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What You Need to Know About Finances Before Starting Up

What You Need to Know About Finances Before Starting Up

As a startup founder, you will go through numerous stages, including launching a business, securing funds, polishing up your business model, collecting customer feedback, recruiting employees, and acquiring customers. But before all of that, you need to ensure your business’ growth, by having a solid financial plan. Having a financial plan gives you the opportunity to boost your cash flow, solidify your personal financial success, and look more professional in front of your investors.

Here are a few critical financial considerations to keep in mind when launching a startup.

Have a Solid First-Year Budget Plan

Estimating your first-year budget is critical for your overall financial performance. Having a budget will help you know how much you can invest in your startup, predict costs, and plan your budget. Your predictions should include the costs of these things.

Company registration:  These costs depend on your industry, and business structure.

Accounting: Accounting expenses depend on who you’re hiring – a freelance accountant, an in-house accountant, an accounting agency, or an accounting tool.

Legal services: Similar to hiring accountants, these costs vary based on the team you hire. While you should rely on a reliable lawyer to give you actionable legal tips, you can still download many legal templates for free.

Hiring and onboarding new employees: You will probably hire new employees three months after the registration. For starters, hire only those people you really need to get your business running and then grow your team gradually.

Office space: You will probably work from home for the first few months. Then, once you start expanding your team, you will need to rent physical offices. In the U.S., the costs usually go somewhere between $8-$23 by the square foot.

Travel expenses: Meetings with potential partners, customer/client visits, fundraising, and industry events will be an additional cost that you will need to budget for in your initial budget plan.

Equipment: Computers, furniture, tools, and other items your employees will need to perform better.

Marketing: Costs of marketing depend on the promotion channels you use and the marketing specialists you can hire. For example, will you focus on strong printed materials or digital marketing? Will you prioritize organic reach through SEO, content marketing, and social media or will you boost your brand’s visibility through paid promotion? You also need to pay attention to who you want to hire. For example, will you hire multiple freelancers to handle different aspects of your marketing strategy, an in-house team, or outsource your entire marketing plan to an experienced agency?

While some of these expenses are fixed and can be easily estimated, others will vary, so make sure you allocate enough resources to them. For some items on your list, such as accounting or bookkeeping, you can always find an alternative option to reduce your expenses, such as inexpensive software.

Plan your Finances in the Long-Run

Once you determine your first-year budget plan, you should start building financial forecasts.

First, you will need to determine your most significant milestones. For example, when you’re planning to hire your first employee, when you will onboard the first customer, marketing goals, and so forth.

Setting the right milestones is important because it directly impacts your choice of metrics. Namely, by linking your objectives with the right metrics, you will be able to track your business’ financial performance and determine whether you’re reaching the milestones you’ve set. Your metrics could be the number of new customers, your full-time employees, or sales.

Third, you will need to estimate your cash burn rate. Just like its name says, your cash burn rate is the speed at which your company is losing money. In other words, it determines how fast you will be spending your venture capital before you start generating positive cash flow.

Finally, estimate your revenue. When just starting out, you can create your forecast based on the number of customers, revenue per customer, and your business growth rate.

Prepare for the Worst Ahead of Time

The idea of the above mentioned financial plan is to set realistic goals and track your revenue consistently. This way, you can stay on top of your business performance and prepare for the worst. Preparation is an important part of your strategy for a simple reason – most startups fail in the first 5 years. To avoid that, you need to prepare ahead of time.

If your company starts running out of cash, what funding methods will you use? Will you take out a bank loan, apply for SBA loans, or look for a partner? Maybe you would want to support your business from your personal savings account. In this case, instead of immediately resorting to complex bank loans, you can look for a personal loan that you would be able to repay faster.

Understand How Splitting the Equity Works

If there are several startup co-founders, you will first need to determine how much equity will go to each of you. This is one of the most significant decisions you will need to make because it determines the relationships among startup founders and dictates who will control business processes and how.

There are many ways to split the equity among co-founders. Even though the 50:50 or 33:33:33 split is often a logical and fair solution, it doesn’t work all the time. There are many alternative ways to split the equity of a business. For instance, you could also consider who came up with the startup idea or who owns the IP. You could also take the roles and responsibilities of each co-founder into account, how much they would gain in the open market, as well as the stage at which they joined the company.

As your team expands over time, you will also need to consider giving shares to non-co-founders. For your employees, this is an indicator that you trust them. When the receive company shares, they will be more likely to work harder and stay loyal to you. In the occurrence that you do give company shares to employees, C-suite and senior hires with salaries over $100k could get the highest company shares, followed by business advisors, engineers, and other staff members.

Make Different Exit Scenarios

An exit strategy is a business owner’s plan to sell their ownership in a company to another company or investors. Now, there are many exit strategies, from acquisition and management buyouts to initial public offerings. Each of these strategies depends on your business’ liquidity in different ways. For example, exiting your business through a strategic acquisition can provide the highest liquidity in the shortest time.

However, to do it right, you need to build a solid business exit plan, as it will impact your overall goals and business path. Here are a few things to keep in mind.

  • What goals and milestones do you need to hit before exiting?
  • When will you reach the goals you’ve set?
  • What exit model is right for you?
  • What industry valuation approach works for businesses in your industry the best?

Over to You

These are just some of the numerous financial factors you should consider before launching a startup. With these financial aspects covered, you will be able to build a stronger business, from hiring top talent to effective product development.

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