Every startup begins with a great idea. There’s this need to invent and excel, fill a market niche, and solve problems for issues that you’re so passionate about.
Despite the energy and soul put into them, nearly half of these startups crash by their fifth year in business. A major reason for this is that the startup either mismanaged its cash or failed to raise new capital.
Here are five financial tips to keep your startup from becoming another has-been.
1. Prioritize Your Books
Punctual “keeping of books” is the stepping-stone for building a successful business. Avoid crunching numbers manually on a spreadsheet. Instead, focus on automating the accounting process. Don’t go on an off-the-shelf software buying spree; verify if they fit your needs.
2. Manage Your Accounting
Accounting begins where bookkeeping ends. It gives the business owner an overview of the financial health of the business, which includes cash flow, receivables, taxes, and other liabilities. A well-kept book of accounts is like money in the bank. After all, no debt or equity can be raised without your suitors fine-combing the books.
3. Keep Expenses Low
Most startups go all out when it comes to investing in a swanky office complete with perks like kombucha in the pantry. The key is longevity: Prioritize needs over wants. Operate thin, and keep expenses low until cash flow turns positive.
4. Have a Contingency Fund
Young businesses tend to be more cyclical in nature and this is why you need to set aside profits when the tidings are good. Reserve funds help you stabilize off-peak operations. There is no hard and fast rule on the size of the fund, but savings that will cover expenses for six months makes your business emergency-proof.
5. Keep Personal and Business Expenses Separate
About two-thirds of businesses start with capital raised from personal and family funds, and it is too easy to treat business income as personal and family income. Do not expense personal spending onto business accounts. Commingling of funds attracts heavy fines from the IRA. Moreover, when you start mixing your personal and business funds, you lose clarity on the actual financial health of your business.