Founding a startup business is both exciting and scary at the same time. Think of it as a rollercoaster: it’s exhilarating and challenging, but it can also hand out some extremely disconcerting and unexpected curves. Between the highs and lows of the experience, entrepreneurs need to stay focused on the things that matter so they can nurture their businesses toward success. With the high failure rate of startups in mind, it’s critical that startups stick to a well-crafted financial plan to ensure that they won’t fall victim to the myriad pitfalls they will face.
Financial mismanagement is one of the primary reasons small business startups fail. In fact, according to research done by U.S. Bank and cited on the SCORE/Counselors to America’s Small Business, as many as 82 percent of business startups fail because of poor cash flow management skills and/or a poor understanding of cash flow. Following are some ways companies can take steps to prevent a cash flow problem.
Categorize your spending. Often, during the startup phase, money may seem to just vaporize into the atmosphere. You need to spend to build a business, but you also need to know what you’re spending it on. By developing a strict categorization process for spending (for example, general and administrative, research and development, sales and marketing, operations, and cost of goods sold), you’ll be able to understand where you may be overspending or underspending. You may want to break out the percentage spent for each category and analyze whether the cash distribution makes sense.
Explore benchmarks. How have successful startups in your industry allocated their spending? Do you know? It might make sense to study the financial practices of businesses that navigated the early troubled waters well and apply some of those best practices to your own strategy.
Have a financial plan. Many people fall into the belief that it’s necessary to spend money to make money. While this may be true in theory, that doesn’t mean that spending should be (or can be) bottomless. A well-crafted financial plan can act as a roadmap for managing your business’ money effectively. It will also help prevent you from spending money that your business may not be able to cover, which will doom you to failure before you’ve even gotten started.
Be sure to emphasize forecasting. It’s important that you keep accurate and up-to-date financial records of your startup’s day-to-day operations. It’s equally important, however, to have an accurate financial forecast that can help you understand where you’re going. A 2005 study by the Institute of Business Forecasting found that an improvement in accuracy of just one percent from under-forecasting or over-forecasting resulted in an annual savings of $970,000 to $3,520,000 a year for the companies that participated in the study. If forecasts aren’t your forte, seek professional help, and ensure your forecasts remain up to date.
Seek help from a professional.
DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its clients’ personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.