Written by Adan Ashkir, Financial Advisor for startups and Senior Tax Manager at Ten Raede Groep
Being financially savvy is one of the most important aspects of running a startup. And usually, this seems to be far down the priority list.
There are usually two routes that startups take. They either onboard someone within the team who is able to handle the financial aspect of the business, or they hire an expert who is able to give them financial advice.
Having financial knowledge will ensure that the startup is able to run the financial aspect smoothly. It will also allow for startups to be able to communicate with investors. When startups don’t know the correct financial terms, it can lead to investors not being interested. This is usually because if the startup is unable to communicate in the right language, it gives the impression that they aren’t knowledgeable about the financial sector — and that is important to investors..
When a startup negotiates with investors, they should be well versed in the financial aspects of the business. Therefore it is important to undergo training to ensure the best possible outcome. I would suggest to start with these tips:
4 financial elements every startup needs
I believe there are four elements that are of key importance to any startup. Ensuring that these financial elements are in place, and always up to date, will allow the startup to succeed. It also opens up the possibility of an advantage over other startups in the sector. These elements are financial goals, price points, running costs and budget plans.
Financial goals
Every startup needs a goal to work towards.
It is important to have these financial goals set out so that every team member is aware of what they are working towards. When the financial goals are established, it helps investors see what they can expect from the startup. These goals also create transparency when searching for investment, as it allows the startup to show exactly how much they need.
If there are financial goals in the business plan, then the investor can check this each year. The investor will then trust the startup easier because the investor can clearly see the goals set out.
Price points
Price points are one of the most difficult aspects of having a startup. Usually startups are confused as to how much their product or services should cost, and some end up just putting a price to it that they think is fair.
There are three questions to ask when considering the price point of products and services.
- What are the overhead costs for the product or service?
- Is the price point market related based on market research done?
- Is the price for the product or service fair?
Answering those questions will allow startups to ensure that they find a fair, market related price for their product or service. The answers to these questions are also important to investors. If they deem the price fair, they will easily invest. This is because the market is right for the product, meaning that the startup has a higher chance of succeeding.
Running costs
Having clear running costs are important, for the startup and the investor. This can help the startup with future plans.
The truth about running costs is that they are sometimes unpredictable, and investors know this. There are many things that startups overlook when they predict what the running costs of the startup will be.
Here are three ways to ensure that the running costs are as close to reality as possible:
- Do market research and find out what the running costs of other startups in the same industry are.
- Approach other startups within the community and sector and ask them for an example of their running costs.
- Get a professional who deals with startups in the industry to offer some advice if the running cost forecast is realistic or not.
Having realistic running costs can better ensure the possibility of investment. It also creates a more realistic plan for the startup to work with, ensuring that they do not overspend.
Budget plan
Above everything, a budget plan is the most important. A budget plan helps the startup to know how much they will need to run the business, and it also includes how much they expect to gain from sales.
A budget plan is a plan for a budget of the future. It is best to have a yearly plan in place that gets reviewed each year, but I would suggest always planning three to five years in advance.
This will allow the startup to adjust the budget if something in the business model goes wrong, or if more unforeseen costs are added. This alleviates the possibility of poor cash management as the budget clearly stipulates how much can be spent on what.
Many startups have the mindset that they have time to make money and they will take it easy. That is not a good idea. It is best to work hard in the beginning and start bringing in money. And, each year that more money is received and expected, the budget should be amended.
Constant reviews
When all of these plans are set up it is important that the startups review them each year.
It is important because it gives a more realistic outlook for the future of the startup. When the first year passes, there will always be changes in the forecasted financial plans. It is after the first year mark when things like running costs, pricing, profits, and all costs will be visible.
It creates a more realistic outlook for the startup and they can easily amend their plans to ensure that it shows a more realistic forecast.
Find a community
Finding a community for the startup to belong to, can lead to success. A community can help a startup in many ways like to grow. They also offer advice like the steps needed to be compliant and how to ensure the startup is within regulations.
The community is usually composed of other startups who are in the same sector. This allows for better collaboration and offers the chance to get more connections. These aspects are important for startups as they allow them to grow.
Running a startup can be daunting, especially when the financial aspect is unclear or a new concept. If the startup still feels unsure, it is always best to hire or make use of professionals to guide the startup through the process. In the end, this will only be beneficial to the success of the startup.
