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A Simple Finance Model for Startup: 5 Tips

A Simple Finance Model for Startup: 5 Tips

Last Updated:  
March 18, 2024
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When it comes to business management, the financial aspect of it is very crucial. Any ambitious entrepreneur must pay attention to the way business funds are utilized. Precisely, the success and failure of a business lie in the way its finances are managed.

However, when it comes to startups, that’s quite an intricate zone. Apart from dealing with fierce competition, young businesses must struggle to survive financially. From meeting capital requirements, stocking, and operational costs to paying employees, startups deal with a lot.

Research conducted by the U.S. Bank in 2020 indicated that 82% of small businesses fail due to a poor understanding of cash flow or it’s poor management. The study also went on to show that 79% are ousted due to little capital while 77% fail because of poor pricing.

In this article, we’ll look at the five dimensions that startup businesses must look into in order to manage their finances effectively.

A Simple Finance Model for Startup: 5 Tips

There could be a range of techniques that startup businesses and more so small businesses can leverage to maintain an upper hand on their finances, but we shall look at the top five here.  

1. Cash Flow Management

Cash flow refers to the movement of money within the business. Generally, it shows how money comes in and how it goes out. It also shows the sources of money and its endpoints in a business. Cash flow management is a process that an entrepreneur follows to monitor the movements of cash and the possible ways to optimize cash sources.

The process generally requires entrepreneurs to draw out a cash flow statement that indicates cash flows from operations, cash from investments, and financing. A cash flow statement helps the entrepreneur understand the actual position of the business financially.

Besides a cash flow statement, other tools, software, or a customized finance hub can help a startup keep an eye on cash flow. In addition, these solutions are scalable and reliable.  

A few things can be considered when it comes to cash flow management within any startup. For example;

  • Avoid offering products or services on credit. Or, only do so when it is highly essential.
  • Ensure to ascertain how much the business spends in a day and how much money comes in regularly.
  • Avoid overestimating the business’s profits or future growth. That is generally because market trends, customer preferences, and market prices change from time to time.
  • Try to reduce credit period
  • Avoid taking up unnecessary loans and if inevitable, ensure to pay them off timely.

2. Track Spending

Every business spends in order to maintain its operations. From daily, and weekly to monthly expenses, a mere habit of paying bills without tracking them isn’t reliable for any startup. A failure to track spending can hamper the business dimensionally.

Generally, it can affect the business’s micro-environment and affect the business’s relationship with stakeholders such as suppliers. It may also lead to business failure.

In order to understand what is spent on an electrician who fixed the air conditioner, office supplies, the free drinking water you provide to your employees regularly, or a sudden mishap that occurred, bookkeeping is necessary.

Bookkeeping helps an entrepreneur understand the financial transactions made in a month or during any period of time. More so, it helps to understand the financial health of a business.

All in all, tracking business expenses can help an entrepreneur to identify what requires more money and check out the unnecessary expenses that need to be eliminated.

3. Budget

Allocating funds to business operations can become more meaningful when budgeting is also followed. Budgeting is generally the process of creating a plan for cash movements within a business.

That means that no spending on things that are outside the budget or that can be foregone. A budget can vividly gauge a startup’s expenses and help it operate within its limits. It can help understand when to outsource funds and when not to.

Budgeting can also help in forecasting. While budgeting, entrepreneurs learn of the possible requirements in the near future. This can help it to prepare for such events and eliminate the need of borrowing money with a high-interest rate.  

Adopt a reliable budgeting tool to help you streamline your budgeting process and optimize its functions.

4. Enhance Financial Literacy

Financial management is one of the major critical success factors in business today. Managing funds effectively can help a startup survive the initial phases and advance into a powerful enterprise.

However, the mere fact of budgeting and keeping track of business expenses isn’t reliable enough. The modern world presents newer techniques for carrying out business tasks.

Currently, there is a range of financial tools, software, and technologies that can be leveraged to maintain an upper hand on business funds. These include Xero, QuickBooks, Expensify, Gusto, and payroll tools, that can help an entrepreneur in financial management.

Besides that, as an entrepreneur, try to upgrade your financial knowledge. Running a business without any understanding of financial information and practices raises a lot of questions.

As an entrepreneur, choose to take up a course to bestow you with crucial knowledge in the finance arena. Besides that, you can choose to seek the services of a financial advisor or analyst to check the business’s performance financially.

In addition, you can listen to financial podcasts while running errands or in your free time to gain the latest insights into the most effective business financial practices.

All these can help set better financial goals that are realistic and achievable.

5. Eliminate Unnecessary Spending  

As much as you may want to offer the best employee perks, or book a luxury hotel for a potential business investor, it is essential to consider the business’s financial position. Spending excessively in the initial stages of a business can hamper its progress.

Generally, try to mitigate risks and cut fixed expenses if possible. Opening up a bank account can reduce the availability of cash and this can cut unnecessary expenses. Besides that, it will help you handle taxes effectively, and returns or enjoy tax exemptions.

Startup Finance Management in a Nutshell

Startups face several hardships during the initial phases and if not keen, these leave many of them ousted. Poor financial management is one of the major hurdles that startups struggle with. In this article, we’ve tried to cover the most reliable tactics that any startup business can leverage to manage its finances effectively. We hope these tips bring a difference in your financial management practices.

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