Establishing a startup is both an exciting and overwhelming endeavor for any entrepreneur. Startups face far more challenges than well-established companies, but none is more pressing than the issue of finance.
Financial stability is the cornerstone of any thriving business. Therefore, your startup must be able to overcome any monetary challenge you come across. Not only is financial soundness crucial to your profitability, but it can also mean the difference between survival and failure.
Read on to explore a few of the biggest financial challenges that your startup will face and how you can overcome them.
Little understanding of startup costs
It’s difficult to anticipate how much it will cost to establish a startup. If you overestimate your initial investment and assume that it will take a long time to see any profit, then you may end up with a frighteningly high number. While this number may be intimidating, it’s better to be prepared for a worst-case scenario than to underestimate your expenses and run out of capital.
If you need help determining exactly what you’ll need to start your business, then you should talk to an experienced financial professional, who can help you formulate a business plan that will accurately reflect your startup costs. This way, you are more likely to obtain the amount of funding that you will need to thrive.
Not enough working capital
Working capital is the most important asset that a startup can have. Without a sufficient amount of cash to spare, you may end up overdrawing your bank account or having to wait for clients to make payments in order to pay your bills. To ensure that you will have enough working capital, you should prepare ahead of time. Put aside an amount equal to at least six months of expenses to use as working capital. This will alleviate some stress as you strive to acquire additional customers and launch new products.
Sometimes, it isn’t easy to put aside such a large amount of money. To get started, try reducing your expenses by about 20 percent until you build up enough working capital to last your company through a significant downturn.
Poor cash flow
In order to properly manage your cash flow, you will need to monitor how much money is going in to your startup and how much is going out. You shouldn’t be waiting on checks from your clients when you need to pay your bills or your staff. If you don’t project your cash flow accurately, then you could find yourself in potentially serious financial trouble.
When you experience issues with incoming cash flow, you may need to overhaul your customer payment policies. For example, you could require customers to make a down payment before you deliver your products and services. Alternatively, you could send out payment invoices at more frequent intervals to ensure that your cash flow remains constant.
Because your company is a startup, you will likely need to adhere to a very strict budget while you find your footing in the market. Though you may have a solid financial plan in place, it is inevitable that you will encounter unexpected costs. Whether it’s an unforeseen bank fee or a rise in the price of supplies, these expenses can have a big impact on your startup’s bottom line.
You have a few options when facing a situation like this. First, you could rely on credit to pay any unanticipated costs, but this should only be a short-term solution. Second, you could engage in “factoring,” which involves the use of accounts retrievable financing. You should only use this as a last resort, however, because this method of financing can be costly.
Many entrepreneurs tend to price their products and services based on how much it costs to provide them. While this may seem like an effective way to estimate your own profit margins, it can actually cause issues with revenue down the line.
For instance, you may find that the way you are pricing your products and services doesn’t accurately reflect their real value in the market. Are you offering low-cost products at a price point that’s too high or bespoke services for too little? Your prices must be accurate and competitive if you want to avoid alienating your target audience.
Look at your competitor’s prices and price your own offerings so that you can make money while growing your customer base. The trick to identifying the correct price is to find a happy medium between how much will help you make money and how much consumers will pay for your products and services.
It’s important to manage your finances properly in any business venture, but it’s even more essential to do so when running a startup. However, you may find bookkeeping to be a daunting task. Between running your startup and facilitating its growth, you may not have the time or expertise to do it properly.
You can’t afford to put bookkeeping on the back burner. Not only will properly maintaining your books help you keep your startup’s finances in order, but doing so will also help protect you from potentially serious financial risks.
If you don’t have the time to invest in bookkeeping, then you should transfer the responsibility to another person. Hire an administrative assistant or identify someone on your team that can do it for you. Otherwise, you may need to work with an outside bookkeeper who will help organize and manage your startup’s finances on your behalf.