7 Tips For Startup Owners To Avoid The Initial Financial Crunch
Startups are making waves in the modern entrepreneurial space with their innovative ideas and breakthrough products. However, an increasing number of promising start-ups are shutting down every day, and financial crisis is one of the biggest reasons for their closure.
An entrepreneur must thrive to prosper through effective financial management practices. In addition to targeting the sale of high-quality products and services, an entrepreneur has to take into consideration several factors that will impact the financial position of his new business.
Here are a few tips for budding entrepreneurs to conduct their businesses with the assurance of liquidity and profitability.
1. Angel Investors – a Potent Source of Funding
Scouting for angel investors is an important financial aspect for a startup. However, with an increasing number of investors operating in the market, it is indeed a daunting task to identify a befitting one. It is, therefore, wise to approach an investor who has a thorough understanding of your industry and believes in your offering.
While being regarded as people who are financially strong, angel investors also bring to the table their innate interest in making your entrepreneurial dream come true. These investors support your business through market-specific information they operate with on a regular basis. Another advantage comes in the form of a long list of business connections that can help you grow your venture. You can also benefit from the goodwill that comes when you associate yourself with a renowned angel investor operating within your territory.
2. Crowd Funding and Seed Funding
The modern-day entrepreneur has the option to resort to Crowd Funding as the “go-to” option to raise finances. This entails accumulating small sums of money from a large group of people to procure combined capital. It is an easy-to-implement funding option, where you don’t have to sweat it out to convince a single investor to make a large capital investment in your business.
Seed funding is another option available to startup owners to raise capital. Seed capital is the amount of money that is required by a startup to invest in office equipment, pay rent for the premises, and even hire and recruit staff. Tagged as an early raising-of-funds practice, seed financiers will be able to provide you with the initial investment to get started.
3. Inviting a Business Founder with Similar Business Goals
Invite a business founder who has goals in line with your vision and mission statements to become a part of your board of directors. A like-minded partner or co-founder can become an asset to your startup. Not only does his collaboration bring your startup to the notice of the fraternity, he can also help you in securing financial help from his trusted contacts. He may also help you with certain resources for your startup during its initial stages.
4. Keeping a Watchful Eye on the Cash Flow
It’s always better to be safe than sorry! This maxim holds true for startups, prompting owners to keep a watchful eye on everything concerning cash and its use. It is important for startup owners to be constantly informed of their liquidity position and their bank balance. Regular audits conducted on the books of accounts will throw light on fraudulent cash outflows, thereby regulating the cash balance of your business.
5. Importance of Budgeting and Cost-Control Mechanisms
The credit cycle of outstanding payments, teamed with an annual budget, will be of utmost help to the entrepreneur in managing costs. Budgeting is a practice to have a thorough understanding of the financial expectations of your business. As a financial-planning tool, proper budgeting can prepare you for any exigency that may arise in future. It also helps in cutting down unnecessary overheads.
Analyzing fixed and variable costs by linking them to sales figures is also an important step in controlling costs. This analysis will avert unwanted costs from burning a hole in your startup’s pocket.
6. Separate Your Personal and Business Finances
Most startups find it difficult to manage their working capital effectively. Working capital management is another important function of startup funding to ensure the smooth and uninterrupted flow of day-to-day business activities. A dent occurs in the working capital reserve when partners siphon off funds from the working capital reserve to cover their personal expenses. Hence, it is extremely important to compartmentalize business and personal finances and bank accounts. Investments, assets, expenditures, and cash reserves should be clearly marked under business and personal accounts.
7. Operate with a “Cash Cushion”
To always expect the unexpected brings to the fore your keen sense of preparedness. This damage-control objective will help you stand your ground even in the face of an adversity. It is for this reason that a startup entrepreneur should always operate with backup cash that is exclusively set aside for exigencies.
Ideally, 10% of the annual budget should be allocated for contingencies to avert the situation of a cash crunch. It is also crucial for small marketers who operate without external investments to have liquid cash in a separate account that will take care of their business expenditure for about two years.
In an attempt to overcome the teething problems of shortage of funds that every startup faces, it is the need of the hour for every entrepreneur to work with a sense of direction. Apart from planning for all the resources needed by businesses, these tips can help entrepreneurs take well-informed decisions concerning their initial business funding necessities.