Keeping Track of Finances for Startups
The turmoil wrought by the COVID-19 pandemic in 2020 upended almost every facet of American life, yet the entrepreneurial spirit came out stronger than ever. New businesses applying for an EIN reached an all-time high in 2020, and that upward trajectory shows no sign of slowing down.
If you recently became a CEO or founder, congratulations! American exceptionalism is built on a foundation of brave individuals who, like yourself, took a risk to forge their own path. However, you’ve probably started noticing the late nights, early mornings, and never-ending client demands that come with being your own boss. As a result, certain operational aspects of the business may be pushed further to the periphery as you focus on growing the top line.
Do not let your finance and accounting functions fall to the wayside. If you lose track of your business’s financial health, it could hinder future growth opportunities, or worse, destroy what you have worked so hard to build. Below we have outlined some key financial considerations to help you keep up with your business finances over time.
Shift your Mindset
As a new entrepreneur, it is easy to get enamored with revenue growth at the expense of the operational side of your business. Yes, it can be difficult to want to crunch numbers in a spreadsheet when you could be meeting clients and growing market share. Instead of viewing the finance function as separate from revenue generation, start looking at it as a roadmap for future revenue growth.
This means accurately tracking your business’s finances and key performance indicators (KPI’s). Why? It will keep you better informed, so you know when to make crucial operational decisions: the perfect time to hire a new employee, to expand production, to seek bank financing. If you are armed with timely and accurate financial data, it will be easier to scale your business and grow your top line.
Study your Bank Account
Having a business checking account dedicated to your business makes the accounting and tax work easier and provides clean, easy-to-digest financial data to pull when needed. Yet, simply knowing the amount of cash revenue received each month and the accounts ending balance is not sufficient to making informed business decisions.
To properly scale your business thoroughly, start by asking yourself some questions. How often is revenue received in cash? Is revenue being received at the beginning of the month or is it spread out? Are your expenses recurring or are they one-offs? Answering these questions can provide an understanding of the cash flows from your operations without needing an Accounting 101 textbook.
Understanding the cash flows of your company is also key to making strategic decisions for your business. For example, what if the amount of cash revenue coming in is more than expenses to the point that cash is piling up in your account? You’ll end up earning little to no return and losing value to inflation. This means it may be time to reinvest in the business by making capital expenditures or adding overhead. On the other hand, if revenue is not enough to cover expenses, then it may be time to look at cutting costs to increase margins. If revenue is being received unevenly and expenses are consistent, you will probably want to keep a sufficient cash reserve to cover expenses that will hit before cash is received. All these considerations can be neatly organized in the next tip.
Create a Budget
The most powerful financial tool for a new entrepreneur is a well thought out budget. Fortune 500 companies have entire departments dedicated to financial planning and analysis (FP&A) (a fancy term for budgeting). Analysts at these companies spend hours preparing budgets that project financial performance 5 years or more. Now, a startup will not need to devote this amount of time to budgeting, and a 5-year outlook is probably not useful when your business is at the bottom of the J-curve. But, if you want to make it big (yes, Fortune 500 big), you need to devote time to budgeting.
Start by tabulating how much you are bringing in monthly and then build on that by factoring in some form of future growth. For example: the United States economy tends to grow at 3% per year, so mature companies often grow their revenues at or around that yearly growth rate. Startups may grow quicker than mature businesses because they are growing off a lower base, but you’ll still want to brainstorm a realistic growth rate for your company and factor in strategic milestones along the way. Whether it is adding a new employee or implementing a new social media marketing strategy, only you can decide what growth rate makes the most sense for your business.
Once the revenues are set, build out your operating expenses in the same way by incorporating any increases into your budget so that the revenues are in tandem with the expenses. A solid budget will help you make better more timely business decisions and value your company down the road.
Implement an ERP Solution
Having timely and accurate financial data will help you reach new heights of revenue growth and market share in no time at all. However, as you add employees and expand your product offerings, you may find your basic spreadsheet becomes too convoluted. At this stage, it may be time to consider implementing a cloud-based ERP and Financial system like NetSuite. After all, as your business scales it is only fitting that the method of analyzing and reporting financial and operational data scales with it. Once a cloud-based ERP is the logical next step for your business, Critical Connexion can help you automate and keep track of your financial needs.