How Effective Financial Management for Startups Impact Your Growth

While great ideas and passion are catalysts in starting a small business, they are not enough to fuel them toward success. You will need ample resources—especially money, the life source of companies—to get things done. Otherwise, you may end up closing even before your business takes flight. For instance, there was a sharp increase in startups failing in 2022, where about 20% of US businesses closed in their first year.

But this does not mean that a startup or a small business does not stand a chance in fierce competition. Since they are often met with dozens of constraints from the get-go—setting up teams, limited cash flow, and a lack of product or service demand—being strategic in your approach to your business finances is vital to generate profit before your resources deplete.

Financial management is a crucial part of your overall business growth, especially if you are a new company or a new startup. It is a strategic approach that relies on your financial planning to effectively handle your money or business finances, like setting up a business bank account, monitoring your cash management account and checking account, budgeting, anticipating needs, allocating investments, and periodic funds assessment. When done successfully, you can avoid common financial pitfalls, optimize financial resources to gain maximum returns, and alleviate your growing business!

However, financial planning is easier said than done. Hence, learning the basics of financial management—in addition to keeping up with the latest business news—is a great first step.

Whether you are an owner or a business manager new to financial planning, having solid know-how can make a huge difference in your outcomes. After all, money or finances is a tool to meet your goals.

Here's your first tip: always keep your personal accounts and personal expenses separate from your business. While the line can be blurred for a sole proprietorship, making personal expenses separate can save you from future headaches.

Here are more of what you need to know to create an effective financial management plan.

1. Start Small, Set Realistic Financial Goals

Good financial management can be structured by having achievable financial goals in place. Ask yourself: How can financial planning benefit you? What are your expectations or financial projections?

Your reasons could vary from maximizing profits and investments to managing cash flows and operational expenses. However, it helps to visualize your long-term goals or the big picture and cut them into bite-sized goals you can follow. For example, if you aim to reduce your total overhead spending by 10 percent in the third quarter, aim to cut your expenses slowly every month.

When identifying your goals, apply the SMART (specific, measurable, attainable, relevant, and timely) method. It helps in having a clear and quantifiable idea of what you want to achieve with constraints in mind within a certain period—monthly, quarterly, or annually. Consequently, it allows you to create concrete financial strategies that you can follow to achieve each goal.

Your SMART financial goals can look like the following:

• Increasing the profit margin by 10% within six months.
• Save $1,000 from your operational expenses at the end of each month.
• Reduce bank loans by 50% before the financial calendar ends.

2. Define Your Budget

Setting up a budget for your business takes tons of planning. With so many variables involved, careful analysis of all your revenue streams and expenses is crucial.

That said, begin by looking at your monthly revenue, savings account, and identify a trend. Ask questions like, how much should you make in every quarter? What factors affect your bottom line, and can you do anything to improve them? If you’re running a new business, begin by projecting a realistic revenue estimation. You can benchmark against your competitors and see what they make each month.

Your next step in determining a budget is to look at your expenses, like rent, payroll, cost of goods sold, maintenance and repairs, operational costs, and taxes. If your cost in producing your products is increasing, maybe it’s high time to reconsider your suppliers and find ones that can provide good quality service/products at affordable prices. Or you'll probably have to re-iterate your offerings, too.

And finally, integrate your contingency fund into your budget. Think of it as your safety cushion in case your business suffers a fall. While there are many economic predictors you can turn to, it’s better to be safe by setting funds that you can use when emergencies and recessions arise.

There is no single rule when determining your contingency fund, but you can start by allocating five percent of your monthly budget. Or if your business bank account is greener, you can stretch it to three to six months’ worth of funds. Aside from protecting you and your people from potential losses, a contingency fund also helps you avoid getting into debt. And if you end up not using it, you can always put them into future investments.

With this data, defining a realistic budget for your business should be a little easier.

3. Manage Your Cash Flow

Your cash flow pertains to the amount of money that goes in and out of your business operations. These are your operating cash flow, or the money earned and used in running your business; investing cash flow, or the money used to purchase or sell non-current assets; and financing cash flow, or your sales from stocks, dividends, and loans. Failure to monitor your cash flow can lead to delayed payments to suppliers, low-profit margins, and erroneous forecasting, to name a few.

One helpful tip that financial experts swear by is to pay yourself first. While this may sound counterintuitive as a company owner with an overwhelming amount of expenses, paying yourself is actually a huge motivator to keep you going. It is also realistic as your business is a means to afford your lifestyle. And it encourages you to aim for a positive cash flow and save as much as possible to earn more money for yourself.

Once that’s out of the way, you can look at your remaining company cash inflows and see how to allocate it to tackle your payables. Improving your cash outflow may entail automating your processes, like using a payroll system to ensure your team gets paid on time. You can also increase the efficiency of your cash outflows by categorizing your expenses depending on urgency. Suppliers who get paid on time are more likely to deliver consistent services or products to your company.

4. Implement an Effective Accounting System

Hiring a business accountant can ease off your worries in handling your finances. For example, they can go through the nitty-gritty of your financial statements, like your income statement, help manage your debits, raise money, and figure out your taxes. Some businesses also outsource their accounting needs to firms for bookkeeping and select financial services.

When you hire an accountant, it is best to tandem their skills with cloud-based accounting software packed with chock-full features. Among your top options are Quickbooks Online, Xero, and FreshBooks.

Quickbooks Online is, by far, one of the most popular accounting software used by bookkeepers and accountants. Because it's created with the needs of small businesses in mind, the software is highly intuitive and adept in helping users automate, track invoices and payments, and maintain financial statements. Xerox, on the other hand, allows collaboration among professionals if you have a fully staffed accounting department. Meaning, your bookkeepers and accountants can access files and work on the platform anywhere.

And if you want beginner-friendly accounting software that caters to simple financial services needs, look no further than FreshBooks. For these reasons, many freelancers and new business owners use FreshBooks when they are just starting to get set up. All three software offer a 30-day free trial, so you can see which one works best for you. But whichever route you go, having an effective accounting system to manage your financial transactions can help you avoid chaos.

5. Save Whenever You Can

Building your team is a lucrative investment as a business manager. Fortunately, with digitalization sweeping across the globe, you can cast a wider hiring net and tap remote workers or freelancers from different markets. This gives you access to a pool of diverse talent across various fields to cover your business needs if full-time employees are out of the budget. Moreover, you do not need to invest in a larger office if your team can work from home. And it even becomes a huge perk, too!

Another way of saving is by managing your inventory—office supplies or equipment. It could be as simple as going paperless in the office or incentivizing employees to use their devices instead of buying new ones. Finally, sticking to your budget when implementing projects, covering events, etc. can be the most effective way to reduce expenses.

Going conservative in your expenditures should not deter you from upholding the quality of your products and services if you want to earn your customers’ trust.

6. Manage Your Debt

Sometimes, incurring debt cannot be avoided. And it’s standard practice when opening up a business as not everyone is fortunate enough to have cash on hand. What’s detrimental to the survival of your business is if debts pile up and remain unpaid. It is wise to instill financial discipline and only borrow money conservatively. You should also track your payment plan and ensure they are followed to a tee.

Keep off loan companies that charge high interest, too, especially if you cannot sustain your monthly revenue to cover your debt. Or better yet, consider diversifying your revenue stream to earn more and pay your debt sooner. You can tap your product and marketing specialists to discover opportunities, like expanding your product line or integrating more features to increase demand.

How you bill your clients matter, too. If you are giving too much leeway, maybe you can agree on a shorter payment term to clear your accounts receivables sooner. Therefore, it is easier for you to budget, manage your expectations, and keep track of your finances.

A well-monitored financial analysis is your window to the future of your business. It gives timely data that glean on your business’ financial condition beneficial in understanding how you can operate better. Financial analysis is also helpful in evaluating if you are fit to apply for a loan or seek funding.

The process entails a closer look at your company’s finances—income statement, balance sheet, cash flow statements, and statement of retained earnings, among others. Short-term and long-term financial analyses are also imperative to determine if a business is liquid, stable, and profitable and if your company settles debts promptly. With accurate information, financial experts or your money managers would then assess if your startup's financial health and performance are at par with your financial goals, KPIs, and competitors.

Other advantages of regular financial analysis include:

• Accurate profitability projection
• Business valuation
• Guarantee financial transparency

Managing a business is not for the faint-hearted, especially for startups and small businesses with limited resources. And while you may want to be hands-on in overseeing your finances, you may want to leave such matters to the experts. You can tap finance professionals to help a growing business.

But who are they, and what can they do to manage your startup’s finances?

Finance professionals are well-trained in the art of managing finances. They are your bookkeepers, accountants, or financial advisors adept in anything related to money. For instance, they can help you formulate long-term financial strategies to keep your business afloat or preserve your resources. They can also manage your business bank account, assess financial risks your business may be prone to, and create a game plan to navigate them.

As businesses grow, owners usually venture into expanding their investments—whether by adding more brands or partnering with third-party brands. You can count on financial advisors to equip you with the knowledge and plans to fit your investment needs. And finally, in case of unfortunate events, financial experts can protect your business by setting up a succession plan. This entails identifying who will take the helm and how assets can be distributed to heirs, to name a few.

With such a vital responsibility, finding a financial expert you can trust takes time. Hence, it is important to zero in on your financial situation and financial needs. And only then can you begin looking for the right match for you. Whatever the case, they must have an end-to-end approach, considering all financial opportunities and risks.

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