Launching your startup founders is a dream for many of us. You become your boss, explore a “new country,” and, above all, pursue something that matters to you.
However, such an adventure requires careful planning since you must accomplish several tasks, including managing finances.
Although finances are not the most exciting aspect of business ownership, they are one of the dominant factors determining any business’s success or failure.
With that in mind, we created this financial checklist for anyone interested in becoming a startup founder.
Have a three-year financial model for your startup
It is essential to understand the situational parameters that your trading depends on so that you can create an appropriate hypothesis for your future years. Having this understanding will help you act as a guide and guide.
The key is to focus on the main elements, such as critical metrics (i.e., number of users), milestones, costs, and revenue, because your startup can scale over time.
Make assumptions and document them in detail so you can continually iterate on them.
- Key metrics beyond revenue, such as number of users, full-time workers, or regulatory approval. This is particularly important if revenue is not expected for a while, which is common in the fintech and biopharmaceutical sectors.
- Major milestones – define them and when they will be completed. For example, they can be your MVP, first hire, client, etc.
- Revenue: Calculate revenue by making assumptions based on number of customers, growth rate, and revenue per customer.
- Cash Burn Rate (Costs) – What must you pay to keep your business running?
Managing your cash flow
Cash flow management is crucial for startups. Most fail for various reasons, but one is much more common than others: not having the money to make it all work.
According to statistics, 29% of startups fail because they lack liquidity. Unless you want this to happen to you, you’ll need to know where the money comes from and where it goes next.
To understand the true profitability of your business, you’ll need to look at free cash flow (FCF). This is a more accurate measure of your financial performance than your net profit because it indicates how much cash your company has available to grow its business or return to shareholders after paying dividends or repaying debt. The formula is:
Free cash flow = operating cash flow – capital expenditures – dividends
Your credit rating
Starting your own business can be an exciting adventure in this mundane world. However, a fresh start is often hampered by your previous financial difficulties, damaging your credit score.
Getting startup funds when you need them most can be difficult when banks turn away from you. Additionally, it’s essential to carefully monitor your credit score before making major financial decisions, considering an expansion, or trying to take advantage of a new opportunity.
Several options are available to check your credit score for free. For example, WisrCredit is Australia’s only free online credit reporting service that allows you to compare information from multiple credit bureaus in one place.
Additionally, Equifax is a national credit reporting agency that provides one free annual credit report. All other credit reports are subject to your payment plans.
Concentrate on customer acquisition.
What is a company without its customers? The sooner you understand how to obtain customers and scale, the more likely your startup will be successful.
Once you have identified and analyzed the different acquisition channels, work on optimization to reduce your expenses.
Since it is difficult to test all acquisition channels at first, both in terms of time and cost, focus on the most lucrative opportunities. Once you successfully expand, you will have the financial capacity to explore other channels.
Take budgeting seriously
Budgeting sounds boring, but doing it correctly ensures that you’ll make rational decisions from day one and that your biases won’t get in the way of your execution.
When you plan your entire first year, you make sure that you will start a business with merit and that, if you need financing, you find the optimal amount. The cost items on this initial list should include:
- Accounting: $ for an individual accountant with a one-year term.
- Registration and constitution of companies.
- Legal: Having a good lawyer is priceless, as demonstrated by the famous experience of Facebook co-founder Eduardo Saverin. Never sign anything with an investor before your lawyer reviews it.
- New employees: Hire them only when necessary. In the meantime, use contractors.
- Other: travel expenses, inventory, equipment, office space, overhead.
- Never forget your living expenses. It is essential to include this if you work full-time and do not receive a salary.
Like death and taxes, these financial considerations are inevitable. Addressing them early will allow you to focus on building a successful business, from Lean Startup product development to customer acquisition.
