. Most would delegate it. Some would DIY. A few – like Alex – would put it on the back-burner and focus on developing their product instead. That’s not okay.
This is a big mistake right from the start – and it’s only the beginning.
For today (and the sake of your sanity), let’s focus only on what you must know about your startup finances before launching. And if you’ve already launched, it’s still not too late to get these practices into place!
Before we begin proper, take a look at these 3 main financial statements by AccountingTools.com:
Every entrepreneur and startup founder sets out with a goal: to be profitable in the long-run. And yet, most people focus on a short-term financial forecast when they should have zoomed in on a long-term one.
Take the P&L statement for instance.
“Your P&L needs to show the full picture”, shares Annie Lin, a certified CPA.
In an article titled, How To Create Realistic Financial Projections For Your First Year In Business, Darren Craig writes:
“The first three-year forecast is important, but the most crucial one will be for year one. This will help you not only manage the business, but give you a set of figures that you can measure sales and costs against, as well as start to understand if the second and third-year forecasts are reasonable assumptions.”
Look through your financial forecasts. Are they showing a long-term projection? If not, get right on it.
Business News Daily sets a good example for this.
Imagine you’re expanding your business. You’re not sure if you have enough funds to justify this big move. In this scenario, a P&L statement comes in handy. It shows you how your revenue is turned into your net income and lets you know whether you’re bringing enough profits to expand your business.
As an entrepreneur, you’re programmed to wonder how your business is doing right now or – knock on wood – if it might run into problems in the future. Do I have too much inventory? Are my assets making sense? Is my business model feasible?
Comprehensive financial statements answer questions like these and help you make better assessment.
Short answer: yes.
Long answer. For a small business, it’s natural not to be making money in the beginning stage.
But here’s the thing. Deciding on your expenses early on keep your accounts tidy and simplify the process. Keeping your finances in place saves you a ton of headaches in the future.
Do whatever you have to do to get it rolling. Whether you’re working with your Chief Financial Officer (CFO) or you’ve hired a certified CPA expert, your financial plans and records have to be in a tip top condition.
Ah ha, the real reason why you’ve clicked this article!
Investors look beyond your business model and experience in the industry. They focus heavily on your financial performance. Pay attention to important factors like your business’ financial stability, risk management, signs of growth, proper debt repayment plan, and revenue streams.
Investors look for a healthy margin. To secure funding, you have to show them the point your business is going breakeven.
Are you expecting a six-month breakeven?
Take a look at your model. Show new alignment, Show your timeline.
You must be able to show how you’re going to make money, Annie stresses. “Passion isn’t enough. You must be able to prove you’re able to sustain your business.”
For the busy, newbie, or cash-strapped, it’s dangerous to neglect this part of your business. It’s time to revisit this problem and solve it before it becomes a crisis. There are freelance experts out there offering to manage your finance statements at a cost-effective rate.
You’ve worked hard at your business – it would be heartbreaking to go back to square one just because your finances aren’t in order. Don’t let this happen.
You, as a business owner, have the responsibility to take special care of your startup finances. It pays off to have a proper financial plan and effective cash management in place. This way, you’ll have enough funds available to meet your day-to-day expenses and be able to run your business smoothly.