7 Ways to Manage Your Startup’s Financial Health

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When you’re just starting out, it’s crucial that you concentrate on getting your product out there and acquiring traction. But as your business expands, it becomes more important to monitor its financial status. For starters, it keeps you out of bad debt and limits your expenses. Apart from that, it provides you with the information you need to make informed decisions about growing your company or hiring more staff.

Below are seven ways you can manage your startup’s financial health.

1. Define the Right KPIs

Deciding on the most relevant and meaningful KPIs for your business can be tough. Certain KPIs are useful across the board, like payroll headcount ratio and sales growth rate. But others vary by industry. For instance, manufacturers need to keep an eye on their inventory levels, whereas public companies might consider measuring earnings per share to calculate their total value.

The following list of KPIs is not exhaustive but it will help you decide which ones are best for your business:

• Gross Profit Margin
• Return on Sales
• Operating Cash Flow Ratio
• Accounts Payable Turnover
• Accounts Receivable Turnover
• Quick Ratio
• Inventory Turnover
• Cash Conversion Cycle
• Gross Burn Rate
• Working Capital

2. Hire a Professional Accountant

Many business owners don’t realize they need an accountant or bookkeeper for daily finance operations. But it’s true: even if you do your own bookkeeping, it is essential to have another set of eyes review your accounts annually.

“Determine if shortlisted accountants have the skills and experience your startup needs. An accountant with years of company and small business expertise is ideal. They should also understand how to run a startup properly and offer advice on financial management,” advises Wahaj Siddiqui, Managing Director of Oblique Consult, a reputed tax and accounting advisory firm for startups and multinational corporations in the UAE.

3. Create a Workable Budget

Budgeting is crucial for any business, especially for startups with limited resources. A weekly, monthly, or quarterly budget is a good place to start. You can use it as a guide for how you will spend the money over a certain time frame. You also need to take stock of your income and expenditures before you can create a budget.

Determine how much money you’re ready to invest in different parts of your company and stick to it. Earmark funds for merchandising, social media marketing, PR campaigns, product operations, and payroll.

4. Open a Business Bank Account

Opening a business bank account, whether for savings, cash management, or checking, is crucial for several reasons:

1. Tax Preparation: Separating personal and corporate expenses streamlines tax filing, avoiding deduction losses or future logistical issues.
2. Legal Protection: A dedicated account establishes your business as a separate legal entity, shielding personal assets if legal action arises.
3. Professionalism: By allowing clients to wire payments directly to the company and conducting vendor transactions through a business account, you appear more professional and legit.

5. Evaluate Your Startup’s Cash Flow

Your startup’s cash flow, the total of its incoming and outgoing funds, is vital to monitor. Mismanaging it can lead to difficulties in paying staff, purchasing inventory, or settling bills. To manage effectively:

• Track all spending, including expenses like business cards, new hire welcome pack, etc.
• Organize bill payments and use online options to avoid late fees.
• Ensure timely client payments through consistent follow-ups.
• Prepare for slow seasons by setting aside funds or adjusting spending.

Maintain positive cash flow by promptly sending invoices, managing savings and debt, obtaining loans in advance, identifying cost-saving measures, and optimizing inventory management.

6. Use Financial Software for Automation

Various free and paid programs aid in automating financial tasks, easing record-keeping burdens, especially for solo accountants. Popular options include:

• Accounting software for invoice creation, expense tracking, and financial reporting
• Spending limit trackers to monitor expenditures and avoid overspending
• Payroll software for efficient employee payment management

Select tools based on your startup’s needs. Research thoroughly to find a comprehensive solution for accounting, budgeting, and payroll management.

7. Secure Funding from Investors

To propel your startup forward, it’s important that you establish connections with potential investors. Equity serves as collateral for traditional lenders and crowdfunding platforms alike. With increased financial backing, your company can expand its operations fast.

However, acquiring funding requires a compelling business strategy. Clearly articulate your goals, vision, and execution plan to instill confidence in investors. Bear in mind that demonstrating the popularity and viability of your business idea is crucial to securing ongoing financial support.

Conclusion

If a startup is in bad financial shape, it will fail miserably—there are no two ways about it. It makes no difference what field you’re in or how brilliant your idea is; if the math doesn’t add up, there’s not much you can do to fix it. Follow the above-mentioned tips to ensure your startup’s finances run smoothly.