You’ve found your billion-dollar idea and started a new business. You’ve gathered your founding team, and you’ve even landed your first few customers. But how should you manage your income and expenses to stay legally compliant, secure venture capital funding, and set up your business to scale?
Most founders and business owners don’t have a finance or accounting background, and it often doesn’t make sense to hire a full-time finance manager for a new startup. As a result, financial management for startups can seem like a complex and daunting responsibility. To help you set up your accounts in a way that supports business growth, here are five key financial tips for entrepreneurs from fellow business leaders.
5 Tips To Improve Financial Management For Startups
1. Set manageable income objectives.
Everyone who starts a business has ambitious goals for their startup’s future, but it’s important to set realistic revenue targets. “Break down your financial objectives into manageable and verifiable milestones,” advises Tanya Zhang, co-founder of Nimble Made. Zhang explains that working towards intermediary income objectives helps you stay on target and highlights any necessary modifications.
To map out the targets that make sense for your business as it grows, conduct startup financial modeling and projections. As well as informing your business planning, strategy, and forecast, these financial planning tools will form a critical part of your presentation to potential investors.
Read more: How To Create a Startup Budget From Scratch
2. Prioritize expenses.
Any growing business will have a wide variety of expenses. To keep on top of your budget and avoid cash flow issues, differentiate the business expenses that are essential from those that are optional. This categorization will allow you to effectively deploy limited cash in the areas you need it most.
You should then regularly compare your actual spend against your budget to show where you are overspending and need to make adjustments to avoid cash flow problems. This is a key financial management tip for any startup or small business—you can learn more in our article 4 Tips To Optimize Expense Management For Startups.
Once you’ve identified areas where you’re consistently exceeding your budgets, act fast to reduce spend: “In some instances, a few minor tweaks here and there can help you to minimize your monthly expenditure,” notes Michael Hammelburger, CEO of The Bottom Line Group. “In other cases, you might need to consider other major cost-cutting measures.”
One more important note regarding startup expenses: Keep separate business and personal accounts, and do not intermingle business and personal expenses. Startups that mix personal finances with business finances run into big headaches down the line when it comes to fundraising, filing taxes, and having a clear picture of their startup’s financial health.
Read more: How To Create A Cash Flow Projection For Your Startup
3. Prepare for employee stock options.
To attract and retain talented team members, consider offering stock options as part of employee compensation packages. Many startups set aside a stock option pool of between 10-15% of the total shares. If you aim to raise money through fundraising, “VCs almost always demand that this option pool be included in the company's pre-money valuation, ” cautions Ben Richardson, CEO of Development Academy. This means the stock option pool is taken from the founder’s equity rather than the investor’s equity. Richardson also advises startups to be aware that expanding the pool in the future to create more employee options will further diminish the founder’s share of company ownership.
Read more: The Founder’s Guide To Startup Cap Tables
4. Dedicate time to accurate records.
Among all the other tasks startup founders need to complete, maintaining accurate and up-to-date accounting records can fall by the wayside. “Many documents get lost, making financial statements challenging to balance when consolidation day comes,” explains Caroline Lee, co-founder of CocoSign.
Accounting records that aren’t accurate or compliant with GAAP make it hard to monitor cash flow, which can lead to financial losses and increase the chances of late tax filing. If you don’t have the time or experience to accurately manage your own finances, consider working with a bookkeeper or accountant: Paying a professional to manage your financial records allows you to focus on growing your business and helps avoid costly accounting mistakes.
Read more: How To Make Sure Your Startup is Audit Ready (And What To Do If You’re Audited)
5. Choose a proactive approach to managing finances
“A bit of effort upfront will prevent a lot of pain down the line. Spend some time to proactively set up your accounting system early on, so you don’t find yourself scrambling reactively once your business operations become more demanding,” said Binita Thakker, Financial Controller at Zeni.
Here are some preliminary steps to proactively set your company’s finances up for success and avoid common financial mistakes:
- Leverage professional accounting software from day one. For a nominal fee, you’re able to leverage the various reporting tools and integrations—such as payroll, AP/AR, bank accounts, credit cards, and more—available via software platforms like Quickbooks Online, making maintaining your books on a day-to-day basis easier
- Pay attention to the business’s current and future data needs and ensure you have adequate categories set up in your startup’s chart of accounts to capture all the details
- Assuming you already have separate bank accounts and credit cards for your business, take the time to set up a link to your accounting software so that all transactions automatically flow into your books
- Take the time to capture any expenses you incur on your personal cards and record them as claimable expenses from the business account
- Keep a record of non-cash expenses such as automobile mileage and business use of personal cell phone (for yourself, and employees)
- Consider a PEO organization to offer competitive employment benefits and perks that help attract prime talent to early stage startups
- Know of your company’s compliance requirements and plan to meet them in a timely manner, e.g. estimated tax payments, extensions/filing of tax returns, 1099 reporting, and more
- Work with a startup accounting professional from the beginning to establish a solid foundation for your business finances, and help prevent re-work or course correction down the line
Read more: Hit the Books: When To Hire a Bookkeeper For Your Startup
The All-In-One Startup Financial Management Service
Are you a first-time founder unsure where to start with financial management for your business? Could you benefit from working with a finance expert but are not yet ready to bring on a full-time financial controller or CFO? Zeni is a full-service finance firm that can handle all your company’s bookkeeping, accounting, and CFO functions remotely and at startup-friendly prices.
Our team can manage everything from day-to-day recordkeeping to month-end close, generating reports (including Income Statement or P&L, Balance Sheet, and Cash Flow Statement), processing invoices, and even tax filing. With Zeni, keeping on top of your startup’s financial performance has never been easier: You can instantly monitor vital insights, metrics, and KPIs, including operating expenses, net burn, and more in real-time with the Zeni dashboard; plus, you’ll get 24/7 access to a finance concierge who can answer any questions.
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