Financial management in startups: these will be your 5 biggest challenges

Financial management in startups determines whether the company will be able to use its resources to grow sustainably. After all, everyone wants to scale, but it is necessary to have a solid foundation and ensure economic viability during all phases of the business.

That’s where the managers’ nightmare comes in: reports, spreadsheets, extracts, and bureaucratic procedures that are inevitable to maintain financial health and follow the company’s evolution.

What makes financial management in startups unique

Doing financial management in startups is very different from taking care of the finances of a traditional company. To begin with, just think about the pace of most businesses: the company develops step by step, following a business plan and increasing its costs in the same proportion as its gains.

In startups, growth is accelerated, the business model is scalable, and the company’s financial situation can change from one moment to the next — imagine the impact of receiving a millionaire contribution and continuing with the same structure, for example. In addition, the disruptive business environment is marked by uncertainty, making financial projections for startups much more challenging.

Add to that the fact that most startup managers do not have time to dedicate themselves to accounting and financial bureaucracy or are more concerned with developing their solution than taking care of spreadsheets, slips, and taxes. But you have to be careful because business numbers and accounts are the basis of growth — and this also goes for startups.

Why is financial management in startups essential?

Financial management in startups guarantees that the company will have the cash to maintain attractive indicators for investors and maintain sustainable growth, even at high speed. However, without proper control of finances, the scenario can be the opposite: negative results, indebtedness, and lack of perspective.

According to a study by consultancy PwC Brasil, published in late 2019 in Folha de S. Paulo, nine out of ten startups end up in bankruptcy in Brazil. Furthermore, the report points out that lack of money is the second main reason for business failure, after the lack of compatibility between the solution offered and the real problem of the target audience.

In this case, the financial problems include difficulty attracting investments and the lack of planning to use the resources in the right way.

In other words: financial management in startups is one of the most critical areas — and any mistake can cost the company’s survival.

5 challenges of financial management in startups

Even without the slightest familiarity with financial management in startups, you need to ensure that your business has a solid foundation to grow sustainably.

Check out the main challenges of finance in innovative companies.

Monitor cash flow

The challenge of financial management in startups starts with modest initial cash compared to the ambitions of the business. In the beginning, resources are always limited, and cash flow must be closely monitored to ensure that revenues cover costs and expenses.

Each entry and exit must be under control, not only in the daily record but also in the projections for the following months.

Have sufficient working capital

To avoid the negative balance, it is also essential to have enough working capital to sustain the financial cycle of the business – that is, a reserve of cash resources that guarantees the operation of your startup. The longer the payment terms, the greater the capital available to maintain the company.

Have a good chart of accounts

Controlling accounts payable and receivable is another essential financial management point in startups. By aligning payment and receipt deadlines, you guarantee that all obligations will be met and avoid indebtedness or the need to take credit.

But, as we know, it is easy to get lost with maturities, and the lack of control can even generate losses with customer default.

Accounting for costs and setting prices

Cost accounting is also often a bottleneck in the financial management of startups, as the rapidly changing environment makes it difficult to accurately assess fixed and variable expenses. In addition, it is necessary to have the company’s costs very clear to correctly price the product or service offered, even if the intention is not to make an immediate profit.

Remember: ignoring business costs and pricing based solely on market and consumer expectations is a fatal mistake, as the company needs to sustain itself to advance exponential growth.

Monitor financial indicators and reports

Finally, analyzing the evolution of the business through reports and performance indicators is one of the most important points in financial management in startups — and also what interests investors.

In the language of the financial market, these are the indicators that will determine the attractiveness of your startup or scale-up for the investor, working as a diagnosis of its growth potential.

For more information you should visit business plan consultants.

Leave your financial management with those who understand startups

If you don’t have the time and willingness to take care of all these procedures, the solution is to leave your financial management in the hands of professionals who understand startups.

With this in mind, Begin With the Right Foot created a tailor-made Financial BPO solution for startups and scale-ups. It works like this: all your financial management is outsourced, including a chart of accounts, cash flow projection, report generation, issuance of invoices and slips, bank reconciliation, and much more.

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