In this article we look at finances and some best practices Entrepreneurs can use to manage the money aspects of their business.

Plan How the Business Will Be Funded 

Most businesses need some form of funding. The level of funding will depend on the goals of your business and your own circumstances.

Ask yourself

  • are you bootstrapping using your own funds or those of friends and family?
  • how much money are you willing to put into the business?
  • are there any government grants available for your startup?
  • do you need to raise equity or debt funding?
  • will your business look attractive to investors?
  • if you are going the investor route have you started with the end in mind defining your exit strategy?

At the startup phase one of the first decisions might be whether you should quit your current job, or run your business on a part-time basis. Try to quantify the risks, such as taking longer to get your business off the ground and the impact on your work-life balance. Some ways to mitigate these risks might be by finding cofounders or outsourcing services if budgets allow.

Calculate the level of income that you need to survive. In many cases it is better to keep your main source of income, so establish time, revenue or traction trigger points which will indicate when you should give the business your full attention. Run through some scenarios including what happens if the hoped for profits take longer to materialise. Have an emergency savings account and put a fallback plan in place, such as an option to return to employment should the business not turn out as planned.

The best way to fund your business is through customer revenues. Self-funding is not always possible and investment allows you to scale faster, hiring a team, having a bigger sales & market budget, quicker expansion into other markets and quicker growth of your market share. As the founder you are trying to validate the need for funding to grow vs diluting your equity.

If your goal is to scale the company through equity funding, you will need to build your business in a way that is attractive to investors. Show that you have the right team in place, have early sales traction or product / market fit validation, show that you can scale quickly and have the potential of a 5 to 10x return on investment.

Don’t worry too much about diluting your percentage ownership, an experienced investor will realise the need to maintain your motivation by proposing reasonable equity splits. Establish a network that helps you to reach out to investors. Securing the investment may take longer than planned, often longer than 6 months, so start looking for investors as early as possible, don’t start when you need the investment.

Financial Management 

If there is more than one cofounder you need to be clear on who is responsible for managing the finances. While some aspects can be outsourced to an accountant you need to stay on top of the metrics that indicate your current financial position.

While your forecasts are unlikely to be accurate at the startup phase it is still important to build a financial model and establish a budget. Understand your fixed and variable costs and your break even, how many sales you need to cover the fixed costs. Be able to explain your gross and net margins, and your unit economics. Add a reasonable risk contingency. Undertake a sensitivity analysis, for example what would be the effect of a 20% reduction in sales from those projected or 20% higher production costs.

Spend your funds in the right areas. Focus on expenditures that can create revenues and tightly manage any overheads. At the startup phase every cost should be challenged. Have good reasons before you make any unbudgeted expenditures, seeking savings elsewhere. Implement a system for forecasting to increase the accuracy of budgets over time.

Understand the key financial metrics for your business. Although many businesses start off by tracking finances on a spreadsheet, the accounting software packages available today are worth the expenditure. Calculate your runway, the time you have before you run out of funds and how many months to reach positive cash flow. Over time understand the lifetime value of each customer or product line and monitor which products or customers make the most profit.

Manage your Cashflow

You need to have a process in place that tells you the money you have coming in and going out, and your cash position. Credit-check all new potential customers and provide incentives for early payment. Don’t be too generous with your credit terms. Stay on top of customer payments, with a system for tracking and following up on late payments. If needed take advantage of invoice financing. Make sure that you leave money aside to pay your corporation and sales taxes.

Businesses can fail when they expand rapidly. Therefore, it’s crucial for fast-growing businesses to diligently manage cash flow and be prepared to decline revenue or seek better payment terms, if the company is overextended.

Prepare for unforeseen circumstances. While it’s challenging to precisely quantify outlier events, establish a risk register to identify potential risks, devise strategies to mitigate them (including securing appropriate insurance coverage), and develop contingency plans for risks that cannot be entirely mitigated.

 

A common reason for businesses to fail is poor financial management. This is often caused by Entrepreneurs not giving enough time to the financial aspects of their business. If you take the time to set up the finance systems at an early stage, establish reasonable forecasts and manage the risks, you will be well on the way to success.