If you are a young entrepreneur or startup, I applaud you!! Building a company is truly one of the hardest things in life. You have to wear multiple hats when you step into the shoes of an entrepreneur. You are essentially responsible for every decision that is made within a company.
While all functions are equally important, Financial Management is one area which needs special focus considering the current scenario where we see many Startups die due to poor financial management strategies. The sad truth is that cash-flow surprises kill many startups. Overall, 90 percent of small-business failures are caused by poor financial management. In other words, this is not the place for shortcuts and sloppy practices.
To prevent yourself from becoming a part of this 90 percent, you need to have a strong financial management system. Financial management of your small business encompasses more than keeping an accurate set of books and balancing your business checking account. You must manage your finances so you don’t overspend and so you remain prepared for all expenditures, as well as profit distributions.
You might feel that financial management is complicated and confusing but the following ten top tips should help you to gain control of them.
1. Have an effective business plan
For many entrepreneurs, the business plan is an outmoded document that gets created mainly for the benefit of VCs and bank loan officers. Bootstrappers rarely think they need one to get by. But the fact is that a business plan — even just a one-pager with a few financial projections — can be a valuable internal tool. A roadmap for even the smallest or earliest-stage idea. It can foster alignment, set the tone for the business and even help you craft your brand messaging.
2. Be a private limited company
The good thing about forming a limited private company is that when the company goes bankrupt (hope it doesn’t!!), you are required to pay only the amount of your shares you have in the company. If a business which is being carried on as a sole proprietorship or a partnership is not incorporated goes bankrupt, the proprietor or partners are personally liable for the debts of the business. Given the success rate of 10% in current market scenario, being prepared for the worst is not a bad thing at all!
3. Get the right funding
It is essential that you choose the right type of finance for your business – each type of finance is designed to meet different needs. Smaller businesses usually rely more on business overdrafts and personal funding but this might not be the best kind of funding for your company. Unusually high debt can lead to higher fixed costs and hypothecation of assets. Similarly, equity can lead to dilution in the ownership of your business. Right balance between debt and equity needs to be maintained keeping in mind the long term goals of the company.
4. Keep up-to-date accounting records
Even if you don't like accounting or numbers, there is no way to avoid accounting for a business. In order to file for tax returns, apply for a loan to expand your business, or for certain legal purposes, accounting is necessary. Accounting for your small business is also important so you are able to assess your financial performance. The financial statements such as the balance sheet and cash flow statement show financial information that is important in the success of your business. The balance sheet shows how much your business is worth and what your assets are. The cash flow statement shows where the future cash needs of your business are. Without any of these financial statements your business would not be able to account for the revenues and profits made from day to day, which results in mistakes and inaccurate records.
5. Keep ‘Em Separate
It is essential that you keep your personal finances and business finances completely separate. Do not commingle! Make sure you are paying yourself a salary (rather than paying your personal bills) out of the business finances as soon as possible. The cleaner your company records are, the easier the audit will go. If your personal finances are merged with your business, the income tax office will be forced to audit your personal records as well as business. This is what can happen if the line separating the two isn’t clear.
6. Monitor your financial position
You should regularly monitor the progress of your business. On a daily basis, you should know how much money you have in the bank, how many sales you’re making and your stock levels. You should also review your position against the targets set in your business plan on a monthly basis. You should be aware of the minimum cash your business needs to survive and ensure you do not go below this. Cash flow statements should be prepared and reviewed on timely basis.
7. Be prepared for Cash flow surprises
In the real world, spending seems to happen fast, and money coming in happens slowly. If planned income comes later than planned expenses, you have a short-term cash-flow surprise! Neither banks nor investors will help you on this one. In the early days of a new business, and every time you make changes, sales volumes slip just when you need them most to cover the extra marketing expenses and new infrastructure. Keeping a surplus and being prepared helps in such circumstances.
8. Be Open and Honest with Investors and Lenders
There is nothing that gets people into more trouble in business than dishonesty and a lack of communication – this is especially true for early-stage businesses that are looking to raise money or get a loan. If you act shady and secretive, people won’t trust you. Hold monthly or quarterly meetings and keep them updated with company’s performance and other metrics. While it isn’t always a pleasant conversation especially during the early days of business but it helps establish credibility and gives them opportunities to help us navigate the tough times.
9. Meet tax deadlines
Failing to meet deadlines for filing tax returns and payments can incur fines and interest. These are unnecessary costs that can be avoided with some forward-planning. Keeping accurate records saves your business time and money and you can be confident that you’re only paying the tax you owe.
10. Hire a Virtual CFO
A Virtual CFO helps a startup to add value and strategic aspects of its finance function. The most critical resource for a startup is the CEOs time and it should be spent on acquiring and servicing their customers. A virtual CFO primarily takes care of all the complete financial needs of the company, from payroll to vendor payments and report which needs management analysis to taxation and accounting. Moreover, such CFOs often have strong relationships with banks and financial institutions, which come in handy when the company negotiates a loan or encounters any financial crisis.
CA Ankush Garg
M R Garg & Associates
Chartered Accountants
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