Financial management in startups determines whether the company will be able to use its resources to grow sustainably. After all, everyone wants to scale, but it is necessary to have a solid foundation and ensure economic viability during all phases of the business.
That's where the
managers' nightmare comes in: reports, spreadsheets, extracts, and bureaucratic
procedures that are inevitable to maintain financial health and follow the
company's evolution.
What makes financial
management in startups unique
Doing financial
management in startups is very different from taking care of the finances of a
traditional company. To begin with, just think about the pace of most businesses:
the company develops step by step, following a business plan and increasing its
costs in the same proportion as its gains.
In startups, growth is
accelerated, the business model is scalable, and the company's financial
situation can change from one moment to the next — imagine the impact of
receiving a millionaire contribution and continuing with the same structure,
for example. In addition, the disruptive business environment is marked by
uncertainty, making financial projections for startups much more challenging.
Add to that the fact
that most startup managers do not have time to dedicate themselves to
accounting and financial bureaucracy or are more concerned with developing
their solution than taking care of spreadsheets, slips, and taxes. But you have
to be careful because business numbers and accounts are the basis of growth —
and this also goes for startups.
Why is financial
management in startups essential?
Financial management
in startups guarantees that the company will have the cash to maintain
attractive indicators for investors and maintain sustainable growth, even at
high speed. However, without proper control of finances, the scenario can be
the opposite: negative results, indebtedness, and lack of perspective.
According to a study
by consultancy PwC Brasil, published in late 2019 in Folha de S. Paulo, nine
out of ten startups end up in bankruptcy in Brazil. Furthermore, the report
points out that lack of money is the second main reason for business failure,
after the lack of compatibility between the solution offered and the real
problem of the target audience.
In this case, the
financial problems include difficulty attracting investments and the lack of
planning to use the resources in the right way.
In other words:
financial management in startups is one of the most critical areas — and any
mistake can cost the company's survival.
5 challenges of
financial management in startups
Even without the
slightest familiarity with financial management in startups, you need to ensure
that your business has a solid foundation to grow sustainably.
Check out the main
challenges of finance in innovative companies.
- Monitor cash flow
The challenge of
financial management in startups starts with modest initial cash compared to
the ambitions of the business. In the beginning, resources are always limited,
and cash flow must be closely monitored to ensure that revenues cover costs and
expenses.
Each entry and exit
must be under control, not only in the daily record but also in the projections
for the following months.
- Have sufficient working capital
To avoid the negative
balance, it is also essential to have enough working capital to sustain the
financial cycle of the business – that is, a reserve of cash resources that
guarantees the operation of your startup. The longer the payment terms, the
greater the capital available to maintain the company.
- Have a good chart of accounts
Controlling accounts
payable and receivable is another essential financial management point in
startups. By aligning payment and receipt deadlines, you guarantee that all
obligations will be met and avoid indebtedness or the need to take
credit.
But, as we know, it is
easy to get lost with maturities, and the lack of control can even generate
losses with customer default.
- Accounting for costs and setting prices
Cost accounting is
also often a bottleneck in the financial management of startups, as the rapidly
changing environment makes it difficult to accurately assess fixed and variable
expenses. In addition, it is necessary to have the company's costs very clear
to correctly price the product or service offered, even if the intention is not
to make an immediate profit.
Remember: ignoring
business costs and pricing based solely on market and consumer expectations is
a fatal mistake, as the company needs to sustain itself to advance exponential
growth.
- Monitor financial indicators and reports
Finally, analyzing the
evolution of the business through reports and performance indicators is one of
the most important points in financial management in startups — and also what
interests investors. Therefore, special attention must be paid to statements
such as the DRE (Income Statement for the Year) and balance sheet and
monitoring strategic financial KPIs such as profitability, profitability, and
the Ebitda margin of the business.
In the language of the
financial market, these are the indicators that will determine the
attractiveness of your startup or scale-up for the investor, working as a
diagnosis of its growth potential.
Leave your financial
management with those who understand startups
If you don't have the
time and willingness to take care of all these procedures, the solution is to
leave your financial management in the hands of professionals who understand
startups. After all, it's no use hiring a consultancy that only does the basics
and can't keep up with the pace of your company, speak the same language, or
use the same technologies.
With this in mind,
Begin With the Right Foot created a tailor-made Financial BPO solution for
startups and scale-ups. It works like this: all your financial management is
outsourced, including a chart of accounts, cash flow projection, report
generation, issuance of invoices and slips, bank reconciliation, and much more.
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