Starting a business in a competitive environment is exciting but it doesn’t come without risks. Most startups fail because of a lack of financial preparation. The Telegraph reports that many new ventures fall apart due to “a lack of understanding of basic managerial and financial concepts.” In fact, a recent survey from CB Insights shows 29% of startups crash because they ran out of cash.
If you want to survive those early grueling months, it’s important to pay close attention to your finances and manage it well. Here are four financial tips every startup owner should follow:
1. Adopt a strict payment collection system
Set policies or handling customer payments. For example, decide on the kind of checks you will only allow and the specific information required to process the payment.
Have a process in place that allows you to monitor all open invoices and balances. Establish collection schedules, credit guidelines, and other purchase terms. You can even an implement incentive system for early payments and penalty rules for payments that go beyond the deadline. Having a collection system not only keeps cash flow moving but also gives customers peace of mind knowing their payments are safely received.
2. Use an accounting software tool to track all expenses
Bookkeeping is perhaps one of the most tedious aspects of running a business. Luckily, there are many accounting software options available now that can help you manage your finances. They are designed to manage your invoicing, bank reconciliation, revenue and expense tracking, and financial report generation. Investing in technology may seem like an option rather than a necessity, but automating your financial processes can save you money and help your team focus on more important tasks at hand.
Some of the most popular accounting software in the UK are GnuCash and Wave Accounting.
3. Have an emergency fund
Also known as “retained earnings,” an emergency stash is mandatory for all businesses but more so for startups. These funds can help manage debt, cover unexpected costs, and keep your business afloat if something undesirable happens. Remember, insurance does not cover every circumstance. As an entrepreneur, it is your responsibility to always prepare for the worst-case scenario.
On the other hand, an emergency fund allows you take advantage of surprise opportunities that may arise. Your retained earnings can help you take risks and stay ahead of your competition.
4. Set up an effective payroll system
As an employer, it is your responsibility to ensure your employees and your business are compliant with the necessary tax obligations. One way is by implementing a solid payroll system.
Payroll management requires accuracy and attention to detail. An experienced tax advisor can leverage their knowledge of current tax legislation to help you streamline your processes, prepare required tax reports, and save you and your employees from hefty penalties.
Investing in startups is one of the riskiest ventures you as an entrepreneur can make. Implementing a strong financial strategy is key to ensuring not just the survival but also the growth of your business.
