Despite having a great business idea and putting in the hardwork, a startup could fail if it doesn’t closely follow its financial health. While most startup founders remember about the boilerplate stuff like noc for GST registration or the best accounting software, they often overlook the bigger picture of maintaining a good financial position to keep progressing. So here is a quick guide of the things you must keep in mind as a founder of a startup in order to be financially successful:
Cash flow is fundamental
Many small business owners cite cash flow as a reason for their failure. Cash flow is the lifeblood of any business, and it can be difficult to get cash flowing to a start-up. Prepare as best you can for lean times in the beginning — and there will be lean times. Keep a tight rein on expenses early on, and build up your savings if possible. That way, when cash does slow down, you can dip into your savings rather than having to take out loans or close up shop. Part of your overall strategy should be to ensure you continually generate enough income from operations to meet financial obligations, keep employees paid and get yourself paid as well.
Track and monitor all spending.
With a new business, there are many costs throughout launching the company. As an entrepreneur, you need to track every cent that is spent and make sure all expenses are accounted for. Good practice includes the cost of everything – from legal fees and rent to the price of coffee and donuts. You can use a spreadsheet or accounting software, but whichever system you use, you must update it regularly so that you always have a clear picture of your financial situation. You will also want to monitor all spending closely to ensure you aren’t overspending in one area or another. Be sure to also set budgets for each area of spending and stick to them. You should also learn about using various financial statements and their components like debtors turnover ratio formula as this could save you a lot of time in your operations and also make your discussions with an accountant easy.
Establish a line of credit.
It’s not uncommon for startups to have short-term cash flow problems. Even if you have enough cash on hand to cover immediate needs, it’s important to set up a line of credit in case an expense comes up that you didn’t expect.
Control your inventory.
If your startup sells a physical product, manage your inventory carefully. Ideally, you should be able to sell all of your products without having to worry about creating new ones each month. However, if you must create new products monthly, try to maintain the same level of quality and features while reducing costs whenever possible. For example, find ways to utilize less packaging or reduce the number of materials used in each product.
Limit your fixed expenses in the beginning.
At the start, you should do everything you can to limit your fixed expenses. This may mean having one or two people wear many hats until you have the cash flow to hire for specific positions. You might also consider using independent contractors or freelancers instead of full-time employees. If you have to rent office space, be sure that it is within your budget and that you don’t sign a long-term lease if possible.
Establish an emergency fund.
Every business owner must have access to an emergency fund in case of unforeseen financial circumstances. Your fund should cover at least six months’ worth of expenses so that you can cover things like equipment repairs, employee salaries and other unexpected bills