Financial Management Challenges Of A Startup

• Financial
• Oct 15, 2020

In today’s advanced world, launching a startup might seem easy and simple, but having an awesome business idea is not enough for you to survive and succeed. The closest you get to success is through execution and not a mere idea. These challenges come from different departments and business units. However, when these encounters are financial in nature, that is when things get ugly. Regardless of the fact from where its coming be it bookkeeping process to account reconciliation or a simple summarizing of KPIs, this could affect the reporting, planning and strategic decision-making function of the business entity.

Here are the most common financial challenges that startups need to overcome.

Funding for the New Business:

Starting a business requires prior planning- a proper business plan, with all the market research, business strategies, financial forecast & planning, needs to be in place before you take a plunge. To turn any business idea into reality you need a steady flow of funds, particularly in the early stages. Funding is vital for improving technology, launching of marketing strategy and also hiring the right talent to grow your business. For startups various options of funding are available- your savings, investment from family and friends, bank loans, angel investors, venture capital and crowdfunding.

Every loan taken & every partnership made can make or break your business, each option comes with a different set of advantages and disadvantages. Any decision you make has to be based on your precise situation, you can also opt for a mix of options choosing several different types of funding depending on the business’ growth and needs.

Poor Cash Flow Management:

Many businesses fail because of inefficient cash flow management, irrespective of the size of business cashflow should be the top priority. To grow a business and allocate the resources to different aspects of a business adequately, you require liquidity. If the cash flow is positive this means that the business is turning profit, you are on the right track, but if its negative it’s a red flag.

There are several ways to avoid that. First and foremost, you should consider changing your policy. You need to go through your Business plan again and change it where required. You might also need to redo your financials- financial plan, costs, expenses and revenue plan need to be redone. Revenue stream should be re-visualized and revamped.  Payment conditions with the clients should be clearly defined and consequences of late payment should be underlined.

This also necessitates the engagement of good financial advisors and use of best financial planning software in setting up of any business in the first place. Automation of billing and predictability of cash flow can drastically improve business performance.

Unsatisfactory profit in spite of rising sales:

Understanding expenses of a new business is a task in itself as it comes in different shapes and sizes and it is fairly tough to understand the major money leaks in the business. Rising sales but dipping profit implies overspending or hidden costs which are not being monitored properly.

To control these leaks, you need to establish an appropriate purchasing policy, analyze your expenses, set budget goals, proper vendor selection and review of old contracts should be done. You also need to regularly supervise the policies, ordering, receiving and reporting in the organization.

Poor Accounting practices:

Managing day to day finances may be a bit stressful and time consuming, but if you don’t do it right and set proper procedures in place it may put your business at risk.

Outdated financial statements and report sheets can’t help effectively manage the finances of your business. It’s an enormous time waster, and only provides you financial records rather than assisting in making critical financial decisions. Manual accounting results in risk of delay too.

You need to purchase a financial planning software that automates and streamlines your process, which helps in reducing time and money cost and is customized as per your business needs. This software should enable you to take decisions with timely meaningful financial intelligence.

Poor or in most cases No Internal Control Policies:

Many a times its observed that small business and startup lack an adequate and effective system of internal control, these organizations very rarely implement anti-fraud controls. Moreover, when proper control policies are not set, it may also have a hit on the reputation of the company, as these lapses result in sales and market decline, customer dissatisfaction and sometimes compliances issues as well ultimately resulting in financial losses.

Appropriate internal controls can avert fraud from taking place or raise red flags when it does. They also help in detecting unintended errors that may have detrimental consequences down the line or simply lower efficiency and profit margin. Adequate internal controls result in setting correct practices and processes which in turn leads to greater efficiency and productivity giving higher profits. When internal control process supports the financial reporting, the ultimate result is meeting the objectives of the business and success.

Poor Data Collation, Analysis and Reporting Practices:

Data is a key resource now. Not only does it help you in making informed decisions but it also helps in keeping other problems in check. Any business with a website, social media presence, electronic payments have enough data collection about customers, user habits, web traffic, demographics etc. New businesses need to be watchful in this aspect as poor data, wrong entry in books and reporting impacts the financial resources and also has negative consequences on the efficiency, productivity and credibility.

An average small business is generally more agile and able to act more quickly on data-driven insights but the data generated or collected should be proper and correct; it also needs to be analyzed in a logical and proper way to take informed decisions. Small businesses can utilize the data to retain current customers, find new customers, improve customer services, devise marketing strategies, predict sales trends and derive correct financial projections. Proper analysis of data helps the companies to solve problems, understand performance and improve processes.

Entrepreneurship is a long and hard road, but one that is worth taking. Once you have all the right mix settled for your business, with good funding, a positive cash flow and good accounting practices, you need to spend wisely. You need to stick to your plan and avoid going on a spending spree and unnecessary display of pomp. Assess your tech needs and spend wisely in that area keeping future needs in mind. Always keep your investors in the loop to create a bond of trust.

Financial management is the most predominating challenge for startups. So, financial advisory and startup consultancy services are the best help in managing financial crises and maneuver the tight spots as these agencies provide you with financial modeling and financial analysis along with financial forecasting to help you take sound decisions. They give you CFO services along with accounting and bookkeeping. All the data analysis is done for you to take decisions accordingly.