5 Financial Planning Tips for Startups

Small businesses not only offer employment opportunities to millions across the globe, but also help fuel economies of the countries they operate in. However, according to a study by CB Insights, 29% of startups fail because they run out of cash. Financial planning is very important and plays a crucial role towards company’s sustainability, profitability and growth. Failing to plan your finances well is a pretty good ingredient for failure.

Significance of financial planning

1. Protect the Business

One of the main challenges startups face is insufficient financial resources for a complete rollout of the business. Business owners have a pool of options to choose from to avoid a cash shortage, such as giving up a percentage of the business’ equity in exchange for finances from other investors. Just remember that while this results in getting the financial support that you need, you lose complete control of your business, as well as equity. If you need more finances injected into the company, you are better off with a bank loan. If you don’t qualify for one, and your main objective is to keep the business afloat, you may want to opt for an angel investor and give up equity; just ensure that you negotiate well.

2. Simplify Accounting

For proper accounting, invest in an effective accounting system. Prepare a budget, adhere to it, and avoid overspending. After some time you, it will be easy to establish your expenditure trends and how to minimize expenses. There's basic, easy-to-use software that can crunch the numbers for you. You can upgrade in future to more sophisticated and expensive software as the business grows.

3. Avoid Extravagance

Wastage of finances must be avoided. When starting your business, you don’t need the most expensive equipment, office space, furniture or take costly business trips. Cost-cutting is very important because it leaves you with more money to invest and not spend. Even as you think about business expansion strategies, don’t forget to analyze the returns in investment for every purchase, which must be advised by the profit margins. If not, shelve that idea for the future.

financial planning importance

4. Source for Additional Funds

With the high risks linked to startups, most lenders are skeptical about extending loans to small businesses. Don’t rush into a loan without considering a repayment plan. Banks today have better lending power and their interest rates are reasonable. If a bank loan will help you open up an extra revenue stream with sufficient income to repay the same, then you should bite the bullet and take one. Just avoid the temptation of applying for more than you need because if you fail to repay in time, your credit rating will be affected. There are many funding options available.  Compare more than one and settle for the best. Watch out for hidden costs because some lenders are mischievous; they don’t fully disclose the charges.

5. Lean Staff

How many employees can you afford to pay and maintain? Even though you have mega growth plans, you should slow down on hiring staff because salaries and benefits are recurrent expenses that will eat into your profits. For a startup, you won’t require a big office space to sit all your staff; you can opt to outsource some services to independent contractors working remotely. Only employ key personnel on stable terms and source for others on temporary basis.

Finally, prepare for the worst. Anything can happen to your business in the future, so consider an insurance policy to cover risks to safeguard the business from any eventualities. 

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