7 Steps Start-ups Need to Take to be Financially Healthy
Don’t let improper money management be the downfall of your business
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A crucial factor that often becomes the Achilles’ heel of any start-up is improper money management. Even if you have a brilliant product, targeted at a previously untouched market, lack of meticulous financial planning can hurt your prospects.
Here are seven key steps every entrepreneur should follow to avoid running into financial mayhem:
1. Keep a buffer
Having a budget, with proper allocation of funds for each business activity, is the first step to ensuring healthy finances. However, lack of prior data restricts the extent to which start-ups can accurately estimate expenses and earnings. You can begin with fixed and variable costs, but you will still have to rely on a few educated guesses at this stage.
You must remember to leave some room for flexibility to meet any unexpected expense that might come your way.
2. Make sure all spending is tracked
Keeping a close watch on expenditures is crucial in ensuring your start-up sticks to the budget you painstakingly put together. More importantly, this will help avoid any nasty surprises during audit season.
The good news is, there are quite a few accounting applications out there such as Quickbooks and Xero to assist you. But even if you’re just using a spreadsheet, make sure you record all your expenses as they happen.
3. Hire the right people
As a start-up, your budget may not allow you to hire many employees. It is, therefore, important to look for people who are not afraid to take on multiple responsibilities.
In addition, you need to delegate work in a manner that optimizes the potential of every team member. This way you can avoid the high costs associated with acquiring new employees.
4. Pick marketing channels carefully
Forget about expensive TV ad slots for the time being. TV ads need to be aired for quite a while before making any significant impact, and even when they do, the returns can be difficult to calculate.
Invest in alternative methods, such as digital marketing, which will not burn a hole in your pocket. This might mean strengthening your social media presence, creating search engine optimized content, or sending out frequent EDMs to your customer database.
If nothing else, you can always rely on good old word-of-mouth marketing. Provide more cost-effective incentives such as discounts and freebies to encourage customer referrals.
5. Keep an eye on unit economics
Keep a constant watch on unit economics. In other words, always ensure that the cost of acquiring a customer does not exceed the earnings from that particular customer.
Losing sight of unit economics could result in your business running out of money before you know it.
6. Approach funding with caution
Unless you’re bootstrapping your business, you’re likely to turn to external sources for funding at some point in your start-up journey. This means you will eventually have to repay the amount and then some. While seeking funding from investors, factor in the feasibility of settling up while taking your business forward.
Most importantly, look for investors who can offer more than just money. Investment is a partnership and what you need is a partner with the expertise and interest to help your business grow.
7. Make sure the business model works
None of what has been said matters if the business model is flawed. In order to maintain financial stability, it is crucial that your model is commercially viable and provides value to your customers.
The key here is to constantly be aware of all the factors affecting the business and be flexible to change, whenever necessary.
A strong financial plan is the backbone of any business, start-up or established enterprise. However, unlike large companies, start-ups are forced to work with limited resources. While the constraints may sound daunting, a careful, systematic approach along the right path will ensure success.