5 Key Financial Management Strategies for New Startups
During the early days of new business ventures, cash outflow is abnormally high, while cash inflow is barely there. As such, managing finances can be quite difficult without proactive planning. I have seen many new startups shut down within the first six months of operation simply due to lack of effective financial planning and management. Based on my experience, I am sharing below 5 key financial management strategies that will help new startups stay afloat through the initial rough period.
1. Make three separate funds before starting your new business venture.
i) Fund to cover your personal financial needs for at least a year. Try not to draw any money from your business during the first year. Just reinvest everything back into the business as much as possible. Same way, don’t “borrow” money from this “personal fund” for your business. Keep this fund completely separate.
ii) Fund to cover business expenses for at least six months. Most new entrepreneurs don’t realize that they won’t start making any profits immediately, and they run out of funds to cover the necessary operational costs, like rent, salary & wages etc. Keep this money aside right in the beginning and you can concentrate on steering your business in the direction of your choice instead of on barely staying afloat. Don’t touch this money for anything else.
iii) The remainder of the capital available to you is your actual “startup capital”. Allocate this amount carefully under various business heads. Prioritize your needs. Keep the whole picture in mind. Don’t just get caught up in micro details.
2. Do your own work as far as possible.
Yes, hiring staff and delegating the work does sound a lot cooler, but in the early days, you’d be better off saving on that “Salary & Wages” head so that you have more to spend on “Operations”. So research extensively. Learn as much as you can about your own business. Then do whatever you can yourself, be it business development, sales & marketing, finance & accounts, or customer service.
3. Minimize Direct & Indirect expenses.
If you can work from home, don’t rent an office space. If you can work fine from a small office on the 3rd floor, don’t go for a premium ground-floor office. Don’t spend lakhs on “Furniture & Fixtures” if the same productivity can be achieved by spending only thousands. Keep the electricity costs to a minimum. Keep the phone & internet charges as low as possible. Printed stationery and designer business cards can also wait for an year or two. Bottom line: If it can be avoided, avoid it; if it can be reduced, reduce it.
4. Spend wisely in marketing.
Visibility is essential, but try not to go overboard with your marketing expenses in the early days, because you’ll need the money for other more pressing business expenses. Plus most customers still prefer the “tried-and-tested” over the “new-and-flashy”. When starting a new business, I have realized that it is best to keep the marketing to a moderate limit. That way,
a) you are not swamped immediately by unmanageable demand,
b) you get time to sort out any glitches in the production/supply chain, and
c) you can work on honing your product/service to meet the exact needs of your target customers.
5. Avoid spending money on expensive “business consultants”.
Connect with other entrepreneurs instead. Reach out. Build relationships with your peers. Show them genuine respect for their experience and they will share that experience with you… for FREE! Yes. Business community is a community of go-getters and achievers. Mentoring startups and helping out new entrepreneurs is seen by most as a long-term investment. (Unless you pose a direct threat/competition to them!) Besides, the experience and confidence you gain by setting up your business on your own is totally worth the effort.
Managing cash flow is perhaps most difficult in the first one year of a startup. As they say – “In the first year, you feed the startup; in the second year, the startup feeds itself; in the third year, the startup feeds you.” And surviving through that first year should be relatively easier if you plan around these 5 key financial management strategies that I’ve shared above for new startups.