loader image

How to Avoid the Startup Finance Pitfalls

by October 30, 2019

Companies go out of business for one reason only, they runout of cash!

Starting a startup is hard, being a founder, means you have to do a lot of things on your own in the early days,you have to take care of product development, sales, marketing, investors, accounting, finances and so on, it\’sso easy to get caught up with too many works and lose focus on what\’s important.

Most founders are not accountants, therefore, it\’s quite complicated and time consuming as a founder to figureout your cash flows, balance sheet, income statement, trial balance and get a hold of your financial numbers.

Successful founders and businessmen, know exactly what\’s going on with their accounting, as accounting is thebackbone of any business. They can do that, with the help of a qualified accountant, either a part time freelanceaccountant or someone full time.

However, with having the right information and resources, it is possible for any business owner, to understand,how exactly is their cash flowing and what\’s the health of their business.

Three things really you should know!

There are three key metrics that if known and tracked regularly by your accountant, would put you in a positionto understand the overall health of your business and finances.

Bank Balance

You can simply log in to your online banking and download your bank statement or get it emailed to you by yourbank every month, you can simply schedule that and have it delivered to your mailbox automatically.

Money Coming In

You need to keep a record of all your sales transactions which come into your business, you can track yoursales with the help of an online accounting tool or free invoicing software which is available online.

Money Going Out

And here you just need to keep track of all the expenses and the payments you make to your vendors, this isalso easily doable with the help of your part time or full time accountant by simply using one of the cloudaccounting software available online to record all your financial transactions.

Two things to calculate with the above numbers

Burn:

Burn, is how much cash every month your company is paying out after your revenues and it can be calculated byusing this formula: Money In – Money Out

E.g: Let\’s say you had revenues of $12,000 last month and your expenses were $15,000, then, $15,000 -$12,000 = $3,000, is the burn which is the net amount your company is paying out

However, in case there are any one time big payments that may come your way, then you can take the averageof the previous three months instead.

Runway:

Runway, is the number of months your company can run without facing any cash flow issues and you can getthe number, by using this formula: ​Bank Balance / Average Burn

E.g: Let\’s say you have $100,000 in your bank and your average monthly burn is $10,000, then your Runwaywould be this: $100,000 / $10,000 = 10 months, which means you can run your business operations for the next10 months without any worries.

Two things that determine the lifehood of your business!

Growth rate:

In life and business, things either grow or die, and a business that is not growing, is actually falling behind,therefore it is crucial to know if your business is growing or not, and at what speed! Using the below formula:

Money In ( Month 2 ) – Money Out ( Month 1 ) / Money In ( Month 1 )

E.g: Let\’s say you had sales of $25,000 in September and $20,000 in August, then we have:$25,000 – $20,000 / $20,000 = 25%

That\’s a 25% growth in one month, great job!

Business status, alive or dead:

If expenses remain constant, and revenues continue growing, do you have enough cash to reach profitability?If the answer is yes, then your company is alive, and if the answer is no, then current status would be dead!

Note that you should always raise money as if it is going to be your last round of funding and strive to reachprofitability with that money, this will make your business more solid and attractive to potential investors.

How often should i look at my numbers

As a founder, you should look at your numbers every single week. And when someone asked, you should knowyour numbers right away. You also need to make sure to review your numbers with your team on a monthly andquarterly basis, and there are times where you should be tracking your financial numbers on a daily basis.

Final Notes

Expenses do not remain constant and hiring people does not just cost their salary, for every person that you hire,you probably need to provide them with equipment, desk space, health insurance, therefore depending on thelocation, anyone you hire would probably cost you about 25% more than just their salary.

When it comes to finance and accounting, you can easily hire from some of the best freelance accountants onDuminex.com with way less cost than a full timer, Duminex will take care of all employee relations and you justset back and get your job done and release their money only when you are fully satisfied!

  • Freelance bookkeeping
  • Contractor accountants
  • Small business accounting
  • Tax accountant
  • Accounting firms