Financial planning tips for startups
Photo by Artem Podrez
Starting a business often begins with an idea you’re excited about – and it could be anything, which is why it’s so great and can give you so much freedom. Whatever it is, once you’ve decided to take the leap, one of the best things you can do early on is get your financial foundation in order – it’s crucial to get this bit right, otherwise you’re just leaving yourself open to trouble further down the road.
The fact is that when you’re clearer on your finances, you’ll get more clarity, you’ll be able to make better decisions, and you’ll be able to get your business off the ground with far less stress. With that in mind, keep reading to discover some useful financial planning tips for startups that will really make a difference.
Understand your costs
One of the first steps is getting a realistic view of what your startup will cost, and that includes everything from one-time purchases like equipment or setup fees to ongoing expenses like rent, software, marketing, and subscriptions, for example.
Having a clear breakdown helps you avoid any nasty surprises, and it’s going to give you a much clearer idea of how much you need to earn to cover it all, which then helps with pricing and so on. Now don’t worry; you don’t have to be perfect with these numbers, but you do want to be honest, otherwise there’s not much point. And if you underestimate your costs, which is a common mistake (especially when you’re just starting out), it can cause issues. If anything, it’s better to overestimate slightly so you’re prepared for unexpected expenses, just in case.
Start with a simple plan
You don’t have to create a complicated spreadsheet or hire a financial advisor straight away – in fact, most startups actually benefit from starting (and staying) as simple as possible, so this is something everyone should be able to do. Start by outlining your expected income, your costs, and any savings or funds you’re bringing into the business, and then track what comes in and what goes out every month – you can use that information to decide what’s working and what might need adjusting.
A good financial plan is about making sure you’ve got something that helps you stay on track and, of course, adapt to any changes that come your way, and you don’t have to have all the answers from the beginning; it’s something you can keep working at for as long as you need to until you’re sure you know what’s what.
Set achievable goals
Ambition is always going to be important, but your earliest financial goals should be realistic and quite simple – they should be focused on what your business needs to survive, and not get too fancy (yet). Before you start thinking about how to make big or bigger profits or how to grow your business quickly, ask yourself how much you need to earn each month to cover your costs, and that needs to be your first goal.
Once you’ve got that number, you can start building in small, realistic targets, like reaching a certain number of clients, selling a minimum amount of stock, or saving towards an emergency fund (which is something all businesses should have). And over time, these smaller goals will build up into larger ones, and the more momentum you get, the better because you’ll get a lot more done.
Keep personal and business finances separate
One of the simplest ways to keep your finances organised is to separate your business income and expenses from your personal ones. Opening a business account is a good step to take as early as possible (even before you actually launch your business) because it’s going to make tracking easier, especially when it comes to managing tax or claiming expenses. And more importantly, it helps you see your business in a more serious way, even if it’s a subconscious idea.
That doesn’t mean you have to do anything special or fancy, and there are some great, easy to use business bank accounts out there for you, so take a look and see what’s going to work for you. Once you’ve got this set up, you’ll feel a lot happier about where your finances are heading because you’ll be able to see them properly.
Know your pricing and margins
A big challenge for new startups is pricing, especially if you’re offering services or selling handmade goods, for example. It can be tempting to start your prices quite low because that’s going to gain interest and attract more customers right away, but if your prices don’t cover your time, materials, and other expenses, you’ll run into problems. On top of that, if you have to then put your prices up quite quickly, your customers aren’t going to be very happy about it.
That’s why you need to take the time to calculate your margins accurately so you know what to do and where your pricing realistically needs to be. How much does it really cost to produce or deliver what you offer? How long does each job take? What’s left after expenses? These are the crucial questions you need to ask sooner rather than later.
Once you’ve got a clearer picture, you can make some better, more informed choices about whether you need to raise your prices, become more efficient, or work out how to reduce costs, so it’s all connected.
Plan for unexpected costs
No matter how well you plan, there will always be expenses you didn’t see coming – something’s going to break, something else will need replacing, or things take longer than expected, so they’ll cost more (or you’ll lose money on your quote). That’s just part of business, and you can’t plan for it all.
Well, you can’t plan for what’s going to happen, but you can plan your finances just in case. If possible, you’ll want to build a small contingency fund into your budget – it really doesn’t have to be huge, but it’s something that can help out in a pinch so that one unexpected bill or issue doesn’t cause massive problems for your cash flow.
As your business grows, it’s good to try to grow your contingency fund at the same time because a bigger business has bigger expenses, and potentially bigger financial problems if something goes wrong.