How to Avoid a Startup Financial Crisis

Startup CEOs need to know how to avoid a startup financial crisis.

It is not enough to have an excellent product with sales ramping up and pleased customers. You must also have your finances under control. This is not just managing your “Burn Rate”.

How to avoid a startup financial crisis.

  • Financial records and administrative issues
    • Have a startup experienced Certified Public Accountant (CPA – US terminology) set up your books and train your bookkeeper.
    • A startup CEO needs a series of mentors or advisors. One key one is a financial advisor. Meet with your CPA every 3-6 months to make sure that you are following a good financial path. Most startups will not need a full-time or part-time CFO on board in the first year.
    • These records and “books” will help you to know how much you are spending and on what. You will also know where your inventory is. You need to learn to understand your “books” or someone will notice that you do not and take advantage of you.
  • Know your bank balance
    A startup CEO needs to know exactly what his bank balance is today. So he/she can write checks that do not bounce. John Gale knows two hitech startup founders that were almost bankrupted by theft by their business partners. There is a reason to audit the books.
  • Manage your “Burn Rate” and cash flow
    Be careful where you keep your cash. If you must sell with credit terms, be prompt in clearing these outstanding balances. If you buy with credit, honor these terms to maintain the best deals.
  • Implement Cost Controls
    • When purchasing, shop around for prices. Use an add-on in your browser that shows you the best prices. Be aware of who does periodic discounts on your regular purchases. Understand the specifications and terms.
    • Purchase only what you need. Do not purchase expensive cars, clothes, etc. You can buy those after your financial exit.
    • Cut back on non-performing products, expenses and staff when necessary, not six months later.
  • Always have a budget
    Create a new budget at the beginning of each fiscal year. Update it when necessary. Look at the variance reports every month. What can you cut out?  Review your budget whenever you plan a large purchase.
  • The IRS
    Your financial adviser should be a tax expert in your space. For example, ask your tax expert if it is OK (or a risk) to not pay yourself a salary.
  • Emergency cash cushion
    • Always have a financial cushion. You never know what it will need to do for you next month. Optimists say that 10% of your annual budget should be for contingencies. When feasible having 3-6 months of “Burn” in a separate bank account will help your peace of mind. For small businesses independent of investors, you may prefer to have two years of cash in that separate account.
    • As Tony Robbins said; “holding onto my day job held greater benefits than costs for the year or so that we spent refining our product and business model.”
  • Your relationship with your bank manager
    Bank managers do not like surprises. Keep yours up-to-date on your business. If he develops trust in you; you will have a valued ally when you need one. If you see a potential problem; a good bank manager can help you to avert it.
  • Keep personal and business finances separate
    Do not mingle personal and business bank accounts, cash, expenses, or assets/investments. As one example, this may cause problems if the IRS audits you.
  • Diversify Investments
    Your startup counts as a high risk investment. Your other investments should be much more conservative and in different sectors.
  • Have a contingency plan
    • Larger businesses have a range of contingency plans. What are the risks for which you need contingency plans? Your office space? Your computers? Your health? I.E. a three month illness? You can strengthen your business by delegating tasks. Then if you are ill; others already know how to do many things. Think of this as growing your human capital.
    • As your business grows create a written manual of business processes.
  • Never depend on only a few customers
    If you have only a few customers; fix that problem!!
  • Never depend on only one product
    If a new product displaces you or preferences shift you are in trouble. Diversify!
  • Insurance
    • Ask your CFO or an insurance professional what insurance you need for your situation.
    • Liability insurance, disability insurance, errors-and-omissions insurance, directors-and-officers insurance and key person insurance need consideration.
  • Cost of customer acquisition
    Underestimating the cost of customer acquisition has been a major problem of startups. Some say that the bursting of the Internet bubble was caused by too many startups underestimating the cost of customer acquisition by a factor of 100.

Conclusion

  • Have a financial advisor
  • Learn to understand your “books”
  • Be prepared for the downside version of various scenarios. People fear the unknown. If you think through some downside scenarios and how you will cope; you will be more relaxed and perform better.

References

 

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