It takes a certain type of motivated, shoot-from-the-hip person to be bold enough to open a startup. It takes another kind of person entirely – someone slow, methodical and, ultimately, risk averse – to manage the finances of said startup. Especially in light of such sobering statistics as the following, from Entrepreneur: that about three quarters of all startups fail.
What makes some startups successful, while others fail? Despite what some might like to think, it is not all be about the ideas driving the business; it’s about running the business in a sound financial manner, especially for those crucial first few years. You need to maintain a healthy cash flow, stay on budget, avoid expensive credit and keep all your activity organized.
To help ensure that you are one of the lucky 25% of startups that succeed, here are four financial tips you can easily employ.
The Budget Is Your Constitution
Create a detailed budget, with all corners of the business covered, and then stick to it. Money should be allocated according to budgetary need, and you should not stray from the plan. Those startups that take a freewheeling approach to budgeting are more likely to fail, since there is no system in place to hold divisional spending accountable.
Of course, your startup business does take place in the real world, and there will certain inevitable costs that you overlooked in your initial budget. As a contingency plan, allocate money into an emergency fund. Your contingency plan should cover all the possible essentials without digging into your general budget too much. It is useful for emergencies but the savings can also benefit you when working with wholesale vendors like KeySource Acquisition or when you want to make office improvements.
Consider Incentivizing Early Payment
As discussed, cash flow is of prime importance to any business, but especially a fledgling one. Promptness is therefore of the essence when it comes to accounts receivable, and one of the more effective ways to ensure prompt payment is to incentivize early payers. Consider working a small percentage discount into client contracts for early payment. And if this doesn’t work…
Find the Right Commercial Collection Agency
Alas, there will still be accounts that are late in paying or delinquent, and for those cases it is in your best interest to protect your cash flow with a commercial collection agency. But – and this is very important – do not just go with any collection agency, as there are some whose strong arm tactics for collection can alienate your clients and give your startup a bad rap.
Get in touch with Summit A*R if you want a collection agency that works diplomatically and professionally, ensuring your client relations are not frayed.
Keep Your Financial Activity Organized, and Hire an Accountant When Ready
At least this one should be fairly easy. As per the advice of Zachary Giegel, an accounting expert specializing in startups, startups have relatively little financial activity to track at the beginning, so keeping things organized should not be hard. But you should definitely do it. And when the business grows too large for you to reasonably keep track of inflows and outflows, you know it’s time to hire an accountant. Also, consider getting someone who offers 1099 filing services onboard too.
With these tips, you should be able to maintain a robust cash flow, while avoiding some of the organizational pitfalls that have done so many other startups in.