Business finances for startup owners works a little differently from traditional finance advice. It’s not merely about balancing the books–you need to build a solid foundation that enables safe and sustainable growth. And with the ever-changing financial landscape, there are always new factors and trends to consider.
If you’ve already read the complete guide to starting a startup and want to dive deeper into the financial part, you’re in the right place. In this article, we’ll give you a guide on the fundamental aspects of business finances for startups and the financial responsibilities that are part of this.
What you should consider when thinking about ‘business finances’
To kick things off, let’s clarify what you should think about when managing your startup’s finances. Here are all the elements that need your attention:
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Operating expenses
Let’s start with a big bang. For startups, operating expenses are not just the day-to-day costs. They also include significant allocations towards growth, such as scaling up a team rapidly or investing in technology and infrastructure.
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Revenue and sales
The numbers everyone likes talking about, but that requires a lot of organization behind the scenes. Startups often deal with fluctuating and sometimes unpredictable revenue streams, especially in the early stages.
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Investments
For startups, investments often involve significant capital poured into high-growth activities, but you need to know exactly where each dollar is coming from and going to – and what the return on investment is.
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Debt and loans
Startups are the students of the business world: they often start out their journey with a lot of debt. Managing repayments and keeping an eye on interest rates is crucial.
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Equity and ownership.
In a startup, equity isn’t just about ownership. The nuances of employee stock options vs. shares are essential, since they impact both ownership and tax implications for both the company and the employee.
Why startups are different: rethinking traditional financial advice
Don’t pick up a dusty book on financial business advice. Startups are ever-changing and dynamic. Here’s why one-size-fits-all doesn’t work for startups.
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Rapid growth and scaling are a daily thing
Startups, particularly in the tech world, often prioritize rapid growth and scaling over immediate profitability. That’s often starkly different from traditional business, where the focus might be on steady, incremental growth. So for startups, their strategy might be different and include:
- Investing heavily in product development and marketing, even if that means operating at a loss in the early stages
- Raising capital through investors rather than relying solely on revenue for funding.
This different approach to growth comes with all kinds of risks and regulations to consider, so it’s paramount there’s a well thought out strategy in place.
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They have non-conventional compensation structures
Startups often use unique compensation structures. You may pay your employees through token grants or offer equity in the form of shares.
This allows startups to attract top talent even when their current cash flow is limited, and for many people cryptocurrencies or shares are a more interesting offer.
Startups might even offer significant stock options to early employees, effectively making them partners in the venture.
All of this requires a solid knowledge of the regulations around these non-conventional forms of payment, to protect both the business and the employee.
On top of that, startups also need to provide employees with health benefits, retirement plans and occasionally bonuses. All in all, this department will deal with a varied and challenging landscape, and professional help and a solid strategy is absolutely necessary.
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Risk tolerance needs to be higher
Startups usually operate in rather uncertain markets, with a higher tolerance for risk. That means that the financial strategies that are being employed need to be more flexible and adaptable. In other words: startups are more used to turbulence than traditional businesses who run more conservative financial management practices.
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Regulations and tax landscape
Startups, especially those in emerging industries, are likely to face different regulatory and tax considerations compared to traditional businesses. A startup in the cryptocurrency space for instance, has to navigate a complex and rapidly evolving set of regulations that more traditional businesses would often not need to deal with.
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Capital structure and funding
The art of raising capital: it’s an important skill in startup land. Startups often rely on external funding such as venture capital, or help from angel investors, to fuel their business growth. This impacts not only their capital structure, but also their financial reporting and management practices.
They might need to produce detailed financial projections to secure a round of venture capital, which requires a lot of expertise.
Financial management tools and strategies for startups
How do you make your finances a success, and not a hot mess? Here’s a mix of strategies and tools to use.
Financial forecasting and modeling
Look for budgeting tools with scenario planning. Running ‘what-if’ scenarios and being able to have all your information in one place will help you prepare for situations that require agile budgeting.
Payroll system designed for equity compensation
If you’re compensating your employees with equity or tokens, look for a specialized payroll system that’s able to handle all of that.
Using a financial consultant with startup expertise
THis might be the best financial strategic move of them all. If you can’t afford a full time CFO just yet, don’t just try to DIY your way through it. Contract a part-time CFO so you get senior-level financial management at the fraction of a cost.
Strategic cash flow management
For startups, managing cash flow is not just about monitoring—it’s about strategizing. Consider:
- Negotiating payment terms: work with suppliers to negotiate favorable payment terms and with customers to encourage early payment, thus helping to keep cash flow positive.
- Securing a line of credit before you need itt: this can be a lifesaver when unexpected expenses crop up or when cash flow is tighter than anticipated
Regular financial health check-ins
For startups, regular financial review should be more than just a glance at the books. It should be a comprehensive health check, involving:
- Board or investor reporting: prepare and review detailed financial reports, and practice how to explain your numbers before meeting with the board or investors.
- Weekly cash flow analysis: with often limited cash reserves, startups must keep a close eye on cash flow. Weekly reviews can help spot issues before they become crises.
Bonus: financial metrics every startup owner should know by heart
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Monthly burn rate
This is the amount of money a startup loses per month. For startups, especially those in the early stages, understanding how long current capital will last (runway) is critical.
Example: if a startup has $500,000 in the bank and its burn rate is $50,000 per month, its runway is 10 months. This tells the startup how much time it has to either become profitable or secure additional funding.
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Customer acquisition cost (CAC)
CAC represents the total costs of acquiring a new customer, including all marketing and sales expenses. Startups must constantly monitor this to ensure they are not spending more to acquire customers than those customers are actually worth.
Example: if you spent $10,000 on marketing in a month and acquired 100 customers, your CAC is $100. This is a basic example, as you should also include other costs, but it gives you an idea.
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Lifetime value of a customer (LTV)
This is an estimate of the total revenue that a startup expects to earn from a customer throughout their entire relationship. It’s crucial for this number to be significantly higher than the CAC.
Example: if the average customer pays $200 per year for your software and stays a customer for an average of five years, the LTV would be $1,000.
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LTV to CAC ratio
This ratio compares the value over their lifetime to the cost of acquiring that customer. A healthy LTV:CAC ratio is often 3:1 or better.
Example: if the LTV is $1,000 and the CAC is $250, the LTV:CAC ratio is 4, indicating a healthy relationship between the cost of acquisition and the value the customer brings.
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Churn rate
For startups, particularly those in the SaaS space, churn–the rate at which you lose customers, is a critical metric that should definitely be considered in your financial plans.
It’s not ‘’business as usual’’: the benefits of a solid financial strategy
The benefits of having a strong financial strategy in place go beyond just keeping your head above the water. Here’s how it actually can help your business thrive, not just survive:
- Sustainable growth: a well thought out financial plan steers resource allocation, which helps foster growth that is ambitious, yet manageable
- Risk mitigation: a robust financial strategy can help you identify potential challenges and uncertainties, which enables proactive planning
- Peace of mind: setting up a startup is stressful enough as it is. Knowing there is a structured financial strategy in place alleviates str3ess, allowing the team to focus on innovation and customer engagement with clarity and confidence
There’s more to it, of course. Read on about increasing the chance of succeeding with your startup.
Finding your north star in financial planning
It isn’t just about numbers, it’s about making a long term plan for success. Investing in a solid strategy pays off, always. Are your startups financial strategies fueling growth, or causing headaches?
