6 Startup Finances Basics You Must Understand

Managing finances is a challenge for any business, especially for one that is still in its infancy.

Small businesses tend to focus on bringing the product or service to the masses in the most efficient way possible. Rarely does that small team include a financial and bookkeeping expert. If we do not have a lot of experience with managing finances, it truly can prove to be a chore and a burden. It leaves us open to problems like slipping into bad financial habits and situations that can harm our business down the road. Often enough, without a dedicated expert on bookkeeping, we would not even notice these problems before disaster strikes. The most important asset we can have when starting a business is knowledge. It is easy to understand the basics needed to successfully start and operate a small business. At least for the initial phases. For example, simple accounting and bookkeeping tasks, applying for a loan and constructing financial statements are all within our reach. It is a sound strategy to educate ourselves in these basics. When the need arises and our business matures, we can hire experts. Until then, here are some points for all startups and small businesses to take into account.

Investing

It is important to always set aside money which sole purpose is to be utilized for growth opportunities. What not many business owners realize is that there is no such thing as stagnation in today’s professional environment. If you think that you are floating, we have some bad news. If we are not investing, even the tiniest amounts, we are falling behind. What this allows us is to upgrade our business and let it thrive and move in a healthy direction. Small businesses have one common goal, to grow out of the startup or small business status. That is best done through innovation and knowing how to attract the best employees and clients. This requires constant investing. Customers care about the quality and level of service. Employees like knowing that their company knows its path and is headed in the right direction. The bottom line is, investing is good and it is essential to stay afloat in today’s modern, heavily competitive market.

Billing strategies

It is the nature of doing business for everyone to have at least one client that is frequently late on their invoices and payments. Another aspect of running a successful business is managing cash flow to ensure healthy day-to-day operation. If we are struggling to collect, there are ways of getting creative with how we bill our clients and customers. One of the leading causes in business failures is too much cash in unpaid invoices that results in poor cash flow. We can incentivize regular payments and disincentivize late ones. For example, if the customer pays the invoice within a favourable time period, they receive a couple of per cent discount off their total. On the other hand, we can make a contract that says that every day the customer is overdue, we add a couple of per cent in interest. These are the most basic of methods but our imagination is the only limit.

Keeping an eye on the books

It is one of the most important practices when it comes to finances. We need to review and monitor our books at regular time intervals. For some businesses, it may be each day, and for some, it may be enough to do it each month. That stands true even if we are working with bookkeepers. Bookkeepers, accountants and other professionals like the LLB Sydney Accountants, for example, do have their purpose. They protect us from any risks of accidental or deliberate illegal meddling. But it is our responsibility to get familiar and intimate with the finances of our business and thus really get the feel for things. Otherwise, we leave ourselves and our business open to sub-optimal and wasteful spending or embezzlement.

Employees and payrolls

If we have hired even one employee means that we take on the responsibility to file and pay forms and payroll taxes. Each country has its own general and unique tax obligations. Employers are responsible for maintaining employee forms like the employer eligibility verification, for instance. Also, it falls onto us to maintain records on withholding, employer matching, unemployment and worker’s compensation. Again, it can get very technical and there is no shame in consulting professional help. As our business grows and expands, it will inevitably become necessary to bring someone in and deploy more sophisticated bookkeeping methods, like software.

Return on investment (ROI)

For any successful business, it is important to figure out which investments have potential and are worth pursuing and which are not. It is especially true for small businesses. The reason being is that startups have a much smaller financial buffer to soften up the negative consequences of a bad investment. With each expenditure, we expect a favourable ROI. Failing to carefully calculate ROI leaves us vulnerable to losing money on irrelevant or bad investments. We need to always be aware of how we are spending our money and how those expenditures are paying themselves off. If they are not, then we need to reconsider our business strategies. Sometimes it means cutting back on spending altogether. But there are more intricate, smarter solutions if the current situation allows for them. Reorienting from non-profitable actions to investments that directly add value to our product and/or service is a complicated task and varies from industry to industry. But if we can get a hang of it, we are streamlining our business operations and finances.

The gross margin

At the end of the day, the bottom line of any business is how much income does it receive. We can always come up with that result using a simple equation. What we need are all the costs incurred to produce our product or service and total revenue. We will quickly glance over the key elements that go into such an equation. The cost of goods sold is pretty self-explanatory and will further on be referred to as COGS. These are the direct costs that incur when producing a product that we are selling. This includes raw materials required for the process and labour costs. We add them all up together and we get our COGS. The gross margin is the number that represents the total sales revenue that is kept after the conclusion of a business transaction. The gross margin is represented in a percentage (%) and everything else in a unit of currency, a dollar for example. The equation is simple and looks like this:

Gross Margin (%) = (Revenue – COGS) / Revenue.

It is the main indicator of whether we keep our doors open. Put simply, it is the difference between how much we sell a product for versus how much we actually take home after all is paid for.
Starting a business in today’s turbulent and highly competitive global market can appear as a daunting task. It is definitely a very bold and courageous endeavour to partake in. It is easy to neglect the aspects under the hood that keep the entire machinery well-oiled and running. All it takes is a little forethought and by addressing these issues from the get-go, we will ensure smooth sailing for us and our company.