If you are planning to start a new business, it is obvious that you are planning to build the ‘Next Big Thing’ and make a good profit from the venture. This is a common goal for all entrepreneurs. However, the road is never smooth. While launching a startup in today’s competitive marketplace is such a thrilling idea, you will need to overcome a series of complex problems to succeed.
Why do Most Startups Fail?
According to a recent report published on the Forbes website, 90% of startups fail with only a handful making it to the 5th year. But what is the reason behind the failure? There are many reasons as to why most of the startup ideas die too soon. These range from investing in the wrong idea to simple factors like failure to use the right tools and technologies. For instance, if you are starting an online marketing agency, a critical tool like the SEO rank tracker could mean the difference between failure and success for your idea. The list can be endless, but there are some common reasons behind startup failure irrespective of the sector or industry.
Image source: CBInsights, Startup Genome Project, 2015
Surprisingly, most startups never fail because they are new, or the idea is not great enough. Most of them fail due to problems revolving around financial management. A recent analysis by Small Business Trends reveals that 82% of startups fail to succeed as a result of cash flow problems. Some of these money related problems include: running out of cash, lack of proper funding, price/cost issues and poor budgeting among others. Fortunately, with the right approach, your new establishment can become part of the successful 10%. In this post, you will learn some important financial tips help you grow your startup from just an idea to a million dollar venture.
Top 5 Financial Tips for Startups
Depending on the type and size of the business, it can cost you up to thousands of pounds to launch a startup. Moreover, you need to have a proper financial plan on how to fund your startup before you start to power it off the ground. Below, we have discussed some helpful financial management ideas to help you overcome the teething problems of a new business.
Tip 1: Start with Proper Planning
Most startups experience financial challenges short after launch because they lack a clear business plan. Simply put, a business plan is a detailed description of your idea, and how you intend to actualize it. It should include various details about the new business such as:
- The concept– description of the business, products/ services, target market, business model and so on.
- Market analysis– research on the particular market niche to show the gap that your solution would fill.
- Financial Elements– description of all financial points such as revenue, cash flow, profit and ROI (Return on Investment).
- Funding Requirements– how much money do you need to start and/or grow your business? How do you intend to spend the capital? You may create a realistic budget estimate at this stage. Besides, you need to include expected profit margins and ROI timelines.
- Financial Projections– an analysis of your revenue growth and the market trends to forecast future cash flow. Here you need to factor in any potential risk and a contingency plan.
Benefits of a Good Business Plan
Having a look at neilpatel.com startup statistics, you will understand why a great business plan matters. According to the survey, 36% of startups with a business plan received investment capital, 36% obtained a bank loan, while 64% successfully transformed their idea into a profitable establishment. While the figures for startups without a plan stood at 18% loan approval, 18% capital funding and only 40% succeeded in the business.
The major purpose of your business plans is to entice lenders or investors to fund your project. It gives you the opportunity to tell your dream and convince the lenders or investors that they will enjoy returns within a specified time period.
For instance, you may tell lending institutions/investors that you need between £1, 000 and £1, 500 to start a fashion store in a particular location, and you expect a 10-15% profit under different situations. You expect to collect £10, 000 within the first 1 year.
Another advantage is that a business plan will guide your operations and help you to evaluate business performance against your target. Additionally, it helps you to consider all costs and expected sales, making it easy to develop a working budget. It also acts as a motivation to grow your business.
Tip 2: Understanding and Choosing the Right Financing Options
Once you have a clear plan, you will need money to execute it. The amount of startup capital you need to invest depends on various factors including your industry, location, size of the business and future growth plans among others. You can rely on your financial reports such as balance sheet, cash flow statement and revenue projection report to estimate how much money you need to fund your startup. How you acquire the fund will play a key role in determining your startup success and growth. Therefore, it is important to select your financing options wisely.
Fortunately, there are a variety of funding options to choose from depending on your situation. No matter your choice, Codie Vincent, founder of Finance District advises, “Always raise more money than you initially consider sufficient. Running a business comes with hidden costs that you cannot account for or see coming.”With these in mind, let’s look at the various funding options.
Various Financing Options for Startups
Personal Savings and Credit
This type of financing is also known as self-funding. If you have saved enough money or have adequate credit, you may invest the funds in your startup. The benefit of self-financing is that there are no interest charges, and your business will remain 100% yours. This is an ideal option when you need to fund a small business idea.
A good example is an online graphic design startup which only needs the cost of developing and running a website. However, in most circumstances, the startup cost is always higher than the available resources so you may need to look for more funds.
A business loan is one of the popular sources of capital for startups. Different types of loans vary in terms of the lender, security and interest among other things. If you need a business loan you may consider the following options:
- Loans from Friends and Relatives
You can borrow money from your family members or friends and refund later based on your personal agreement. This may be a soft loan, which requires no collateral and may incur low to zero interest rates.
- Startup Business Loans
This is a special type of unsecured loans for funding your new business. In some counties such as the UK, the government offers up to £25,000 unsecured at 6% p.a. Interest rate to boost new ventures
- Bank Loans
Various banking institutions offer a variety of business loan products to help entrepreneurs launch and grow their startup. You need to provide your business plan and in some cases collateral to obtain such loans. However, the interest loans for bank business loans may be higher than other options.
- Peer to Peer Borrowing
You can also register with a P2P lending platform and borrow money from other platform users (investors) quickly and easily.
The main advantage of obtaining a loan to start a business is the fact that you will maintain 100% equity. However, you will have to pay back the loans together with applicable interest.
When choosing a loan, it is important to consider the interest rate and the payback period, so as to select a reasonable option for your entity.
- Private Equity and Venture Capital
In this case, investors provide money to entrepreneurs in exchange for a share of startup company equity. There are various forms of venture capital including:
- Seed Financing– investing in a mere concept. This option is popular in funding in blockchain tech startups in the name of initial coin offering (ICO).
- Early Stage Financing– funding the growth of a business in its early stages, but already with marketable products, mostly not more than 2 years old.
- Series A Financing– this involves funding a startup with a proven business model and a great revenue generation potential.
Other Financing Options
❖ Invoice Funding/ Financing– involves borrowing against a client invoice (invoice financing) or selling unpaid invoices to other companies (invoice factoring)
❖ Angel Investors– Getting fund from experienced and high net-worth investors who also mentor you to grow your startup business. Angel investors will get a portion of equity depending on your agreement.
❖ Enterprise Finance Guarantee (EFG)– financing scheme for startups with no sufficient security to obtain a bank loan.
- Incubators– you may think of this as a kind of babysitting. The incubator company takes care of the startup during its early development stages up to such a point when it gains financial stability.
Tip 3: Track and Monitor Cash Flow
You need to monitor the amount of money getting in and out of your business and ensure that you have enough to keep the business going.
You need more than just enough for employees’ wages if any, purchase the necessary tools and settle utility bills. The overhead of the business is the key determinant of success. It is therefore important to practice proper cash flow management for your startup. The best practice involves:
- Keeping standard and consistent financial records– know the source of every coin and how it is spent.
- Hire a professional accountant– a qualified accountant will help you to keep accurate records. If your business is not that large, you may rely on a certified accounting consultant.
- Separate personal and business finances– A major reason why most startups run out of cash is mixing personal expenses with business operational cost.
- Strike a balance between debts and revenue –a good business should at least be able to finance your debts. Therefore, you need to select a loan product that gives you time to generate enough income before it matures. Debts can also be a blessing in disguise in that it helps reduce your tax.
- Proper budgeting– Ensure that you create a detailed budget and stick to it, this enables you to manage your cash flow more efficiently.
- Use financial application software to help you track your spending more accurately.
Tip 4: Exploit any Cost-Saving Opportunity
Take a close look at your budget and identify opportunities to minimize your expenses. A good example is by choosing a smaller and cheaper office in the suburbs, instead of large office space in the city centre. If your business allows, you can even save more by getting a shared office. Some of the best ways to cut down expenses include:
- Minimizing your initial startup fixed costs– rent, utilities, salaries, loan interests and insurance among others.
- Ensure that your business is legally compliant– You can do so by hiring professionals to ensure that every operation is carried out in the right manner. For instance, hiring a financial expert will help you to ensure tax compliance to avoid fines from tax authorities. Moreover, compliance reduces penalties or litigations which could be very expensive for any business.
- Smart hiring– hiring personnel who can multi-task can be a great way to reduce your wage bill. Always work with the smallest team possible, but do not leave any skills gap unfilled.
- Risk assessment– analyze any potential risk and plan on how to counter the impact to reduce loss. Further, expect the best for your startup but come up with ways to recover from the worst situation.
Tip 5: Adapt to Market and Technology Trends
Making use of available technologies can help you save more and increase your profitability. For instance, you can use business automation tools to eliminate the need for certain employees and maintain the accuracy of operations.
However, technology is evolving at a high paced rate and before you know it what seems very useful today may be obsolete tomorrow. To keep up with the speed you need to:
- Keep an eye on emerging technologies and adapt them in your business.
- Look for free or affordable online tools for various tasks such as promotion, communication and collaboration among others.
- Develop a strong digital marketing strategy – this involves SEO, Social Media, blog and other forms of marketing as well as evaluating your marketing efforts to get the most ROI.
- Have a research and development team to help you keep an eye on the trends in your market and improve your products/ services to address new demands.
To sum it up, most startups fail due to lack of proper financial management. When launching your startup, the best approach is to have a clear business plan, identify and choose the ideal financing options and practice professional finance management. If you are not so good at bookkeeping, it may be perfect to hire the services of a qualified financial expert. Additionally, you need to avoid any unnecessary costs, but do not harm your revenue generation in the name of saving costs. Whatever, your business the above tips will help you avoid financial pitfalls that could lead to the downfall of your new venture.
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Duncan Kingori From https://dofollow.com/ has been in the writing profession for a decade now. He has great experience writing informative articles and his work has been appreciated and published in many popular publications. His education background in communication and public relations has given him a concrete base from which to approach different topics in various niches.