Financial Management for Startups

How to manage your startup’s financial health

Here are seven tips to successfully manage your startup’s financial health.

1. Open a business bank account.

A business bank account is one of the most important pieces of getting your startup’s finances in order. Whether you open a checking account, cash management account or savings account, opening a business bank account is a wise financial management decision for these reasons:

• It prepares you for tax season: Keeping your business and personal expenses separate with the help of a business bank account will make it easier to file your taxes. If you skip this step, come tax season, you might have a hard time untangling your business and personal expenses from each other. This can result in you losing out on deductions and cause a logistical nightmare.
• It offers legal protection: A business bank account can offer limited personal liability protection depending on your business’s legal structure. For example, a business bank account may help prove your business is a separate entity, which can protect your assets. [Related article: Business Liabilities Every Owner Should Know]
• It makes you appear more professional: A business bank account allows clients and customers to pay your company rather than making payments to you personally. This lends your venture an air of professionalism and could lead to repeat business.

2. Recognize your financial literacy.

Gathering the proper tools and resources to understand and manage your business’s finances takes time, but it’ll save you a lot of stress and money. Don’t be afraid to admit when you don’t understand something.

“A very low percentage of new business owners actually go over every number in their finances every month,” said Barry Moltz, a financial consultant, author and public speaker on small business management. “Even fewer actually understand all the numbers on the page.”

It’s critical not just to write your business plan but also to understand what the financial terms within it mean. After all, how can you assess whether your business is operating according to your plan if your financial literacy is lacking? Brush up on financial concepts you don’t understand and make sure you comprehend key reports like profit and loss statements.

3. Manage your cash flow.

Cash flow is the money that moves in and out of your business. When you make more money than you spend, you have a positive cash flow. With so many small businesses struggling with cash flow globally, you need to pay close attention to yours. 

These are a few ways to avoid negative cash flow:

• Send invoices as soon as possible.
• Closely monitor your debt and savings.
• Borrow money before you need it.
• Evaluate your business operations to see where you can cut expenses.
• Adjust your inventory for cost efficiency.

4. Determine your startup’s financial and market logistics.

Once you have a working knowledge of business finances, you have to ask the tough questions specific to your enterprise:

• How much money do I need to start this business?
• How long until my product or service becomes profitable?

There is no perfect answer to these questions. It depends on your niche, which should be as narrow as possible in the beginning.

“Entrepreneurs often try to target as broad of a population as possible,” Moltz said. “That will just lead to more competition.” [Analyze your competitors with Porter’s Five Forces.] 

Finding your niche and understanding your audience will help you answer these more concrete questions. Service-based businesses, for example, take much less money to start than product-based businesses. No matter your market, the key is to not overspend.

“New business owners spend way too much money in the startup phase,” Moltz said. 

It seems logical — the more money you spend getting customers, the more customers you will get. Unfortunately, that is not usually the case. That’s where profitability comes in.

5. Conduct financial forecasts to gauge profitability.

Similar to how much money you’ll need to start your business, your future profitability depends on many different factors.

“A business can take its time becoming profitable for however long you have the cash flow to support it,” Moltz said. However, he added, most small businesses need to achieve profitability in the first year to be sustainable.

Make sure to take advantage of financial forecasting, a financial management tool that estimates profitability based on your past and present financial conditions. By doing so, you should know ahead of time when you’re expected to become cash-positive.

“Overforecast revenue and underforecast expenses,” Moltz said. 

In your forecast, cut your revenue in half and double your expenses for the first six months or year to avoid overspending. In this vein, Moltz’s go-to piece of advice for his clients is that “revenue is vanity and cash flow is sanity.” It doesn’t matter how successful you appear from a sales standpoint if you aren’t generating a profit.

6. Research your funding needs carefully.

While some business owners bootstrap their ventures, others turn to outside funding to grow their companies. There’s a lot to consider if you go this route, including how much money you need, repayment terms, your credit score and when you need the funds. Not every kind of funding will work for every enterprise, so determine exactly what your business needs to make an informed decision.

These are some of the financing options available to small business owners:

• Traditional loans from banks
• Grants
• Business lines of credit
• Invoice factoring
• Merchant cash advances
• Peer-to-peer lending

7. Utilize experts.

At the end of the day, your most reliable tool for financial planning is old school: the expertise of another person. Consultants, financial advisors, small business accountants, certified public accountants and bookkeepers are all potential resources.

“A lot of business owners don’t manage their finances because they don’t understand it,” Moltz said. Instead, they employ professionals to do it.

An expert’s help putting together financial statements, tracking business expenses and forecasting profits can save you time and money in the long run. Since your time and money are precious, you want to ensure they are spent effectively. Professional finance experts can steer you in the right direction.

Best accounting software for financial management

Need a hand with financial management? Check out a few of our choices for the best accounting software to assist with all of your financial management tasks. These software programs are designed to make managing your business’s financial health faster and easier.

FreshBooks

The flexibility of FreshBooks is undoubtedly one of its top selling points. With global accounting tools, customizable invoicing features and the ability to integrate with more than 100 third-party applications, the possibilities with FreshBooks are nearly endless. You can even run payroll through the platform, minimizing the time you spend juggling different financial management programs. For more information, look no further than our FreshBooks accounting software review.

Xero

If your small business is looking to streamline invoicing, bill paying and W-9 management, then Xero might be the right accounting software for your needs. Xero’s comprehensive program helps small business owners keep track of their finances with features like one-click payments, efficient bank reconciliations and expense tracking. With Xero’s project management tools, you can stay on task and follow different financial threads with ease. Check out our Xero accounting software review for more details about the platform’s features and pricing plans.

Plooto

Strong automation features and a robust vendor network make Plooto another leader in the financial management space. With Plooto, you can automate countless aspects of financial management, from invoice management to internal workflow structuring. Plooto also boasts features that distinguish it from its competitors, including a network of over 150,000 payees and the option to pay checks online. Take a look at our Plooto accounting software review to learn more.

Oracle NetSuite

There’s a reason Oracle NetSuite is one of the most tried and true enterprise resource planning systems. It’s equipped with the features needed to make resource management and accounting a breeze for your small business. Among its valuable perks are domestic and international accounting tools, financial planning software and user-friendly billing management programs. Read through our Oracle NetSuite accounting software review for more insight.

QuickBooks Online

With affordable prices and seamless integration features, QuickBooks Online is a popular accounting software choice among small businesses. Users benefit from over 20 types of built-in reports, easy expense and profitability tracking and workflow automation features. Plus, QuickBooks is one of the only accounting programs that also offers business bank accounts. It’s a one-stop shop for effective financial management. Check out our Intuit QuickBooks Online accounting software review for more information.

Financial management: the key to a profitable startup

Maybe you’re looking to start your small business off on the right financial foot or perhaps you’re hoping to continue its sustained success. In either case, strong financial management can help your startup achieve its long-term goals. Use the financial management strategies outlined above as a guide while tailoring them to the specific needs of your business. If you find yourself needing extra support, don’t be afraid to lean on experts and trusted software to help get the job done.

Jane Godiner and Yara Simón contributed to this article. Source interview was conducted for a previous version of this article.