When beginning a startup, the excitement is palpable and the journey is just beginning. In the current environment, being part of a startup is of higher regard. The lifestyle is being idolized and people are choosing to begin their own journey.
However, what many fail to realize is there are moving parts to a startup, and one of those is the financial aspect of it. The dream and the overall goals are crucial, but keeping finances in check is critical to the success of your startup. Here are a few key concepts to consider.
Know What You’re Selling
First you need to know what you are selling. The reason is your costs will vary greatly and you need to have this solidified to build an effective budget.
For example, if you are offering a service, you may not have to worry about inventory and raw material costs. Where as if you are beginning a product startup, you will need to budget parts and labor to build the end result.
This is where you need to find out roughly the margin involved. Leaving meat on the boat is what will allow you business to thrive.
Cash Is King
When beginning your startup, many have this idea of people lending to you and from there beginning your company. You have to remember that cash is king, and becoming highly leveraged will likely makes things difficult in the beginning.
First you should begin saving a stockpile of cash to use for marketing, payroll, and other expenses to running a startup.
You can raise capital by getting a second job, flipping items on the Internet, selling items from your home, or simply cutting back in day-to-day expenses. This will save you stress down the road and allow you to be nimble in your financial decisions.
Details. Details. Details.
Be sure to consider all the details when your startup begins. Ensure you have the proper licenses, insurance, and permits in place, because it can cost you more in fines.
Hiring a lawyer may not be the cheapest route to take, but this can help prevent any unnecessary expenditures later on down the road. Ensuring you have preventative maintenance in place will save you money later down the road.
Revenue is critical and needs to be addressed as early as possible. Typically a new company may not turn a profit for a short while during the starting process. However, this number will need to enter positive territory sooner rather than later.
First you will likely need to identify a burn rate, which is how long your company can run with the cash on hand. A burn rate will give you a sense of time on how long your business is sustainable with minimal to no revenue.
For example, if you have a company and it takes $10 a month to run and you have $100 in the bank, your current burn rate is 10 months. This will fluctuate greatly with incoming revenue.
From there, you will want to identify the end goal. It may be to pass it down the family tree or sell to a private equity firm. Each of these goals will help in sizing how large you want revenue to grow and for what purpose.
Monitoring and maximizing revenue is important because cash flow is the life of a business.
Startups can be small or large, online or brick and mortar, but no matter what avenue you take the finance aspect is important. These are some high levels to consider when starting out. Depending on your business you will get specific and need to understand the flow. Today’s startup culture praises ideas and being able to be funded without generating income. Be sure to have an already tested product or idea for the greatest results.