Learn about calculating your company’s operating income margin to master financial health, experience growth, and attract investors.
It’s no secret that startups (and even large corporations) are facing tricky times right now as the state of the market hangs in the balance. There’s urgency to dial in your finances and make a plan to keep your startup above water.
So, last week we had the privilege of bringing together three of the top startup industry leaders to give you the low down on how to improve financial position and create opportunity for your startup in 2023.
Each of our speakers brought a unique perspective to the conversation, but one thing they all agreed upon – you have to have a strategic plan in place regardless of your current financial position or the state of the economy. And good investor relations combined with the support of a fractional CFO can help you get there.
Keep reading for an actionable recap of what we learned from the POV of a venture capitalist, a CFO, and a startup founder.
VCs are investing less capital in startups and at a slower pace. Raising funding will be more challenging than in the previous three years, especially if you’re an early-stage startup. It’s still possible, but the expectations have gone up. To raise capital, you need a more evident product-market fit, clearer business models, higher predictability around sales, and better execution. You will have a hard time if you don’t know how to show these things.
Growth at all costs is no longer the name of the game. We’ve gone from startups with large amounts of capital consistently overspending like their money is growing on trees to a time of conservation. Startups need to grow sustainably, focusing on positive operating margins that are more tightly managed and clearly documented back to your VC.
Founders need to understand the metrics of their business and consider the economics of their models. Not just document them – understand them! This understanding builds confidence and helps you better manage your board. Clear and comprehensive data is necessary for investors to provide insights and recommendations to startups. Still, if you don’t understand the data, it’s hard to have an open conversation around it with your advisors or to secure new funding. Investors want to see that you can fully express the bet that they’re making with their capital investment, hold yourself accountable to those bets, and make pivots and decisions quickly based on the numbers.
Regardless of how much money you have on your balance sheet, always be cautious with your spending. Review your startup’s budgets monthly, by department, so that you have total awareness and can build a culture of efficiency vs. recklessness. Conservatively forecasting your top line and expenses can help with this – you’ll avoid overspending, and ensure that you’re spending behind growth instead of ahead of it. This allows you to build for growth without the risk of layoffs due to market turmoil.
Every startup will approach financial modeling differently, depending on which stage of growth you’re in. You might still be validating your product or service, you might be getting traction, or you might be on your last bit of runway and need to plan to extend that as long as possible. No matter what type of model you’re building, it has to have fidelity – to be unbreakable. Relying on a Google Sheet won’t give you fidelity. But most founders don’t have good enough accounting skills to set up data properly, therefore missing the key metrics needed to have a stable plan. So founders need to find the support, through someone like a fractional CFO, to build this for them. Having some fidelity and some accounting expertise behind it will give you the peace of mind that you can make decisions with a stable model to back them up.
You can create the models, you can create the budgets, you can create the spreadsheets, you can create the PowerPoints – that's all great! But there's something to be said about communicating to your team, getting buy-in on your model, and leading the team through executing what you created. If you have a fractional CFO with experience on your team, they can help navigate the management change that has to happen with senior leadership on your team to make sure that everyone is on the same page to execute. They can help lead you through that difficult conversation, through any conflict that may arise, and get everybody on the same page about the direction you want to go.
Build a financial model that will give you a healthy amount of runway, that makes you feel comfortable, and that helps you intelligently decide how to make decisions. This could be anything from when and where to decrease your expenses or where to redirect spending to keep your startup on a safe path. You should also model for different scenarios, from the best possible outcome to the worst. Once you have those models and awareness of the data in them, you can operate from a place of purpose and creativity rather than a place of fear and reactivity.
Startups should focus on the market first, then problem-solution and ideas around solving those problems and solutions in those markets. Shifting resources towards new markets that are still in need of your solution as economic change might be the key to your success. And a good financial model can support you during a shift like this and help you do it quickly.
No matter what strategy you decide on, you have to be transparent with your team. The team needs to know the risks involved and the financial models being used so that no matter what happens, there are no surprises and everyone, including investors, are on board from day one. Make sure leadership is all pointing in the same direction and wants to work together in the same way to reach a common goal.
Fractional CFOs play a strategic role in supporting startups through growth, both in and out of recession. The benefits are endless when you’re facing new challenges daily, losing sleep over your dwindling cash flow, and lacking a solid financial model. No matter what the scenario, having this type of guidance available to you is the number one way to improve your startup’s financial position in 2023.
Want to learn more about how Zeni can help? Book a consultation today.
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