10 Effective Ways of Managing Finances for your Startup
Written by Princess Wilson
A disturbing but popular statistic is that 90% of startups across the globe fail, with 70% shutting down in the first five years. In Africa, startup failure rates hang around 54%, but the reasons for this failure are pretty much the same.
According to CB Insights, running out of cash or failing to raise new capital is the number one reason startups fail. This is primarily due to the inability of startups to manage their finances the right way.
As a founder, staying on top of your finances is crucial in getting your business through its early tender years and beyond. So here are some surefire ways to manage your finances and help your business scale!
Have a Clear Business Plan
A business plan is a fundamental document that outlines what you seek to achieve and how you plan to achieve them. As your business grows, it is easy to get immersed in several activities and become distracted, which might cause you to make poor financial decisions.
But, if you have a clear business plan that shows you where your money should go and how to generate a steady income flow, your finances become much easier to manage.
This document is also helpful in establishing the state of your business and making sound financial projections, which will help you prepare for any future obstacles.
Open a Business Account
Failing to separate your business from personal finances only leads to unexplainable losses and tax issues.
While some countries do not mandate entrepreneurs to have a separate business account, it is the best way to go if you intend on managing your finances efficiently.
A separate account will help you stay on top of your expenses, profits, revenues, etc.
As a business owner, you must not neglect to pay yourself. Set out a certain percentage from your earnings as your monthly reward.
While it is easy to want to put everything into running the business, there is a downside to this.
Not paying yourself means you are more likely to dip into the business funds for personal reasons. This is particularly easier when you don’t have a separate business account, so re-read the previous step and read it some more.
Additionally, paying yourself can also be a safety net for unexpected circumstances, as well as a way to check the profitability of your business.
Monitor and Manage Cash Flow
Knowing how to monitor cash flow efficiently is a crucial skill every founder should have if they plan on keeping their doors open. This is particularly important in the early years of your business, where funds may be limited.
Thus, it is important for business owners to always know where all the cash comes from and where it goes.
To do this, review your expenses and overhead costs to generate an overhead rate you must monitor every day and stay on top of daily financial operations and business reports. Additionally, create a simple cash flow statement and forecast that outline your monthly cash flow and future projections.
Lastly, if you have staff, remember to optimize their salaries using payroll software that automatically transfers payments to their accounts on scheduled days. This significantly boosts cash flow management.
Save Costs by Outsourcing
As a startup founder, you need to devise a means of reducing expenses until you gain a significant customer base. An excellent way to save costs is by outsourcing to third parties.
Instead of buying equipment that may rack up expenses due to repair or maintenance, consider leasing instead, especially if you need the equipment for a short time.
This also applies when you need certain short-term services. Instead of spending money on recruitment, salaries, and benefits, outsource to a third party at a relatively cheaper rate.
In other words, only buy equipment or hire a staff that would be needed for a very long time.
Invest In a Cloud-Based Accounting Software
Ask experts, conduct thorough research, and choose an accounting software that is just right for your business. But not just any kind of software but a cloud-based program.
A cloud-based software will optimize your accounting process, making it faster and easier to collaborate with other staff. It also reduces expenses by eliminating the cost of maintenance, server failures or version upgrades.
Investing in a cloud accounting software provides accurate access to your financial transactions, helping you manage your finances better. Popular examples of such software programs include Xero, Sage X3 and QuickBooks.
Monitor availability to reduce supply chain risks
As a startup founder still trying to build a reputation as a credible and reliable business, it is vital that you not only monitor availability but have backup suppliers as well.
The best way to monitor availability and avoid getting stranded is by having a supply chain plan which should be included in your business plan; refer to the first tip.
To eliminate supply chain risks that may affect your projected sales and revenue, prepare an efficient supply chain strategy, track existing orders, and work closely with suppliers to ensure availability.
Also, always have a backup supplier to ensure continued access of products/services, reducing losses and improving credibility.
Plan Tax Payment
Tax planning generally involves reviewing expenses, profits, and revenues. As you may already know, startups are mandated by law to pay tax. Failure to do so, as, and when scheduled may lead to your business getting shut down,
Thus, you need to conduct efficient tax planning to save money and reduce any liabilities. To do so, your startup must have an efficient bookkeeping system, a reputable accountant, and of course, you must always carry out all transactions using your business account.
Invest In Growing and Retaining Your Customer Base
Spend more on strategies and other means to grow and retain customers, as that would ensure a steady flow of cash back to your business.
Invest in online and offline marketing, discounts and other activities that would bring in new customers and keep the old ones coming back.
In other words, if cash must leave your startup, ensure that a chunk of it goes into expanding and retaining your customer base, which will, in turn, bring more revenue.
Hire an Accountant
Although the tips and insights we’ve given so far would definitely help you stay on top of your finances, hiring a professional would ensure your finances are airtight.
While it may be easier to handle initially, managing a startup’s finances is a tedious day-to-day job that might become too much for a founder who has other aspects of the business to worry about.
Thus, hiring an experienced accountant would put your mind at ease and help you focus on the core parts of your business.
Take advantage of these tips and watch how the financial health of your startup can improve drastically. If you’re looking to learn more about managing your finance or other ways to help your business scale, try out our Startup Academy.
Startup Academy is a free intensive training for early-stage African tech founders, providing them with the skills and resources to scale. Classes for the new cohort are open. Register now.