You are exceptionally good at what you do. You’ve hired the best employees and you treat them well. Customer satisfaction is through the roof. You’ve found ways to outwit and outshine your competitors at every turn. Surely you are destined for long term growth and success. Aren’t you? Maybe not.
The truth is, almost all startups fail with a couple of years, and it usually has nothing to do with any of the factors mentioned above. All too often, when a startup crash lands, it is because of financial troubles. You can know the ins and outs of your niche, but if your financials are not optimized, the truth is, you are going to get into trouble quite quickly. Don’t let that happen to you. Instead, check out these 5 tips for optimizing your financial assets early on.
Hold On to Your Equity
Securing investment funding can be tricky for a startup. Then, when you do get the ear of investors, the idea of paying back the funds you get with interest can be extremely intimidating. After all, how can you pay them off when you are concerned with keeping the lights on.
Unfortunately, many investors realize this and will tempt you with offers involving gaining equity in your business rather than requiring you to pay them back. Approach these offers with care. Giving up 5 or 10 or 15 percent might not seem like a big deal now, especially in return for the funding you desperately need, but as your business grows that’s going to become pretty significant. You may be better off holding onto your equity and taking simple interest based investment offers.
Tighten Your Belt
Until you are out of the startup phase, and are at the very least ready for round 2 financing, both you and your startup should live as leanly as possible. This means no frivolous business trips, paying yourself a minimal salary (or perhaps none at all), and backing away from all but the most necessary purchases for maintenance and growth. This will put you in a better position financially, when you are eventually ready to invest in assets and activities that will help you get to the next level.
Think About Pensions and Retirement Now
Paying fair salaries is only one way that employees remain assured that you have their best interests in mind. They also want to know that you care about your futures. These reasons and regulatory compliance are why you want to auto-enroll in a smart pension plan. The initiative is already well-adopted in the UK with AutoEnrolment.co.uk and is steadily getting traction in the US. Consider creating a similar scheme within your company instead of the standard 401K to retain the most valuable talents.
Simplify Your Accounting
Unless you are an accounting or financial management startup, chance are that accounting is not your specialty. Unfortunately, if you aren’t on top of your accounting, you can make some very costly mistakes. To avoid this, find a way to simplify your accounting system and to foolproof it from any mistakes that you might make. Fortunately, there are many automated accounting packages to choose from. There is usually a fee for using these packages if you are a small business, but it is well worth the investment and peace of mind.
Be Ready for Emergencies
Inevitably something is going to happen that is going to throw you and your business off track. This could be anything from a shift in the market that you didn’t predict, to a lawsuit from an angry customer or vendor, to an illness or accident. If you are prepared for this, you can survive such things. If not, you are in deep trouble. To be ready for disaster, start an emergency business savings fund to keep things afloat for at least 9 months to a year. Also, consult an insurance agent to ensure that you have all of the right insurance policies in place in case something goes horribly wrong.
Living lean, thinking strategically, planning for emergencies, and staying on top of your accounting are keys for long term survival. Follow the 5 tips above and your business just might be one of the few that survived the tough startup years.