3 financial aspects startups need to look at before launching

Photo credit: George Hodan.

Operations is like the body of your business, strategy is the brain behind it, and finance is the lifeblood that sustains it. Startups are usually great in operations and strategy, but what can set them apart from failing ventures is their knowledge on finance and accounting.

For many entrepreneurs, finance and accounting take a backseat in business decisions, as most decisions are not made holistically or considering possible financial implications. While there are short-term rewards from this agile decision-making, long-term performance suffers from poor judgement.

Drawing from my experience in helping startups and large corporations with their finance and accounting strategies, I believe scaling involves taking multifaceted considerations from the very onset of business planning. While many of my clients have either a finance professional or an accountant in the core team, prompt consideration is more important than recruiting a finance guy before the ball gets rolling.

Financial forecast

This is probably one of the most important things most startups fail to do. Financial forecasting is a totally frustrating process of assuming information from a conservative case, basic case, to the best case.

While many startups happily fill out their business model and plan templates, narrative and idea-based assumptions could be weak. Seeing the financial impact on at least the first five years of the business will give you a better idea on whether to push through with your business or let go of the idea altogether.

The basic spreads that you ought to consider are your assumptions, profit and loss, cash flows, balance sheets, and key performance indicators.

Mark your targets for each year and at the end of the day, check how well you’re meeting them. And remember, goals needs to be SMART (specific, measurable, attainable, realistic, time-bound). Don’t shoot for the moon, but stretch your goals.

Budget

Many confuse this with financial forecasting but what’s important here is that the initial cash inflow and outflow are determined to avoid immediate insolvency.

A financial forecast done well can serve as a great budgeting tool, but since most startup founders are not really financial-savvy, doing a budget for the expected inflow and outflow can make things easier. Planning on the right amount of paid-up capital can save you more money and spare you from the trouble of paying more in the future.

But keep in mind that each time cash is injected into your business, taxes and filing fees must be settled within a fixed number of days.

Business plan

OK, say you want to ignore the above items and don’t believe you need to go that far. Well, I’m not sure how big your dream is, but of course it is your decision.

Ignore the factors discussed above but don’t ignore this one. It’s great if you have a finance professional or an accountant in your team, but grieve not if you don’t.

Call your friend who is an accountant or a lawyer and talk to him or her about your business plan. Get inputs on the plan and structure and ask what else you need to consider.