How to Improve Your Startup's Financial Health

Startup Cash Flow

For every startup, the first few years are the most important. They determine whether you will survive in this overly competitive market or not.

Now, there is a plethora of steps you need to take, from analyzing the market demands and tailoring your products to them to promoting your business to the right people, through the right channels.

However, none of this would be possible if you don't learn how to manage your finances in the first place. Namely, statistics tell us that 82% of small businesses fail because of cash flow problems.

So, how to overcome the most common obstacles startups face and make your finances healthy?

Let's find out!

Don't Mix Personal and Business Bank Accounts

When you start a business, you need to set up a separate, business bank account. That's something every business owner knows. Unfortunately, no matter how important this rule is, it is often ignored by inexperienced startup owners. The main reason why they choose to use their private bank accounts for their business purposes is simple- they want to save time and cut the bank fees.

If you believe that this is a great idea, you're forgetting what the consequences are.

First, the IRS has strictly determined norms that help them tell a business from a hobby. Of course, one of them is your business expenses. So, if your startup's cash flows through your personal bank account, the chances are the IRS will classify your business as a hobby.

The second and probably the most serious problem is paying taxes. Namely, when tax time comes and you need to list out your business' income and outcome, you will have to separate them from your private expenditures. And, to do so, you will have to go through basically every cent you've earned or spent. Just imagine how time-consuming and nerve-racking this would be.

Finally, mingling your startup's finances with your private ones seems highly unprofessional. Writing a check on your name instead of your company's name may seem suspicious to your clients and prevent them from collaborating with you.

Given all this, it's obvious that opening a small business bank accounts pays off. Even if your business is part-time and you do it from your home, you should take this practice seriously.

Automate Your Financial Management

To beat your competitors, you need to know where your every single dollar is going or coming from. This includes keeping track of all your bills, taxes, invoices, and receipts every month. Not to mention the risks. The lack of attention or experience may seriously jeopardize your business.

So, to make the most of your financial management, you should automate your accounting efforts. Start by investing in a direct debit payments system or cloud-based accounting software that will give you a detailed, real-time view of all your financial transactions. This way, you will be able to simplify your recurring payment collection and process transactions effortlessly.

By monitoring your financial health regularly, you will be also able to see what financial management strategies work for you and make your decisions reasonably. Most importantly, you will reduce your administration time and maintenance, as it can be automated by your chosen service provider.

Of course, as the time goes by and your startup evolves, you should consider hiring an in-house accountant. They will do all the hard work for you, from paying taxes to keeping track of your cash inflow/outflow, letting you focus on other aspects of your business' growth.

Learn to Read Your Financial Statements

When launching a startup, you need to know what the different aspects of financial management are. For example, you need to know how to analyze financial statements to see how profitable your startup is. Here are a few basic elements of financial statements you should keep in mind:

  • A cash flow statement shows your cash inflow and outflow.
  • An income statement represents a summary of your startup's gains, expenses, and net income or loss within a certain period of time.
  • A balance sheet tells you how balanced out your startup's assets, liabilities and shareholder's equity are on a specified date.
  • A statement of shareholders' equity informs you about the variations in the value of shareholders' equity over a certain accounting period.

Boost Your Employees' Productivity

Do your employees check their social accounts out or browse through entertainment sites during their working hours? Of course they do. No matter how brief and insignificant these activities may seem to you, they can heavily affect your startup's finances. Namely, according to the Office Team's report, your employees spend approximately 42 minutes a day doing nothing. They emphasize that, if these figures were true for basically every employee in the U.S., the companies would suffer a $15.5 billion loss in productivity every week.

This is something your startup cannot survive. And, to prevent this on time, you need to go the extra mile in boosting your employees' productivity.

And, to start, you need to know what occupies your employees the most. Is it social networks? Maybe it's answering private emails during their working hours? Are there any workplace distractions you should detect and eliminate? Conduct some anonymous research and ask them to provide you with honest feedback.

Most importantly, once you receive the answers, you need to be tolerant. By supervising them constantly or banning social media and entertainment sites, you will not achieve the desired effect. They will still use their mobile phones to access them.

Worse yet, you will show that you don't trust your employees. And, you're forgetting that these people sometimes give up on their weekends to complete their projects on time. Show them you respect that. Make sure you set your goals clear and to-the-point. Let them know what you expect from them and allow them to relax occasionally, as long as it doesn't compromise their or other people's performance.

Over to You

Handling finances may be a tedious task, but it's one of the most critical aspects of managing your startup. As they overlap with all other segments of your business, they may make or break it.

What you could conclude from these examples is that financial management is not just about earning and spending money.

On the contrary, it requires you to implement a detailed strategy that will help you make data-backed decisions, reduce all unnecessary expenses, and allocate your resources wisely.

This is how you will manage to stay competitive and boost your bottom line significantly.

Guest Author

David Webb

David Webb is a Sydney based business consultant and online marketing analyst. With six years of experience and a degree in online business strategy, he is driven to help the people in better understanding of this new digital age. In free time, David enjoys writing, travelling and occasional night out with his friends.