You can't neglect your startup's financial health in the crucial early stages.
In the beginning stages of managing your startup, the nitty-gritty of finances might be the last thing you want to think about, but letting financial planning fall by the wayside is a troubling habit for new business owners.
The pressures of success and profitability can weigh down a new business. But no matter your level of familiarity with business finances, there are key questions and resources to keep in mind. Here are four areas to incorporate into the management of your startup's financial health.
1. Recognize your financial literacy.
"A very low percentage of new business owners actually go over every number in their finances every month, and even fewer actually understand all the numbers on the page," said Barry Moltz, financial advisor, author and public speaker on small business management.
Gathering the proper tools and educational resources to understand and manage your business's finances takes time, but it'll save you a lot of stress and money. Don't be afraid to admit when you don't understand something.
2. Determine your startup's financial and market logistics.
Once you have a working knowledge of what's what in business finances, you have to ask the tough questions specific to your enterprise:
- How much money do I need to start this business?
- How long until my product or service will become profitable?
There is no one perfect answer to these questions. It depends entirely upon your niche, which should be as narrow as possible in the beginning.
"Entrepreneurs often try to target as broad of a population as possible," said Moltz. "That will just lead to more competition." [Interested in finding the right accounting software for your small business? Check out our best picks and reviews.]
Understanding your niche will help answer these more concrete questions. Service businesses, for example, will take much less money to start than product businesses, which will accrue more expenses. No matter your market, the key is to not overspend.
"New business owners spend way too much money in the startup phase," said Moltz. It seems logical – the more money you spend getting customers, the more customers you will get. Unfortunately, that is not usually the case. That's where profitability comes in.
3. Conduct financial forecasting to gauge profitability.
Much like determining how much money you'll need to start a business, your future profitability depends on many different factors.
"A business can take its time becoming profitable for however long you have the cash flow to support it," said Moltz.
However, he said, most small business owners need to achieve profitability in the first year to have a sustainable business. If you take time to perform financial forecasting – a management tool that estimates profitability based on past, current and present financial conditions – then you should know ahead of time when you're supposed to be cash-positive.
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"Over-forecast revenue and under-forecast expenses," said Moltz. In your forecasting, cut your revenue in half and double your expenses for the first six months or year to avoid overspending. In this vein, Moltz's go-to piece of advice for his clients is that "revenue is vanity and cash flow is sanity." It doesn't matter how successful you appear from a sales standpoint if you aren't generating cash flow.
4. Utilize experts.
At the end of the day, your most reliable tool for financial planning is old school – the expertise of another person. Consultants, financial advisors, your accountant, a CPA or a bookkeeper are all potential resources.
"A lot of business owners don't manage their finances because they don't understand it," said Moltz. Investing in the help of an expert for putting together financial statements, expenses and financial forecasts can save you a lot of time and money in the long run.
Your time and money is precious, so you want to ensure your resources are spent effectively. You should take this same attitude with your business's financial health. Rushing your business's potential for success will only hurt it in the long run. Instead, dedicate significant time, energy and maybe even money to maintaining financial health for your enterprise.