DRIVE STARTUPS We Present Latest Startup News, Tips & Inspiration
It’s easy for new business owners to get overwhelmed. You’ve seized a fantastic idea and you’re bringing it to life, but there’s a lot on your plate. At the same time, if you slouch on record-keeping or don’t spend money judiciously, you’ll crash and burn. And if you focus too much on the finances, your product or service will suffer.
Manufacturing startup Fab provides an infamous example. As Alyson Shontell starkly explained to Business Insider, “Jobs created then lost: 500. Value created then lost: $850 million. Money burned: $250 million.” Shontell also chronicled the end of Clinkle, a payments startup that dramatically failed to build and release an app somewhat like Apple Pay. I’d also bet you’re familiar with statistics that show 50 percent of new businesses fail in the first year and 95 percent fold before the five-year mark.
With so much at stake and so many information streams to track, what should you be on the lookout for? It boils down to wisely managing the money inflow and outflow — while keeping your other eye on building your core business. It’s tough, to be sure. It’s also a necessary skill for anyone working at a startup.
Here are eight tips to help get a handle on it all.
1. Avoid unmanaged cash flow or sloppy books.
Keep records and pay attention to them. You need a bookkeeper and an accountant, but you should personally understand where your resources are going. When needed, you must be able to track every transaction down to the dollar (and ideally, to the cent). Online services such as Quickbooks Online and Bench can help.
Related: 10 Expert Tips on Managing Cash Flow as a New Business
2. Obsess over accounts receivable and accounts payable.
If you’re not familiar with these terms, you should be. According to AccountingCoach.com, “Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer.”
This is a fine balancing act of paying what you owe and collecting what others owe you. Some businesses find themselves in a dangerous cash-flow position after they’ve let their accounts receivable grow without proper management. You’ll feel like business is going great. Sales keep coming in, but a look at your bank account reveals you aren’t being paid by customers. Don’t just make the sale. Make sure you collect on it, too.
3. Know your COGS and your margins.
COGS is an essential business acronym that stands for “costs of goods sold.” Another resource, AccountingTools.com, describes COGS as “the accumulated total of all costs used to create a product or service, which has been sold.” At minimum, it includes material, labor and allocated overhead — all costs of purchase, conversion and other expenses a business incurs to bring the item or service to the point of sale.
To keep margins up, you need to keep your COGS number down. Of course, you can’t sacrifice the level of quality needed to maintain great service and a standout product. If you run a fast-food restaurant, I expect you to know the margins on every menu item. You should know not only what it costs to make each cheeseburger but also the margin on each piece of cheese and slice of tomato.
Don’t assign a random price simply because a competitor has a similar product or business model. Determine your true COGS and establish the right margin to remain competitive and financially viable to your own bottom line.
Related: Understand Profit, Cash Flow and ROI to Ensure Your Business’ Financial Health
4. Diversify your revenue.
Know where your money comes from. You put your company in a precarious situation if you never seek new business. Relying solely on old customers or supporting the majority of operations with one large client/contract is a recipe for disaster. You never know when a client might change direction. Never let your pipeline become stagnant. Diversify, diversify, diversify!
5. Don’t overpay your taxes.
Pay what you owe, not more. Keep all your receipts and make as many claims as possible. You have the right to a correct tax bill, but it’s your responsibility to ensure you get it.
Investigate your claims options and take full, legal advantage of IRS programs. Put some effort toward documenting all your expenses, or you’ll effectively pay them twice. It’s critically important for your accountant to understand your business so he or she can recommend how to utilize every possible deduction.
Related: The Truth About Saving Your Receipts
6. Don’t overpay for anything else, either.
Never spend more money than you need to. Think sensibly when purchasing. Need to get a desk? Don’t spend $500 or more at a furniture specialty store if you can get a perfectly functional desk for $200 plus a bit of assembly time. And do you really need that ridiculously loaded espresso machine?
To put it bluntly, it’s stupid to prioritize impressing your employees or satisfying your luxury tastes over extending your runway. Even highly funded startups such as WeWork worry about these kinds of expenses. Create a frugal (but not cheap) spending culture at your startup, and you’ll have a much healthier bottom line.
7. Watch your time as closely as you do your money.
The adage “time is money” is especially true at a startup. Make sure you’re not being busy without being productive. The opportunity cost can kill you. Pay attention to how time and effort are allocated across your team. It’s dangerous to depend heavily on a single employee who’s in danger of burnout or looking for a way out.
Related: The 80/20 Rule of Time Management: Stop Wasting Your Time
The biggest takeaway here is to be proactive about your finances. Internalize these processes until they’re second nature. You’ll be able to keep a keen eye on your money and your product or service.
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