For a startup business, managing funds and focusing on financials are imperative. If a startup seeksexternal funding, it is further necessary to record the inflow of its own funds, how they are utilized and how well the business is performing financially.
Financial skills are not limited to creating detailed financial statements but also involve effective
management of finances to plan for the overall business operations and growth.
Forecast of Revenues & Expenses
Most startups have limited money and financial resources, which are their lifelines. Hence, financial estimations are important for business planning, efficient operation and growth. A startup must understand how to have a basic revenue target for a financial year based on its ability to acquire new businesses and aspire for a growth rate year-on-year to sustain its entity. A startup must also be able to project the expenses to run the business month-on-month and reasonably determine the cash flows required to cover those expenses at the required profitability.
Estimation of Capital Expenditure and Working Capital
A startup must be able to understand how much funds are necessary to invest upfront into the business towards physical assets such as building, machinery or technology tools that will allow the company to conduct the business.
Additionally, for day-to-day operations, the company must be able to gauge the expenses around electricity, internet, water, food, staff salary and so on, and ensure that funds are available in the form of working capital to fulfil these requirements.
Startup founders are required to be conversant with basic financial statements such as the following:
- Income Statement – often referred to as the Profit & Loss statement, it indicates the company’s revenues, costs, profits or losses over a defined period. It is an important indicator of a company’s performance.
- Cash Flow Statement – this statement shows how cash moves into and out of a business. At any given time, the cash flow statement is an accurate reflection of how much cash exists at the company’s disposal, whether it is running into losses or the company is yet to recover its receivables from customers.
- Balance Sheet – the balance sheet provides a snapshot of the business, its financial status and major assets and liabilities, and the equity available at a given point.
Financial Management Skills to Acquire
Startup founders will benefit from being well informed about the timelines for receivables, collections and disbursements to be able to manage liquidity effectively and achieve real-time control of cash. Having a comfortable cash position will protect the organization from the risk of cash insufficiency.
Having control over expenses helps startups reserve cash for important growth initiatives and not depend on external funding in the initial stages when the valuation of the firm is not high enough to secure venture funding. The required financial management skills for a startup thereby include methods to reduce expenses and formulating growth plans that are viable and scalable.
A review of revenue goals over monthly/weekly/daily periods and setting achievable milestones help in making consistent progress. This also supports founders to be prepared for unexpected and worst-case scenarios.
A proactive approach to financial management ensures good control of funds, smart investment
decisions and the ability to utilize capabilities to operate successfully. Be it a startup or an established business, financial skills are vital as they influence every aspect from basic company operations to developing strategies for future.
Hiring a professional to manage finances and investing for a startup or investing in automated
accounting techniques or software are regarded to be extremely beneficial for a company to make informed financial decisions.